Foreign Exchange Constraints Research Articles

Exports and the Propensity to Save

may be constrained by the maximum available supply of savings. Foreign aid supplements this and enables a faster pace of economic development. Second, in the initial stages of development an underdeveloped country may require several goods of strategic importance that it is unable to manufacture domestically because either skills or raw materials are lacking. In addition, the export earnings may not be adequate to purchase such goods from abroad. Lack of foreign exchange, therefore, slows up the economic development process. In this context foreign aid overcomes the import constraint. It has been suggested that the development process can be accelerated when the foreign-exchange constraint is removed, compared with the savings constraint. A major assumption of Chenery's model is that the ex ante savings gap and the foreign-exchange gaps are independent of one another. This assumption has been the subject of critical analysis. It has been argued that the balance-of-payments problem cannot be treated in isolation from the savings-investment problem. Alfred Maizels has argued that variations in exports might result in associated variations in domestic savings.2 Should this be correct, the two-gap * I am indebted to Professor David Felix for his encouragement in exploring the main hypothesis of this paper. He is not responsible for any errors in the analysis. I am thankful to two anonymous referees of this journal for helpful comments on an earlier draft of this paper. I am also thankful to Ling Ling Chang for help with the computer work.

COMPUTERS IN INDIA

The attainment of independence in 1947 by India was followed by a period of rapid industrialisation aimed at converting an agriculture‐based economy into a highly industrial one. The revolution in data processing that was taking place in the West did not escape India, and the first computer was imported by the Indian Statistical Institute way back in 1955. Compared to other developing countries, India got off to an early start as far as computers were concerned. Although foreign exchange constraints as well as conscious policy did not permit the indiscriminate import of computers, efforts were made to develop an indigenous base.

Trade, growth and income redistribution: A case study of India

The concern of this exercise is with the effectiveness of trade policies and their assessment in achieving economic growth and income equality. A link between growth and equality is provided through employment. If there is substantial increase in employment, the inequality of income distribution is likely to be reduced. Thus, trade by bringing about higher levels of production and employment may reduce income inequality. We have applied a closed input-output model to the Indian data to estimate the interrelationships between trade, growth and income redistribution. It has been found that employment opportunities could be raised substantially through redistribution as well as through export promotion in developing countries such as India, if capital and foreign exchange constraints are not binding. Import substitution, however, does not turn out to be as effective a strategy to achieve these goals.

Project Appraisal and Foreign Exchange Constraints

Journal Article Project Appraisal and Foreign Exchange Constraints Get access Charles Blitzer, Charles Blitzer International Bank for Reconstruction and Development Search for other works by this author on: Oxford Academic Google Scholar Partha Dasgupta, Partha Dasgupta London School of Economics Search for other works by this author on: Oxford Academic Google Scholar Joseph Stiglitz Joseph Stiglitz Princeton University Search for other works by this author on: Oxford Academic Google Scholar The Economic Journal, Volume 91, Issue 361, 1 March 1981, Pages 58–74, https://doi.org/10.2307/2231696 Published: 01 March 1981

FINANCIAL DEEPENING AS A PREREQUISITE TO INVESTMENT GROWTH: EMPIRICAL EVIDENCE FROM FIVE EAST ASIAN ECONOMIES

The Developing EconomiesVolume 17, Issue 3 p. 295-306 Free Access FINANCIAL DEEPENING AS A PREREQUISITE TO INVESTMENT GROWTH: EMPIRICAL EVIDENCE FROM FIVE EAST ASIAN ECONOMIES James W. HARRIS, James W. HARRISSearch for more papers by this author James W. HARRIS, James W. HARRISSearch for more papers by this author First published: September 1979 https://doi.org/10.1111/j.1746-1049.1979.tb00616.xCitations: 2AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat REFERENCES 1 ADELMAN, I., and KIM, M. J. An Econometric Model of the Korean Economy,” in Practical Approaches to Development Planning, ed. I. Adelman ( Baltimore : Johns Hopkins Press, 1969). 2 BHATIA, R. J., and KHATKHATE, D. R. Financial Intermediation, Savings Mobilization, Entrepreneurial Development: The African Experience,” IMF Staff Papers, Vol. 22, No. 1 (1975). 3 BLOMQVIST, A. G. Empirical Evidence on the Two-Gap Hypothesis—A Revised Analysis,” Journal of Development Economics, July 1976. 4 CHENERY, H. B., and BRUNO, M. Development Alternatives in an Open Economy: The Case of Israel,” Economic Journal, March 1962. 5 CHENERY, H. B., and STROUT, A. M. Foreign Assistance and Economic Development,” American Economic Review, September 1966. 6 FRANK, C. R.; KIM, K. S. and WESTPHAL, L. E., Foreign Trade Regime and Economic Development: South Korea, National Bureau of Economic Research ( Cambridge : Ballinger Press, 1977). 7 FRY, M. J. Money and Capital or Financial Deepening in Economic Development Journal of Money, Credit, and Banking, November 1978. 8 GALBIS, V. Structuralism and Financial Liberalization,” Finance and Development New York : IMF Publications, 1976). 9 GALBIS, V. Financial Intermediaries and Economic Growth in LDC's: A Theoretical Approach,” Journal of Development Studies, Vol. 13, No. 2 (January 1977). 10 GRANGER, C. W. J., and NEWBOLD, P. Forecasting Economic Time Series ( New York : Academic Press, 1977). 11 HARRIS, J. W. An Empirical Note on the Investment Content of Real Output and the Demand for Money in the Developing Economy,” Malayan Economic Review (forthcoming). 12 JAO, Y. C. Financial Deepening and Economic Growth: A Cross Section Analysis,” Malayan Economic Review, Vol. 21, No. 1 (April 1976). 13 KAPUR, B. Alternative Stabilization Policies for Less-Developed Economies,” Journal of Political Economy, Vol.84, No. 4, Part 1 (August 1976). 14 MCKINNON, R. I. Foreign Exchange Constraints in Economic Development and Efficient Aid Allocation,” Economic Journal, June 1964. 15 MCKINNON, R. I. Money and Capital in Economic Development ( Washington , D.C. : Brookings Publications, 1973). 16 MICHALOPOULOUS, C. Production and Substitution in Two Gap Models,” Journal of Development Studies, July 1975. 17 PRACHOWNEY, M. F. J. Small Open Economies ( Lexington , Mass. : Lexington Books, 1975). 18 SHAW, E. S. Financial Deepening in Economic Development ( New York : Oxford University Press, 1973). 19 STOUT, A. M. Foreign Assistance and Economic Development,” AID Discussion Paper No. 7 (1965). 20 STOUT, A. M. Savings, Imports, and Capital Productivity in Developing Countries,” Paper presented to First World Congress of Econometric Society (1965). 21 STROUT, A. Korea's Use of Foreign and Domestic Resources,” in Practical Approaches to Development Planning, ed. I. Adelman ( Baltimore : Johns Hopkins Press, 1969). 22 WEISSKOPF, T. E. An Econometric Test of Alternative Constraints on the Growth of Underdeveloped Countries,” Review of Economics and Statistics, Vol. 54, No. 1 (February 1972). 23 WEISSKOPF, T. E. The Impact of Foreign Capital Inflow on the Growth of Underdeveloped Countries,” Journal of International Economics, Vol. 2, No. 1 (February 1972). Citing Literature Volume17, Issue3September 1979Pages 295-306 ReferencesRelatedInformation

A Land Use Model for Evaluating Appropriate Production Technology in Ashanti, Ghana

A computerised land use model in developed, where basic foodstuff, together with cocoa and timber export production are required to meet forecast demand levels to year 2,000. The ability of the land to produce these products under current farming technologies in modelled. Using land availability alone, significant surplus are demonstrated, but when the energy constraint inherent in hard farming and the foreign exchange constraint are modelled, a deficit occurs. By modelling simple technological adaption to current practice it is demonstrated that a productive system, capable of feeding the forecast population of Ashanti can be defined. By including basic housing and clothing projects it is demonstrated that basic industrial production methods can be discussed for appropriateness as a total productive system for basic necessities in Ashanti to year 2,000, by giving the problem of feeding people, from available land, priority.

SHORT-RUN TRADE EFFECTS OF THE LAFTA

SUMMARY This article uses ordinary least squares to estimate the trade effects of the Latin American Free Trade Association (LAFTA). Estimates are made for total LAFTA and for each member country. The basic models use income, foreign exchange and a proxy for economic integration. The findings indicate that economic integration promoted an expansion of intra-LAFTA trade for all member countries. And most of the increased intra-LAFTA trade was diverted from third countries. The findings also confirm the importance of the foreign exchange constraint for the trade of developing countries. An analysis of the reciprocity of concessions indicates that the effective concessions which Argentina received were less than those it granted to other LAFTA members. More pronounced were the similar findings for Chile and Colombia. In contrast, the ‘favored’, less developed LAFTA members (Ecuador, Paraguay, and Uruguay) received concessions worth many times the value of the concessions which they granted.

On the Concept of Foreign Exchange Multiplier—A Correction

In an earlier issue of this journal, Diamond [1] has argued that in develop¬ing countries increased imports may have an inflationary rather than a defla¬tionary impact on the economy. His reasoning is based on the fact that develop¬ing countries are faced with short supplies of imported inputs and not with a deficient demand. An increase in the imports of intermediate goods results in increased production and higher G.N.P. The ratio of the increase in output to the increase in the imports is termed foreign exchange multiplier by Diamond. Diamond's analysis is quite useful as it enables one to determine the increase in output when foreign exchange constraint is relaxed in a developing economy. However, his analysis suffers from two problems. First, the assumption that all of the increase in foreign exchange will be allocated to the imports of intermediate goods is unrealistic. Second, there is a mathematical error in his Equation 6 when he divides the output vector by an imports vector. In this note, the assumption that all of the increase in foreign exchange is allocated to the imports of intermediate inputs is relaxed. Diamond's Equation 6 is corrected. It is further shown that for the computation of a foreign exchange multiplier for the economy as a whole one does not need inter-industry matrix and that information regarding the value added per unit of gross output is sufficient.

Empirical evidence on the two-gap hypothesis: A revised analysis

This paper reconsiders the problem, analyzed by Weisskopf (1972a), of empirically classifying a set of low-income countries as having had their growth performance primarily constrained by the availability of foreign exchange or of domestic savings. Ambiguities in Weisskopf's procedure are noted, and an alternative, based on the extension of classical likelihood-ratio methods to the case of regression parameters subject to linear inequality constraints, is suggested. Reclassifying a subset of countries from Weisskopf's sample, we find stronger evidence against the importance of an independent foreign exchange constraint than indicated by Weisskopf's original results.

Production and substitution in two‐gap models

The paper examines the assumptions about production and factor substitution in two‐gap models. It focusses on the basic assumption of substitution between domestic and imported capital inputs implicit in the foreign exchange constraint argument. The elasticity of substitution between these two sets of inputs is measured using time series regressions employing data from Argentina. It is concluded that in Argentina the observed capacity to substitute domestic for imported inputs was substantial. It is argued that for countries with a somewhat developed industrial sector, rigid assumptions of complementarity between domestic and imported inputs might be inappropriate, and that projection of foreign exchange requirements based on such assumptions, commonly employed in two‐gap models, would be questionable.

Benefit-Cost Analysis and Trade Policies

This paper extends the theory of optimal taxation and government production to open economies. Appropriate rules for project evaluation and the determination of consumption, production, and trade taxes under a variety of restrictions (e.g., less than 100 percent profit taxes, government budget constraint, foreign exchange constraint) are derived. Among the results are (a) international prices should be used for evaluating public projects, unless there is a government budgetary constraint or there is a quota (this result does not require that tariff rates be optimally chosen); (b) no tariff should be levied on intermediates and only consumption taxes should be employed if there are 100 percent profit taxes. If profits are not taxed at 100 percent, both consumption and trade taxes should be employed.

Foreign-Capital Utilization and Economic Policies in Developing Countries In Developing Countries

T HE traditional aid-and-development literature assumes that, under most relevant circumstances, aid and other capital flows to developing countries induce an expansion of economic activity and output in these countries. In the underlying models such capital finances an equivalent amount of net imports of either (a) capital goods of an unspecified nature (thereby relaxing the saving constraint) or (b) specific required inputs obtainable only from abroad (thereby relaxing the foreign-exchange constraint).' A number of writers have estimated the effects of past capital inflows and capital requirements on the basis of 'this assumption, without seriously questioning its validity (Rosenstein-Rodan 1961; Chenery and Bruno 1962; Manne 1963). Several recent writers, however, have criticized this view, both because of its formal incompatibility with other aspects of the theoretical models employed and because of its inconsistency with empirical observation (Rahman 1968, Areskoug 1969, Chenery and Eckstein 1970, Griffin 1970, Griffin and Enos 1970, Weisskopf 1972).2 It seems that a considerable portion of these capital inflows have in fact been allocated to consumption and that ties and other creditor (donor) restrictions designed to channel them into investment have been largely ineffective. The traditional aid-and-development models must therefore be deficient.

A Note on Professor McKinnon's Model of Foreign Exchange Constraints in Economic Development

Journal Article A Note on Professor McKinnon’s Model of Foreign Exchange Constraints in Economic Development Get access Basant K. Kapur Basant K. Kapur Stanford University Search for other works by this author on: Oxford Academic Google Scholar The Economic Journal, Volume 83, Issue 329, 1 March 1973, Pages 221–234, https://doi.org/10.2307/2231116 Published: 01 March 1973

The Foreign-Exchange Bottleneck Revisited: A Geometric Note

In the recent literature on economic development, the notion that the growth of developing countries is limited by a foreign-exchange constraint which is independent of a savings constraint has gained wide currency.' This view implies that for many developing countries there is a redundancy of ex ante domestic savings, imposed by the limited availability of foreign exchange to the economy. The resulting two-gap analysis in terms of independent savings and foreign-exchange constraints has been enshrined in the UNCTAD philosophy as presented by Prebisch in Towards a New Trade Policy for Development,2 and has formed the basis of the theoretical models of McKinnon3 and Chenery and Strout.4 More recently, the basic assumptions of these models have come under attack.' The purpose of this note is to integrate these criticisms in terms of a simple model which (a) rigorously shows the minimal assumptions needed to give rise to an independent foreign-exchange bottleneck, (b) distinguishes between

THE FOREIGN EXCHANGE CONSTRAINT TARIFFS AND IMPORT SUBSTITUTION

SUMMARY Recent studies have stressed that a foreign exchange constraint can be limiting the rate of output growth in many developing countries. On the basis of a simple constraints model the role of tariffs and related import substitution in relieving a foreign exchange constraint are analyzed. It is first argued that the assumptions necessary for a foreign exchange constraint to be limiting output growth require that the optimal government intervention is through non-uniform exchange rate adjustment implied by trade controls and multiple exchange rates. But, whereas the optimum government intervention is through the establishment of a structure of optimum tariffs and subsidies, such a policy is not feasible in light of data availability and administrative capacity in developing countries. The costs and benefits of a non-optimal intervention through controls are then explored and standards of minimum acceptability of developing countries’ trade policies are established against which actual policy can be compared. It is concluded that trade controls can be used to improve growth performance but only if a number of rigid conditions are met.

Foreign-Exchange Constraints in Economic Development and Efficient Aid Allocation: Comment

Foreign-Exchange Constraints in Economic Development and Efficient Aid Allocation: Comment

Foreign-Exchange Constraints in Economic Development and Efficient Aid Allocation: Rejoinder

Journal Article Foreign-Exchange Constraints in Economic Development and Efficient Aid Allocation: Rejoinder Get access R. I. McKinnon R. I. McKinnon Stanford University Search for other works by this author on: Oxford Academic Google Scholar The Economic Journal, Volume 76, Issue 301, 1 March 1966, Pages 170–171, https://doi.org/10.2307/2229075 Published: 01 March 1966

Foreign Exchange Constraints in Economic Development and Efficient Aid Allocation

Journal Article Foreign Exchange Constraints in Economic Development and Efficient Aid Allocation Get access Ronald I. McKinnon Ronald I. McKinnon Stanford University California Search for other works by this author on: Oxford Academic Google Scholar The Economic Journal, Volume 74, Issue 294, 1 June 1964, Pages 388–409, https://doi.org/10.2307/2228486 Published: 01 June 1964