The long-run determinants of North-South terms of trade and some recent empirical evidence

Abstract

This paper reviews some recent evidence of the long-run decline in the terms of trade of primary commodities versus manufactures in the context of North-South trade. This evidence is evaluated in the light of competing explanations of the sources of the observed long-run trends in the context of a model of North-South trade which includes a general resource, labor and capital in the North and specific factors in a dual economy model of the South. Changes in factor supply, sectoral and factoral bias in technical change, biased demand conditions, changes in the pattern of protection, and institutional elements, all play a role in determining the evolution of commodity and factor prices. The Lewis hypothesis of sectoral bias in the pattern of technical change towards temperate agriculture in the North and against tropical agriculture in the South is then reexamined in the light of the recent empirical evidence on terms of trade movements and some sketchy evidence presented on the patterns of bias in technical change in the North and the South. The evidence is not consistent with an absolute technical change bias towards temperate agriculture in the North. Rather, the rate of technical change in temperate agriculture is now comparable to that experienced in manufactures so that Engel curve effects now assert the major downward pressure on the long-run terms of trade between temperate agriculture commodities and manufactures, overriding the effects of diminishing returns to natural resources as Northern population expands. The empirical evidence onbiased technical change in the South is much more sketchy and the evidence on various components of North-South terms of trade is more varied.