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(Dom Helder Camera -former archbishop of Olinda, Recife, Brasil) (1984)
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Basic Knowledge on Economics. By Róbinson Rojas Sandford
Notes: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Session 17


             The Balance of Payments
             Understanding the dynamics of balance of payments. The
             political economy of balance of payments. The balance
             of payments and the concepts of globalization, 
             dependence, dominance and comparative advantage. 
             Patterns of consumption and aggregate demand.

            Prepare a short proposal for researching on the
            following: "Comparative advantage, by prescribing that
            developing nations continue to specialize in the
            production of cash crops and raw materials, denies 
            developing nations the dynamic benefits of industry".


________________________________________________________________________

Concepts to build upon the logic of the interaction of
           economic variables included in the balance of payment. 


Aggregate demand, as defined by standard economic theory is an aggregate
of different types of consumption. At the most general level, it can
be described as follows:


PRIVATE CONSUMPTION: is the consumption of goods and services that
                     after being consumed, do not produce other goods
                     and services: food, housing, clothing, books,
                     newspapers, medicines, leisure, writing material,
                     are among essential goods and services.
                     If distribution of income in a particular society
                     is extremely polarized, private consumption will
                     be dominated by taste and needs of the wealthier
                     elites, probably consuming large amounts of
                     luxury-superflous goods and services.


INVESTMENT         : that is, consumption of goods and services which
                     produce something else (other goods and services)
                     when transformed by human labour. Machinery and
                     raw materials are within this type of consumption.
                     In accordance with textbook economics, these goods
                     and services are called CAPITAL. By definition,
                     this type of consumption will be useful only if
                     connected to human labour.


GOVERNMENT SPENDING: Defense, law and order, institutions to collect
                     taxes from civil society, are the basic items of
                     expenditure. But, then, the government can have
                     an economic role, particularly if related to social
                     welfare. Therefore, organizing the supply of public
                     goods such as education, health, housing and income
                     for old people and deprived people, is another
                     economic role the government can have and can
                     contribute to economic growth through
                     subcontracting the building of schools, hospitals,
                     low-price houses, railroads, roads, bridges,
                     irrigation works, power generation units, etc.


FOREIGN TRADE      : Foreign trade is composed of selling to foreigners
                     and buying from foreigners. Selling will provide
                     foreign currency to buy from foreigners. Therefore,
                     a general situation of equilibrium between exports
                     and imports will be thought as economically healthy.


Students must read also my notes on
Circular Flow of Income, and Theories of consumption

In general terms, less developed countries dedicate a very high
proportion of their domestic economies to foreign trade. Because of
historical reason -before becoming free nation-states the overwhelmingly
majority of these countries were colonies of Western European powers,
United States and Japan- less developed countries are producers of
raw materials and cash crops mainly to meet the needs of industrialized
countries. This "specialization" in accordance with the "comparative
advantage theory" is not a bad thing, actually is a very good thing,
because less developed countries can become industrialized exploiting
this relative advantage, selling raw materials and cash crops and buying
technology and modern machinery from industrialized societies.


Thus, foreign trade for third world countries is critical, and
therefore balance of payments behaviour will be at the center of any
study of the political economy of developing societies.


To make sense of the above, one can built a MODEL.

The following factors will affect the dynamics of balance of payments:

1)relative price between exports and imports. That is, relative prices
  between prices of commodities (raw materials and cash crops, and
  foodstuff) and manufactured goods (main imports by third world
  countries.

2)net balance between foreign investments and remittance of profits,
  depreciation and interest on these investments.

3)net balance between foreign investments for producing for the
  domestic market and import of intermediate materials, technology and
  spare parts.

4)net balance between long-term loans and payment of interest and

  repayment of principal.


5)the aggregate effect of 1), 2), 3) and 4), if negative, will make
  that type of foreign trade "unsustainable", and with that, the whole
  process of growth for that particular society. If negative, the
  theory of comparative advantage will be false.


If negative, the economy of this particular society will depend
structurally on external financing, on external markets, on external
industrial behaviour, and on external fluctuations in flows of money,
flows of capitals, and flows of goods and services.

By and large, central industrialized economies will dominate peripheral
dependent economies, and the process of "globalization" of production
in an environment of free-markets, free mobility of capital, and free
mobility of goods and services, will be in reality a process of further
dominant-dominated international relations. A further development of what
is called "economic imperialism", or, sometimes, neo-colonialism.


SOME EMPIRICAL FINDINGS.


Diverging prices for commodities and manufactured goods in the
international market during the process of globalization:



UNIT VALUE INDEX           
of manufactures           Petroleum  Agriculture Metals and Fertilizers
exported by                                      Minerals 
France, Germany,
Japan, United Kingdom,
and United States


1965        100             100         100         100        100
1970        114              83         107         111         77
1975        205             767         190         143        405
1980        327            2683         329         257        331
1985        314            1983         238         189        228
1990        455            1667         238         270        256
1996        518            1483         298         241        308

Source: "Global Economic Prospects and the Developing Countries. 1997",
        A World Bank Book, 1997
______________________________________________________________________


SUMMARY FOR FREE MARKET ECONOMIES WITH NEGATIVE        TOP OF PAGE
        NET FACTOR INCOME FROM ABROAD        ($ MILLION -1992 PRICES)
------------------------------------------------------------------

                        1960-1992            1960-1975   1976-199

TOTAL                 -3065221.19           -672230.50 -2392990.70
PER Day                   -254.48              -115.11     -385.66
PER HOUR                   -10.60                -4.80      -16.07
------------------------------------------------------------------

AFRICA/per hour             -2.21                -2.01       -2.39
LATIN AMERICA/per hour      -3.26                -1.52       -4.90
ASIA/per hour               -1.79                -0.72       -2.79
INDUSTR>/per hour        -3.35                -0.55       -5.98

------------------------------------------------------------------

Note: Six industrialized countries received more than 95% of the
      above flow (United States, Switzerland, Japan, Germany,
      Luxembourg and France)

===Source: World Bank Tables 1995===processed by Robinson Rojas===
______________________________________________________________________

BACK

LATIN AMERICA AND THE CARIBBEAN: INVESTMENT FINANCING
            (Coefficients as a percentage of GDP)

                            1975 dollars           1980 dollars
                          ----------------   ---------------------- -----
                          1950  1960  1966   1973  1970  1974  1982  1990
                           to    to    to     to    to    to    to    to
                          1959  1965  1972   1979  1973  1981  1989  1997
                          ----------------------------------------- -----

1.Gross domestic savings  22.7  25.4  25.7   24.1  26.1  23.1  23.9  21.0
2.Net factor payments
  abroad                   2.1   1.7   1.9    1.9   2.1   2.4   4.7   3.2
3.Terms-of-trade effect   -0.8  -0.4  -3.4    0.4  -5.9  -1.1  -4.0   0.7
4.External savings         1.5   1.2   2.0    3.0   2.6   4.0   1.6   2.9
5.Gross domestic savings:
           (1-2+3)        19.8  19.7  20.4   22.6  18.1  19.6  15.2  18.5
6.Gross domestic
        investment:(4+5)  21.3  20.9  22.4   25.6  20.7  23.6  16.8  21.4
7.Net transfer of
      resources abroad:
         (4+3-2)          -1.4  -4.5  -3.3    1.5  -5.4   0.5  -7.1   0.4
--------------------------------------------------------------------------

GROSS DOMESTIC PRODUCT.- GROWTH RATES

                                1960-    1970-    1974-    1982-
                                1969     1973     1981     1988
                                --------------------------------

Industrialized countries         4.9      4.2      2.3      3.0
Latin America and the Caribbean  5.7      6.4      4.7      1.5


CONSUMER PRICE INDEXES

Industrialized countries         2.9      5.7     10.0      4.2
Latin America and the Caribbean 17.7     18.6     45.0    117.9


BALANCE OF PAYMENT ON
CURRENT ACCOUNT  (US$ billion)

United States                   -5.8      1.8     -8.6   -152.5
Latin America and the Caribbean -4.5    -30.3    -41.6     -9.2

------------------------------------------------------------------------
source: CEPAL, "Postwar transfer of resources abroad by Latin America",
               United Nations, 1992
________________________________________________________________________


THE BALANCE OF PAYMENTS ACCOUNTANCY:


1.Exports of goods and services
2.Imports of goods and services
3.Factor services

    Profits
    Interest received
    Interest paid
    Other

4.Private unrequited transfers

-------------------------------

BALANCE ON CURRENT ACCOUNT (1-2+3+4)

-------------------------------------------------------------------

5.Private unrequited transfers
6.Long-term capital
   Direct investment
   Portfolio investment
   Other long-term capital
      Official sector
        Loans received
        Amortizations
      Commercial banks
        Loans received
        Amortizations
      Other sectors
        Loans received
        Amortizations

------------------------------------------
BASIC BALANCE (1-2+3+4+5+6)


7.Short-term capital
     Official sector
     Commercial banks
     Other sectors

8.Errors and omissions (net)
-------------------------------------------------------------------

BALANCE ON CAPITAL ACCOUNT (5+6+7+8)


TOTAL BALANCE (balance on current account + balance on capital account)

Total net transfer of resources:

     equivalent to net inflow of capital, minus
                   net payments of profits and interests

     Another way of looking at it:
              credit plus foreign investment plus unrequited official,

     where

     credit is equivalent to the net inflow of long-term capital
            (not including investment) and the inflow of
             short-term capital (official and from commercial banks)
             minus net payment of interest.

     foreign investment is equivalent to direct and portfolio
             investment less net payments of profits.

________________________________________________________________________


BOX1____________________________________________________________________


THE MIRACLE OF THE MULTIPLICATION OF PROFIT


According to figures from the US Department of Trade, the average annual
return in US capital invested in Latin America in 1978 was 16 per cent.
Let us see what this means in practice. Let us take a company investing
$100 million in a Latin American country. Let us suppose that, out of
$16 million profit that it gains from this investment in the first year,
it sends home $10 million and ireinvests locally $6m. This pattern is
then repeated for the next seven years. Let us asee what this means.


($m)

                  Annual                 Registered Accummulated
         Profit  Remittance Reinvestment   Capital    Remittance

Year 1     16       10          6            100         10
Year 2     17       10          7            106         20
Year 3     19       12          7            113         32
Year 4     21       13          8            120         45
Year 5     22       14          8            128         59
Year 6     23       15          8            136         74
Year 7     25       15         10            144         89
Year 8     26       16         10            154        105
TOTAL     169      105         64            164        105


In Just eight years, the mother company has recovered its initial
investment of $100 million, and the capital invested in the Latin
American country has increased to $164 million. Is in this way that
US investments in Latin America were able to growth from $10 billion
in 1966 to $32 billion in 1978, with only a small part of this money
being effectively sent from the US to Latin America.
(from C. Branford/B. Kucinski, "The Debt Squads. The US, the Banks, and
 Latin America", Zed Books, 1988)
---------------------------------

Year 9     28       16         12            164        121
Year 10    29       17         12            176        150

In ten years, profits remitted abroad are equivalent to 1.5 times
the original investment, and registered capital will be 1.76 times
the original amount.


END OF BOX 1____________________________________________________________



BOX2____________________________________________________________________


22. The performance of TNCs and their affiliates
(from The United Nations Library on Transnational Corporations, updated
 by Dr. Robinson Rojas)
------------------------------------------------------------------------


21. TNCs and the Balance of Payments: the exchange gap

21.1 introduction
     why, and under what conditions, should the impact of TNCs on
     the balance of payments be of concern to host and home countries?

21.2 viewed form the host country's perspective

    a) identifying the external transactions associated with FDI

      i) capital account:
         - initial inflow of foreign equity or loans, net of
           imports of real assets (+)
         - subsequent capital inflows (+)
         - reinvested profits (+)

     ii) Current account:
         - imports of intermediate products and goods
           for resale (-)
         - exports of affiliates (+)
         - profits and interest earned (-) royalties and
           management fees (-)

    iii) transactions of other forms associated with TNC
         affiliates (even a good which is non-tradeable may
         embody inputs which are tradeable)

    b) attributing balance of payments transactions to TNCs

      i) alternative models of estimating effects
     ii) what would happen in absence of TNCs (the counter
         factual situation): making direct comparisons with
         balance of payments transaction of non TNCs
    iii) indirect effects of FDI on other firms

    c) the relevance of host country macro-economic policies in
       evaluating contribution of TNCs to balance of payments
       objectives of host countries

21.3 variables affecting impact of TNCs on balance of payments

    a) according to type of TNC affiliate activity, e.g. resource
       based, import substituting manufacturing, export processing,
       service, etc.

    b) according to TNC specific characteristics (e.g. age, size,
       strategy, control exercised on sourcing and export markets,
       etc.)

    c) according to policies pursued by host governments;
       cf. Singapore with India, Mexico with Thailand, etc.

21.4 Do TNC affiliates export/import more than indigeneous firms in
     developing countries?

        The evidence is mixed, but, on balance, TNCs affiliates
     export about the same or marginally more than their domestic
     competitors; but they also import more. Clearly there are country,
     industry and firm specific characteristics which are as, if not
     more, important than the nationality of ownership in influencing
     balance of payments effects

21.5 intra firm trade flows

    a) the components of intra-firm trade e.g. foodstuffs and raw
       materials, components and parts, finished goods, services,
       second hand equipment, machinery etc. 
       (Casson, M.C. and Pearce, R.D., MULTINATIONALS AND ECONOMIC
        DEVELOPMENT: A SURVEY, University of Reading, mimeo, 1986)

    b) the significance intra-firm trade in TNC transactions

    c) the propensity of TNCs to engage in intra firm trade

      i) type of TNC activity; composition of final output
     ii) extent of 'roundaboutness' of production and degree
         of horizontal and vertical integration
    iii) propensity of TNCs to engage in trade
     iv) propensity of TNCs to internalise intermediate product
         markets
      v) country-specific variables

    d) the likely effects of intra-firm trade on the host countries
       balance of payments

21.6 a home country perspective

------------------------------------------------------------------------



 Lall, S. and Streeten, P., FOREIGN INVESTMENTS, TRANSNATIONALS AND
DEVELOPING COUNTRIES, London: Macmillan, 1977

 Helleiner, G.K., INTRA FIRM TRADE AND DEVELOPING COUNTRIES,
London: Macmillan, 1981

 Nayyar, D., "Transnational corporations and manufacturing exports for
poor countries, ECONOMIC JOURNAL, 88, March 1978

 Dunning, J.H., INTERNATIONAL PRODUCTION AND THE MULTINATIONAL
ENTERPRISE, London: Allen and Unwin, 1981 Ch II
UNCTC(1985b)

 Kirkpatrick, C.H. and Nixson, F.I., THE INDUSTRIALISATION OF LESS
DEVELOPED COUNTRIES, Manchester University Press, 1983

------------------------------------------------------------------------


22. The performance of TNCs and their affiliates


22.1 introduction

    a) the choice of which intermediate or final goods and services
       to produce (allocative efficiency)
    b) efficiency in use of resources (technical and scale
       efficiency)
    c) private and social criteria for assessing 'performance'

22.2 the performance of TNCs as a whole

    a) growth and profitability of TNCs vs other firms
    b) variations of performance among TNCs
    c) the relevance of industry and countr-specific variables
    d) data problems

      i) lack of standardized accounting procedures
     ii) judge performance in different ways cf. Japanese with
         US firms
    iii) firms differ in the calculation of costs and revenues;
         and use of 'discretionary' profits
     iv) profits may be affected by intra-firm transfer pricing
         practices
      v) difficulties associated with foreign exchange conversion
     vi) difficulties associated with price distortions of both
         inputs and outputs

22.3 the technical efficiency of foreign affiliates

    a) measurement techniques

      i) the structure-conduct-performance (SCP) paradigm
     ii) optimum use of factor resources
    iii) productivity, profitability and market share indices;
         the 'pyramid' of performance ratios
     iv) other performance indices

    b) empirical evidence of performance of TNC affiliates;
       problems associated with deriving a meaningful measure of
       efficiency

    c) private and social efficiency: what governments may do to
       increase the social efficiency of TNC affiliates

22.4 the choice of sectors in which TNCs invest

    a) what types of sectors do TNC invest in cf indigeneous firms;
       e.g. are they more (or less) growth, (net) export,
       productivity, R and D intensive etc. oriented
    b) how do TNCs which promote global strategies allocate
       resources among affiliates
    c) individual country or industry case studies (see especially
       Dunning, J.H., and Pearce, R.D. (eds.), THE WORLD'S LARGEST
       INDUSTRIAL ENTERPRISES: 1962-83, Farnborough: Gower, 1985)
-----------------------------------------------------------------------


 Lall, S., "Transnationals, domestic enterprises and the industrial
structure in host LDCs: a survey", OXFORD ECONOMIC PAPERS, 30,
No. 2, 1978

 Sosin, K. and Fairchild, L., "Capital intensity and export propensity
in some Latin American countries", OXFORD BULLETIN OF ECONOMICS AND
STATISTICS, 49, 1987

 Lecraw, D.J., "Choice of technology in low wage countries: a new
classical approach", QUARTERLY JOURNAL OF ECONOMICS, November 1979

 Caves, R.E., MULTINATIONAL ENTERPRISE AND ECONOMIC ANALYSIS,
Cambridge: Cambridge University Press, 1982

 Chudnovsky, D., EMPRESAS MULTINACIONALES Y GANANCIAS MONOPOLICAS EN
UNA ECONOMIA LATINOAMERICANA,  Buenos Aires: Siglo XXI Editores, 1974
Stopford and Dunning(1983)

 UNCTC, TOWARDS INTERNATIONAL STANDARDIZATION OF CORPORATE ACCOUNTING
AND REPORTING, New York:  UN E82 II A.3, 1982
------------------------------------------------------------------------
--RRojas Research Unit/1998 
---------------------------

"I'll be the judge. I'll be jury", said cunning old Fury: "I'll try
 the whole cause, and condemn you to death",

 Lewis Carroll, ALICE's ADVENTURES IN WONDERLAND
------------------------------------------------------------------------



END OF BOX 2____________________________________________________________

TECHNICAL NOTE:

Standard Industrial Classification (SIC) of the United Nations:

1.- Agriculture, hunting, forestry, and fishing
2.- Mining and quarrying
3.- Manufacturing
4.- Electricity, gas and water
5.- Construction
6.- Wholesale and retail trade, restaurants, and hotels
7.- Transport, storage, and communications
8.- Financing, insurance, real estate, and business services
9.- Community, social and personal services

(Sectors 1, 2 and 3 are typically the most tradable)

Standard classification of Non Tradables and Tradables:

NON TRADABLES:

Construction and public works
Residential rent
Government services
Personal Services


TRADABLES (other than raw materials and cash crops):

Textiles, clothing and leather
Paper and printing
Refined petroleum products
Chemicals and rubber
Manufactures of metals
Transport materials
Machinery and equipment

_______________________________________________________________________