Sunday, November 24, 2013

16. Dumping

If food (often sponsored by the country of origin's tax payer) is donated to citizens a poor country it is called foreign aid and is lauded and encouraged. When (taxpayer) subsidised food is exported and/or sold below cost to citizens of a poor country it is called "dumping" and is condemned and prevented? Please tell me what the essential difference is.

For the serious student - here is an interesting situation of "dumping" by American chicken producers on the South African market.

My personal view is - dump your cheap chicken on me! In this case I believe that we have an opportunity to export "white meat" to the US and earn higher prices on that market. Perhaps someone in the chicken industry in South Africa can enlighten me. The focus on the flow of money rather than the flow of value (represented by goods and services) by economists when looking at trade is a fundamental mistake that analysts make when analysing trade between countries. The gain from imports is always larger than the loss in money or currency! This is always true otherwise the trade would not have taken place in the first place! This holds true whether one is talking about consumer goods or capital goods.

Another point that needs to be kept in mind when talking about "cheap" imports. When a country imports "cheap" (in price terms) one is importing goods that is of relatively high value in the sense that local producers cannot compete by producing similar goods at competitive prices. The effect of this is that local productive capacity can employed in producing other products that will be of higher value (products that are valued more highly by customers).

There is no such thing as unemployment in a free market economy - just as there is no such thing as unsold goods in a market where there is no reserve price. As an exapmple one can look at the implosion of the Steinhoff share price there were sellers and buyers from R 120 per share right down to R 1,07! In the same way if a person cannot find a job, one reason could be that the price is to high for the value produced.

Cato Institute:

Thursday, November 14, 2013

15. Education and Economic growth

Scores on science tests have a particularly strong positive relation with economic growth. Given the quality of education, as represented by the test scores, the quantity of schooling — measured by average years of attainment of adult males at the secondary and higher levels — is still positively related to subsequent growth. However, the effect of school quality is quantitatively much more important. Barrow RJ, Education and Economic Growth, on

Monday, November 11, 2013

14. Developing a developing country

There are many ways that developing countries can overcome difficulties when trying to compete with developed countries.

1. The first way is to concentrate on producing what they have a) an absolute advantage in and b) produce what they a comparative advantage in. (explain and define these terms in your answer). This means that they would continue producing the raw materials that they could export to the developed countries that have either run out of those raw materials (natural resources like iron ore, copper, platinum, and even timber) or never had in the first place (oil to Germany).

2. The second way is to start beneficiating these products if economically viable to do so. This can be done by increasing the skills base and developing the capacity to do so by importing the skills and technology - this will help to improve ones competitive advantage on home ground. Competitive advantage can be improved by upskilling the local population - so that they gain the needed advantage. They can do this by making it easier to attract foreign skills (by not placing barriers in the way to do so), attract foreign direct investment (by lower tax regimes) and importing technology (by not placing onerous tariffs and levies on imported capital equipment)without unduly worrying about foreign exchange imbalances. The idea is similar to a start up business having to obtain external finance to get going.

3. The third way is to capitalise on the lower cost of labour that is usually present in most developing countries (not in SA because of the fact that unions have gained political pull and are able to make SA labour costs uncompetitive in terms of labour productivity). Labour costs can however be reduced by not placing tariffs on basic foodstuffs (like the 80% chicken tariff) which pushes up the cost of living for SA labourers, which in turn affects cost inflation and salary demands; and makes local production not able to compete with other developing countries.

4. In developing countries where there are high levels of unemployment minimum wages tend to keep labour costs artificially high. Labour rates should be allowed to go down and find their levels where all resources are fully employed. This will be at lower levels than the controlled minimum wage levels and have a dramatic effect on the county’s ability to compete in the international marketplace. This is especially important for developing countries that are far away from major markets such as the US, Europe and Japan.

5. Developing countries can form alliances such as BRICS, SADC to reduce obstacles in trade between such markets.

6. One reason that developing countries do not fare well is a lack of infrastructure. Here Fiscal policies could be redirected from consumer spending (social grants) to infrastructure development through capital projects (but also not in the way that China tried to do it under Mao in the Great Leap Forward and Stalin in his attempts to industrialise Russia - the key lies in freeing up the economy to private initiative and reducing the heavy hand of the state when it comes to taxes and regulations.

7. Developing countries can also reduce the cost of doing business – by reducing the cost of governance – in other words extract less tax from the productive sector of the economy to fund unproductive government initiatives. This will place such a country in a more competitive relationship to others. Mauritius is an example in this regard.

8. Some developing countries have had tremendous success in establishing Free Trade Zones where all onerous employment regulations, tough foreign trade requirements and capital restrictions as well as high tax levels have been reduced or completely eliminated. Much of China’s growth has been because of the liberalisation of these policies, including the protection of private property rights.

Charl Heydenrych charl.heydenrych a t mancosa co .za