Measuring Terms of Trade of LDCS: A Different Approach

Abstract

The so called Third World Debt Crisis has occupied the center stage of the literature regarding economic development in the 80's. This has pushed aside a number of other problems that Less Developed Countries (LDC's) have in their economic relations with the Developed Countries (DCs). Nevertheless, these are real problems and those countries suffer from their consequences. Deterioration in the terms of trade of LDC's is one issue that has been, in the 50's and 60's, in the center of controversy. The question has been lingering even prior to the WWII. After the World War II the possibility of nations being worse off as a result of a deterioration in the terms of trade was examined more thoroughly. Following the publication in 1949 of the United Nations study, Relative Prices of Exports and Imports of Underdevel oped Countries, some economists began to talk about the deterioration in the course of a century of the terms of trade for a certain category of products. Raul Prebisch (1950) and Hans Singer (1950) argued that the terms of trade were deteriorating against primary products. M. Ellsworth and F. V. Meyer, among others, challenged the reliability of the statistical data on which these observations were based. In 1956 Kindleberger's monumental work, The Terms of Trade: A European Case Study, was published. In this book he concludes: We have found that there is something to the notion that the merchandise terms of trade tend to move against underdeveloped countries, but little in the usual corollary that they move against manufactures and in favor of primary products. The distinction is important. According to Arthur Lewis (1954), the existence of a dual economy, a subsistence sector side by side with a capitalist sector, keeps real wages in LDCs down and causes a deterioration in the terms of trade of these countries. Surplus labor abounds in the tradi tional sector. The productivity of labor is very low, and production is at the subsistence level. This is due to the fact that in the countries that produce tropical crops, there is a subsistence sector that will provide enough excess labor to prevent increases in real wages. Thus the neoclassical assumption of full employment does not hold for one partner, the LDC. Here, the marginal productivity of labor in the subsistence level is almost zero and its supply is practically unlimited. Arghiri Emmanuel questions Ricardo's as sumption of perfect mobility of factors of production within each country, and perfect immobility of these factors among countries. He argues capital is internationally mobile while labor is immobile. This is what Emmanuel (1976) considers present-day reality. If this is the case, then exchange is unequal because of differences in wages, for the same type of labor, which will bring about a transfer of value from lower real wage countries to higher real wage ones.