Foreign Investment in the Exporting Sector: Welfare Enhancing or Welfare Reducing?

Abstract

There has been a considerable amount of debate on whether structural adjustment policies suggested by the IMF and the World Bank to many primary product exporting nations may be selfdefeating. The terms of trade deterioration due to export expansion by any one country may be small enough to be ignored. However, if several exporters engage in simultaneous export expansion, all of them can suffer welfare losses. Diakosavvas and Scandizzo [5, 231-64] among others find that the terms of trade of primary commodities have indeed exhibited a downward trend in this century. Panagariya and Schiff [8] address this issue in a partial-equilibrium-simulation model of the cocoa market. They provide examples whereby productivity increases in one exporting country lead to welfare losses for other exporting countries despite the imposition of unilaterally optimal export taxes.' Bhagwati [2, 481-85] had shown that optimal trade taxation rules out the possibility of immiserizing growth. Bandyopadhyay [1] shows that this result does not generalize to the case where two (or more) exporters have market power. Hence, productivity increases in the exporting sector can be immiserizing even in the presence of optimal export taxes. Rodrik [11] provides an excellent survey of these issues. The concerns expressed in the elasticity pessimism literature (the classic papers by Prebisch [10, 251-73] and Singer [12, 473-85] addresses these issues) have been largely alleviated by the experience of the East Asian countries. However, these concerns remain alive in the context of some primary product exports like cocoa and coffee. Using a two country-free trade model Brecher and Choudhri [4, 181-90] show that the Singer-Prebisch concerns are specially relevant in the context of foreign investment in the exporting sector of primary product exporters. The value of the marginal product of foreign capital has to be repatriated to the foreign nation. Hence, a decline in the terms of trade for the host nation is sufficient to guarantee its immiserization. The traditional two country models that have been employed to analyze issues in optimal trade taxation do not address the issue of interdependence among different exporting nations. In a two country model, there is only one exporter of a particular commodity. However, in reality several nations export the same commodity. For instance, Cote d'Ivoire, Ghana and Brazil are all