- Email: [email protected]
Aspects of a new world development strategy I: Financial transfers from developed to developing nations
A global econometric model is used in this study to evaluate the effect of a {ant-in-aid transfer from the developed market economies to the non-oil-exporting developing ec~~noti.ies. Two alternative financing schemes, expenditure diversion anddkt taxation, are supposed in the paying countries so that the government current amount balance is not dis~url~tx!. The results suggest that the developing countnes would benefit greatly from the implemer.tation of any transfer s&me. The develofd cou&es, under either of tke assumptions of this study, would a& realize any substantial benefits from ofking such a prl)lrlent.
INTR.ODUC!TION
A previous study (Weinberg 1979) has evaluated a financ In!Transferof 1% of flECD gross product t,o the IDCs when the impscat on the transferring nations’ incomes is not imposed. 1.; that scenario, it was supposed that profits from the auction of gold reserves of the Int crnntional Monetary Fund be granted to dS=velopagcountries. Not surpriGng[y, !_k creation of new financial resources and the alfocstion of those rescurces directly to the developing nations had a substantial positive impact O:EL their output anr incon-kes.The increased import demands ofdeveloping nations also resulted in a significant stimulus to the OFXD nations, This article extends the previous research by dkectly imposing :k i;,ostof the transfer on the donor nations. Two altematkz scenarios are implemented. In one case the transfer is fina3ced by the diversion of yi,,blic expenditure, amounting to 1% of the total gross product of each dec ei;)ped nation, froxr.domestic uses to the developing regions. ‘inthe oth~ scenario, direct taxes are imposed in these sam,ecountries. The revenues from these ta~ce, Go amounting to 1’96of gross product, are used to finance the foreign t.ElI&~. Th:s
study WSJ limit itself to the comparison ofthe two trar&er scerr;~rio~
--Address cowesp~ ktrfeerrce to CM B. U’eir;berg, Wharton Econometric Foreczwing Associzion, Inc., 3642 S rknce Center, Phiiadel?pkiii, Pennsylvania 19104. *Any vhws cv q lin ons expressed herein are solely those of the authors aad do not reflec L
the positions of q institution or the views and opinions of Project LINK. StCarl B. Wzi !tber:g was an Assistant Rese,arch Professor of Economics a New Ir’ork University wlhen this study was carried out. huvmal ofPolicv Af&Gg I(3), 343-357 (1979) (c Society for Policy Modi:ling, Y979
343 0’ 61-&938/79/03034. +15$J1 75
described above as ahernatives to s baseline solution without transfer, QPI~ to one another. To evAWe the merits of the pohcies properly, thq sE~3uld be compared with the alternative of donrwtirt fiscal stimulation or tax relief of the same amount. Such a study is bq~ond the scope of thiaispaper, $&tough references to previous research (e.g., Hickman and 3ishleicher 1977 ) can be used to infer the probable full sys,tem government e~.penditure mu!tipliers.’ The issues that can be asssssed by these shnulations are summtized in terms ofthe Aallsystem, or open-economy, mukiplie~ of the LWK world model system.’ First, will a traulsfer be overeflected or underefTected? Second ( if&a transfer is effected, are the foreign expenditure multipliers of the LEWKmodels greater than or Sess than ,?hegovernment exglenditure multipliers or the tax mu9ti;plielrs8? Third, to what extent and with what effects will %he‘benefits‘(or Iossas) from the ,&ansfer redistribute income among the developed economies? This last issue will depend upon a combination uf the varqringbilat,eral marginal propensities to import of the tdcvelopingcountries Froaneach developed nation, and the varying fore&u trade and government expenditure/tax multipliers of each transferring economy..’ The exwsition proceeds in three sections. First, a simple kkjrmesian model is developed to illustrate the theoretical issues involved in the transfer problem. Next, a discussion of the irnplementatio~l lof these scenarios :n the LIF% models is presented, with a summary ofthe prelink up single-country results. T%en, the postlinkage or full system results are c&cussed. Some conclusions and discussion follow.
Modem @terest in the effecti of a financial transfer began with Vine:*‘s ( P924) stud!{of capital exports to Canada. The issue became important to lWeinberg (t979) and Hickman (1974) generate ikcal policy multipliers when #several economies are i.timulated simultan~nsly.. ZFor II full d~cription of the IJNK model systems, see K.kn (1975) and Kiein: and Su (1939).
The policy z spects of the simulnticns presented here have to be considered cautic&y.
It
wuid be misie &ag to interpret this study as an a.rsmpt to quantify the imoact of rvarious
r~qxw& for ckvefopment aid that are being, sqgested by national anli iwemational organizations (such as the UNCFMX Since rh.$a~aiy~is is still experimental, it is presenird soie!y zi +&eres:ilt of a simuiz;tion exercis4e in the irSe+r.ational transmission ol’bukrss cycle phencmwa. Acr.uaf policy prqwsals concerning tLd transfers from the devekqed economies involve many more comohx issues t’lan co&d be reproduced in simulatiotis of he LINK ! ystern .
AS’MCTS OF A NEW WORLD DEVELOPMENT
STRATE::G’! I
345
contenqmrary debate again dting the interwar period in ke famous debates betwn:enKeynes (1X29) and Qjhlin (lS29) over tl;#eGerman war reparations. Another focus of the transfer debate has been ‘ln the effects of American foreign aid programs after MwM ‘War Ii. T’s quote I-L G. Johnson (1956), “The transfeia problem bulks large in the hterature of international trade theory.” In this section, we shall develop a Keynesian model of the adjustment of a two-coun?ry wodd to a unilateral transfer. I!ssentially, we follow the arguments of Alex.ander ( 1Y52) and Tsiang [196 1) in dleveioping this model, even though their analyses centered on. the problem of exchange devtiluation. It hag been amply demonstrated that these two problems are formally similar (Johnson 1958). The model and analysis are al:;~oidentical to $hat of Metzler (,1942) in his analysis of the transfer problem, We begin with the equilibrium condition for the goods market i.n“‘home” country, which may be written as y= A -I- G + B,, W whew Y = current period expenditures on goods and servi,zes,AI:= the sum of domestic expenclitures on consumption and investment, LCdomlestic absolljtian, G = (exogf!nous) government expenditures, an5 lil’= home country trade balance. A!1 variables are measured at corptant pr,rices. ITkmestic absorption .4 is usually (determined a3 a function ot’income, pGces, and interest rates. For Plhiepurposes of our analysis,, price and interest efl&s will be ignloredas tifough they are negligible in the short run; thus, A = AI(Y) --=(i - s’)Y -I- A’,
m
wlhere s’ = the mruginal propensity ‘to hoard Dut of income8 and A := autono8mousidXloIptbIl. Ifall investment are defined to be autonomous, we may then replace S’ with s, the marginal propeasity to dave Thus, the new absorptron func~tion and its derivative bibComes A = A(Y) = f J:- s)Y f i’,
t
2b)
asterisi~ will be used tkoughout this lpapetr to denote the “fmei.gn” variables, v&h the same deftiI!ion as the domestic variable. The real trade balance for the home country may be written
The
.B c= iM* -- Al,
(4)
where M’ reprwwks home couc&ry imporb and @ represents foreign imjzorts. We specify knpo~ts soiely as a f%nction of income: M==D’+dnY,
@aI
d&f = mdY,
(W
propensity Ito import out of income, and D = autonomrp:s imports. By definition, B* = --B. Substkitiug, we may write our ftiI\lmodel in three equations:
where m = the margina
Y= y*=
[(l
-s&Y+
F1-I- G A [(D* + m”Y’:‘) - (D + my)],
XJ
(da)
[(1 - s*‘)Y* + I*] -+ G* -+ l[(D + HZY) ‘- (n* + mPj] (W
19= (I?
+ m’Y*)
- (0 + mY).
(W
Differentiating and collecting terms yields the following: (s
m:)dY - m*dP
t
bs’
-
= dC,
m*‘MP - mdY = de , ,, -mcsY + m*dT* = -dB.
(74 (‘W
(74
of We assume “ normal” ranges c I’vsiu~~ for s, s*, m, and II?*,so that 1111 these parameters are positive sxld less than one. This simple system may be used directly to study the impact of a trZllX&r. _A.ssume that a unilateral transit is paid by the “home” country to the “,foreign” coun~t.. The payrrent is financed by diverting government exy?en&ture from domestic uses in tie home country. ‘Ihe foreign government receives the transfer and clomplctely dis\91ursesit 69the residents of the foreign country. In thL case, we may redefine ~16follows: CicI;= -T,
(8a)
dG* = -i-T,
(81))
where I is the amount of !he transfer in red terrm4 Substitutir_g (8242) into 17a-c) and solving, yields
%ote that distributional &Tects c,f the transfer are not corkdered.
d’,vlg-
-
-p/,q
[9ll.)
d9j”llg’ :-- s/K,
W))
db/T = (m’Cs 4- ms:‘”)/iv, where K
=I
(SC)
J,,P ,-i-m*s -i- m,+‘.Tlhe imp~kx%baof -&issimple model, under
‘immd” iasrunzpticres Ekmntthe!values of ‘lhf:marginal propensnies, is that ircome in the home country ?&, and that f:mslgn country income rises. The balance of payments ~mpao~;esGorthe home countq, but by less than the aZount of the transfer, thus implying thsl; the Wansfer is effected in real terms. Total world income inGreases (decreases) as (s - se) is greater than (bss than) zero. Total wlxld trade will increase (decrease) if (srattk- s**n)is greater than (less than) zero. Thus same analytical framework can be used to evaluate the ef?fectsof a tran&r financed by direct taxation. Two changes must be made. First, absorption 6.ndimports :nust be ~writtenas a func+ionof &sposa,bte income in the paying country. Second, government gexpeniliture chakge s are IOfixed at zero in the payling countl;y,. Thus., = y -I- jr, .Y,t;, (lOa) dir.= T.
UOW
The distribution of the trzlsfer in ,the foreign country is asstrmed to be
implemented via government cxpenditurss. Thus, r16 = 0 , &l’G”
z
(Im)
:J-.
(10.1)
Tue revised system, in diEercnti,a? f;,m~, is (s + m)dY -‘.- m*rlY* z= (s + m - l)T, -mdP’
-t (s* -b m’“)dJi
mdY -
== (1 -. f?2)I’,
m:‘bdYip $- alB E=m %.
(1 la) (1 W (1 w
Solving the system yields the Golk~wing: LfY/T == :!I- s* ‘K d:E/-k/T-1 J;/K, ,$:5/T ==(s*m
1124 (12b)
-+ sm*),lK,
(12c)
--dm-e.K is def;.P;edas lbt#ore. These results gre iderncal %(I the previous case, except that the ifnpact on
the paying
country
i-s di~rr;i&wi
yrvhentax reven.ues are used to ~~~EHMX: Ihe gain fron: the transfer if s”/K is
transfer. In fact, ,3-g p ~yjng ~C~iunQ migk
Gerhard Munduch and G~nsd B. Weinberg
348
less than one. The likelihocd of this occurr!!g will increase if the foreign country’s margbal propensity to imwrt is very high and its savings propernsity is very low. These circumstances seem to match the scenarios to be presenmd in this study, where the transferring countries are d.eveloped economies anJ the rf:cipient nations are develop&: regions. It should also be noted that the “real” balance of tradealways improves for the paying country, but by less thau the amount of the transfer. The transfer wili thus be “unde~reffe~ted,“,since!a frac tioa of the giR is retained in the receiving country. In terms of the policy issues “being~~slyzed in this study, we can directly compare the transfer multipliers with the government expenditure multipliers. The government expenditure multipliers may be calculated from our original system as dr’ldg
=
(s* -tm*)lK,
(13a) (13t9) (13c)
Comparing these results with the transfer financed by government expenditure, it is clear that ‘dlcmesticincome in the home country is p;l.ways stimulated by a direct incre.srs.2 in domestic government expenditures, while tending to decrease in the transfer scenario. The foreign country income gains more (less) if (m *- S) is greater than (less thaci) zero. However, the trade balance cleterioratifess&ply as s result of dirc:ct fiscal policy.. ‘l? expected outcome ofthis simlplemodel, therefore, is that ;GI~direcr: domestic stirnubs is a rao~ effective policy than a transfer of resources. This accounts for bth the direct and indirect effects on the paying coun&ies. However, donestic fiscal policy would have the drawback {.A awa”stating the external balance of tie stimulating econoinj. Before :c-ncIuding, we should Iike to point out some limitations of the precedmg 2j.n@Jsisin the light of the LINK model simulations that follow. First, any I:.V Cer scenario is typically multilateral, involving several donor and recipbt nations. Our simple model gives no insight into the mulblateral iiiternational effects. Seconti, the model is static in nature, while th~3 full LINK system simuljations incorjpcrate a complicated dynamic structure. Third, our simple made1 ignores all price, wealth, and interest rate effects While these simp!ifj&q as:snumptionsare useful, they are naive in view Og real-world experience: LINK simulations handle the “direct effects” more eEectively than can the stylized model.
ASPECT!5 OF Pi NEW WORLD DE’t’ELOPMENT STRATEGY I
349
In this section, we describe the transfer scenarios in detail, then outline: the changes introduced in each of the LINK country models to account for them.. Finally, we discuss the effect3 of these changes in each of the co~try models when simulated in isolation (prelink simula%ica). Therefore, the simulation results mentioned here COG’1 !Ithe LINK models taken one at a time. We distinguish these from full s,,~em simulations wbere all of the coMries are solved simultaneously (postlink simulations). Hrasinglecountry sinmlations, exports, import prices, and wor,ld trade aYe fixed exogenously for each country. ‘I%esesame variables br:come endagenous when the entire set of models is solved simn~taneousl~. ‘?“heMay 1978 LINK Ettrecast :3olutionwas used as the baselire in the simulations. This 3-year fiarecast r:19?7-1979) was extended using linear or 1-3garithmicextrapolation of exogenous variables to ~btaicir: inputs where the model forecast did not already exisr. For our purposes, tie d-year period 19?8-1981 was used as the experimental wriod. Two alternative scenarios are covered in this study.
Each year, monetary resources are transrerred t.othe developing economies. The payment is financed in 13 developed market economies by diverting govetnme3t expenditures from domestic purch;dses of goods and services; to foreign transfers. Consequently, there if; no direct effect,on the governnneilBbw3Rnce.The amou# of the transfer is approximately l% of the value of nominal gross product in the contr01 solution. To implement the scenario, gn3vemmentcxpeuditures were reduced in each model by 1% of gross product, and fore@ transfers,were increased by the same amount. No adjustments were made to account for possible monetary effects in the developed market econo!mies. In t& developing regions, forei,gn aid receipts were increased by the amount of the transfer. T!le cumulative payments Tap was reduced by the amount of the transfer, implying that the payment i5 9 free gi&,not requiring amortization or interest payments. The paymen QW distributed among non-oil-exporting developing market economies in pscpoation to their marginal share of the financia3 aid received prior tcs the transfetr. By assumption, noqe of the transfer is hoarded. During 1978-l 98 1. ahe con8rcsi sol&ion values are used for develsphg and developed countries.
359
Gerhard Mundkh and cZarIB. Weinberg
Scenario II
The developing ma&et economies receive the identical transfer as in scenario I. In this case, however, the 13 developed market economiss impose a direct tax on their residents to bance the transfer. The additional flow of financial &aidreceived by all non-OPEC areas was accozzted by increasing the tixogenous capital i&low variable I**, and by manipulating the exogenously determined allocational shares in this flow to the developing African, American, and Asian regions. & a result of the higher capital inflows, prelink imports in these regions were increased by 43.7, 4111.2,51.3, and 50.2 billion dollars in the years 1978-1981, respectively. In those same years gross product increased by 3.5%, 4.0%, 4.8%, and 5.O%, also on a prelink basis. To ensure that the transfer represented a gift rather than a loan to the developing nations, an additional adjustment was made to the recipient models. Cumulative debt is calculated in these models and is used to determine the value of future period debt servicing. Automatically, the increases in foreign transfer that we specified were added to this cumulative payments gap. Constant adjustments were introduced for each period c 1re transfer in order to offset these increases. The changes in the devcjloped economies models were introduced by adjusting the appropriate policy .va!-iable for each scenario, and by km&aneously increasing ofkial foreign transfers, where they existed. Thirteen models, the developed market economies in the LINK system, were adjusted. The centrally planned economies were assumed to remain passive in these scenarios, snd their model inputs were left unchanged. The nominal amaunt of the changes, in each case, was exactly equal to 1% of nominal gross national prcduct. MULTKCOWNTRY SIMULATION RESULTS Both scenarios were simulated using the full LINK sysr.em. In such a postlinkage simulation, export and import prices are determined for each model using a world trade model. The inputs of this model are the import demands and export prices (3fall of the system’s country models. Thus, all rnrernati~tial variables are c.etermined in a consistent manner, recognizing the glabaI constraints on thz trade accounts in bath vokJmes ;bndsvalues.5 Stnce most of the LINI; country models assume foreign export and import prices exogenously, there may very well be substantial differences -
‘The rr~e&xhAogy of the LlNK system can bl- found in Ball ( 1973), Kieirl ( 1975), Klein pnd Su (1979), and W’aelbroeck I 19716).
ASFECTS IOFA NEW WORLD DEVELOPMENT STRAT@GYI
3Si
between fU system (postlinkage) multipliers and grefink results. These difI’erences are analogous to the difference between os%n economy multipliers without foreign repercussions and those multipliers with foreign repercussions. Of course, differences are more complex ~1the LINK than in a simple multiplier model, due to nonlinearities, dynamic structure, and multilateral international effects. Table 1 summarizes the predicted impact on total world trade of the alternative transfers. World trade has increased both in vdume and. value terms in each year of experiment. The world trade multiplier with respect to the two transfer alternatives may be eJnsilycalculated in nominal terms. For scenario I, these are 1.45, 1.27, 1.34, and 1.07, during 197%-1981, respectively. For scenario II, the corresponding multipliers Exe 1.58,1.44, 1.59!,and 1.40. The multipliers show an oscillation, which i!:explained by the 1~ structure of capital accumulation and productictr functions in the devek@ng region mod&. The tax financiq; alternative unambiguousl:r gener,ites the I!arger trade multipliers, as might be expected. Also, the stabi,@ of prices between the scenarios and the control suggests tha.t the mult ‘plier of the volume of trade with respect to the “constant dollar”
T&k 1: Post.linka.ge Transfer Experinnent:Total World Trade and Unit Value --YCZE i ..__. -.---19783
1979
1980
Indices
-
---.
.----~---.
-
Variable’
Cimt,rol
Value Vo:ume Price
1232.1
‘Ialue llolume PliCt?
1421 2 530.1 268.1
1481.8 ( t4.25) 554.8 (+4.66) 26’7 1 (-0.37)
1490 1 (t4 85j 557.3 (-i-5.1 3) 267 4 (- -3.26)
Valce Volume Price
1627.6 563.6 288.8
1699.3 (S4.41) 590.9 (+4.84) 287.6 (- 0.42)
1712.7 (+5.23) 594.3 (i-5.45) 288.2 (-0.2 I )
496.4 248.2
Scenario 1
-c _-
1294.4
(+S.My
523.8 (+5 52) 247.1 (-0.44)
---
Scenario II --_---1300.3 (-“5.51) 525 $ t-t 5.94) 24 I.L I -0.40)
19A5.9 (+4.35) 63a.8 (-f-6 34j 308.6 (-0 lo) ~____g -_.-.-Walues are measured in c*.rrent U.S.S. 2: rlu~ are mea>urcd in cnlstant r 1 S $ elf I Q’?fl. Price indices are 100.0 in 1~70, and are derived from U.S.% unit value indices. l?81
Value Volume Price
1832.5 593.2 3ir8.9
i 896.2 (+3.48)
616.0 (+3.84) 307.8 (-0.36)
bPtirenthetica! values show perzectage ct ange.
10.4 i.8 5.2 0.0
-0.1 3.9
Africa Asia L.A. ME.
OECD LDC
0.1 0.0
0.0 0.0
5.2 0.0
0.6 3.9
0.0
i-8
0.0
--0.:
0.2
-0.6
i0.4
0.1
3.8
0.2
-G.! -0.1 ~_G.S 0.1 0.4 -0.1 0.2 -0.1 -0.1 -1.0 0.7
I
Austria lgiwn Clanada f;inland Fiance Germany Italy !sps2! N&h. f Sweclen U.K. U.S.
II
--_ __
0.2 0.0
9.0 0.0
0.0
0.0
0.2 0.0
0.4
0.2 0.2 -0.0 0.3 -0.4 -0.1 0.7 -0.1 0.1 -0.2
II
PGDPSc
0.5 0.5 G.9 0.2 G.8 0.4 0.8 1.4 2.0 1.4 [email protected]
I ._...__
I
-_
-0.2 0.5 --8.3 -09 0.0 -0.3 -0.0 0.4 14 1.4 -1.3
Austd.
__
---
GDPS70*
--.-_
6.3 2.9
5.3 5.5 54 0.0 6.8 2.9
5.8 6.2 s.9 0.2
II - -. ..-6.2 6.2 3.7 4.6 3.4 2.7 1.4 2.G 2.6 3.9 6.2 6.8 5.5 5.0 4.2 4.6 13.5 14.2 3.4 2.8 5.1 5.6 5.6 5.1 9.2 9.6 I
Elxporh 4S)d
--
:371
0.2 18.4
5,4 22.9 3ir.5 0.0
1.6 0.5 0.8 2.0 0.4 1.3 0.2 -0.5
63.0
I _0.0 0.8 -3.9 -13.6
1.0 18.9
-0.3 4.4
9.4 2.1 6.6 0.0
0.0 1.0 -0.6 -0.9 0.0 -0.3 -0.8 -0.2 1.4 1.6 -0.8 -0.3 -0.5
1.6 0.8 2.1 -0.2 0.0 2.2 1.7 1.6 2.0 2.1 0.9 -0.3 0.0 54.4 23.3 33.9 0.3
I
0.5 4.4
0.0 0.0
0.0 0.0 0.0 0.0
---a.2 0.2 -0.2 0.1 G.3 -G.l -0.2 -8.1 -0.1 -1.2 0.8 0.2 -0.1
G.4 1.0 0.6 0.0 0.8 0.3 I.3 9.6 I.7 1.8 -W i.6 -0.1 9.4 2.1 6.6 0.0
! II
0.4 0.0
0.0 G.G G.0 0.0
0.2 G-2 0.0 0.5 -8.5 0.0 I.1 -0.1 0.3 YJ.4 Q.S 0.7 -0.1
PGDPI
-_.
Ii
GDPS’O
-----
II
Imports CSje
_-
----
k 2: Yostiinkage Transfer Experiments: Percent Dwiations4 from Control, 1978--l!%!
5.3 2.4
4.5 4.7 4.6 0.1
1.4 7.6
5.8 3.4 2” 1:; 2.3 5.4 4,3 3.4 11.2 2.2 ’ ,
I
&ports
1373
II
($1
6.0 2.7
5.0 5.0 5.1 0.3
8.2
4.3 5.0
5.8 4.5 3.5 1.6 2.3 6.3 4.9 4,3 11.8 3.4
-__.-.i”.
0.3 15.6
16.9 46.: 0.1
4G.8
-9.7 0.6 0.7 -8.7 G.0 1.3 -Cf.4 G-7 2.8 Q.5 1.9 -1.6 -0.4
I
.-
1.0 15.9
41.1 1?.3 47.1 0.3
1.3 1.3 1.8 0.0 0.0 2.0 2.6 !:7 2.6 2.3 1.1 -2.1 -9.3
I’ rl.
lmportr (S)
I_
353
354
Gerhard Munduch and Carl B. Weinberg
transfer would be approxkaately the same as the “nominal” multipliers nqorted here. Table 2 summarizes, as deviations from the control solution, postlinkage rest&s by country and region for the two alternative scenarios. For each year, tie left side represents the deviations from control solutions expressed as a percentage of the control solution values; tht: .righ: side expresses these same deviations in the original units of measurement. The essential elements of the transfer experiments may all be observed in the data for 1978. In both scenarios, a substantial increase in the imports of the &veloping regions occurs in this first year of the simulation. The impact tJf this is twofold. The developing region models, which determine output from the supply side, realize an initially large increase in their output and product. The developed nations realize a substantial increase in their export sales directly as a result of the increased imports of developing regions and indirectly through an intematioual trade multiplier effect. It may be observed from the 1978 data that a disproportkjately large share ofthe kcreased exports accrue to the United States and Japan, with France and West Germcan:y also receiving larger than average expolrr stimulus. The allocation of these exports gains introduces a distribution of the benefits of the transfers, that is, a distribution of gain in proportion to the bilateral export weights of each developed. country with the developing regions. This weighting scheme is indeper.dent of the weights u:sed to assign the burden of financing the transfer, which are proportionate tc the relative gross products. l[t should be noted that the export shares are vaj-iable in this system and are determined by the central world trade modei in the LINK system. Tke benefits of increased export sales, in percentage terms, depends upon the degree of openness of the economy receiving the increase. Thus, in *he CJnited States, the unusually large absolute increase in export !j$ak;srealized as a result of the transfer policy fails to stimulate the economy :,u#iciently to offset the financing of the trmsfer in scenario I. On the other h$md, Austria, which receives a much smaller export stimulus both in absolute level and in proportion to total exports, realizes a gain of 0.5% of real gross product. Summarizing the changes in real gross product in the f’ rst year k.‘fa transfer policy, seveil countries realize decreases of gro.;s product in scenario I, while only the Swedish gross product declines irn~c::nario II. The region as a whole SURXSa modest decline ci’ aggregate aztiv;,ty in the first case. and a slight increase of OECD gross product is realized i.nthe second case. This result is qot surprising in tight of ,the discussion in the previous sectiort, and reflects the fact that the income multiplier for tax policy is less than the income multiplier fov government expenditure changes. Thus, the real cost. to the paying nations is less For scenano II than for scenario 1.
ASPECTS OF A NEW WORLD DEVELOPMENT SI’RATE~Y I
355
The krgest losers in scena.rio I, in absolute terms, are the United States and Canada. Excluding them from the aggregate results reverses the result:: of scenar-icvI in that aggregate activity increases for the:developed regions a: a group. At best, these Pwo economies should be neutral to the secant; scenario, and certainly stand to lose from the policies of scenario I. Surveying the impacts of the policies on prices, we find very little impact on the aggregate OECD price level as measured by the GDP deflators. This result is consistent with;the structure of these models, and agrees with previous results. However, certain specific models have price reactions to specific policy alternatives, particularly the German, Dutch, and Swedish models. The following years of simulat:on reflect essentially the same pattern as the first year. There is, however, an oscillation in the pattern of imports of the developing regions. This occurs as a result of the c; nihmicstructure of the developing region models, where increased impor!s and prpduct induce capital accumulation, which enters the production function with a lag. The implications of this lag for stabilization policy, as opposed to stimulaiion policy, seem ta be rather few since there does not appear to be a corresponding pattern in ;gross output of either developed or developing regions. Anther measure of the net gains and iosses to the world as a whole can be calculated as the changes in the trade balance for developed and developing regions, adjusted for the transfer payments and receipts. Jn scenario I, Ihe developed regions balance of payments improved only in the first year. by 1.9 billion dollars, then worsened in successive years by 5.0,2.1 3 and 10.7 billions of dollars. In the second scenario, this same measure worsened in each of the four ~22~s by 0.2. 5.‘7, 2.0, and 9.8 billions of -dollars. Developing region payments improved by this same rncasure in the first scenario by 0.1, ‘5.2, 1.a, and 9.;? billions of dollars during 1978-l 98 I, respectively. In t$e second scenario, payments worsened by 1.Obillion in the first year, followed by ga’ns of5.3,1.2, and 9.2 billions ofdo!lars d:>ring 1979-1981. Taking these “net payment balances” together, we find that the balances of the developed and developing region ; improved, jointly, only in the.first IWOyears of the scenario I sin iulation. Since the world balance, of payments must come to zero, there must have been a net gain to centrally planned and residual “rest of the world” r ations. Phrased dii-rerently, the L:akages from the developed/deve1oping Y *ade flows to the other regions would be stimulative to those other economies. Note also that these trade balance gair.s reflect only static ga i ). In the longer run. imyrc;ving %c ability tu import of the developing economies improves their ability to accumulate capital goods, thus extending their ‘long-runproduction possibility frontiers.
The distribution of the benef3.s of the transfer across the devebping rq@ons is also i fint3rest. Africa brems to gain the m,ostin perGent.ageItems 9
wlhileLatin America seems to gain mos: in absolutiisterms. A truer measure of benefit is probably benefit per capita; however, appropriate population statistics are not available at this molment.
To summtize tie conclusions of this study, it is clear that a WansferTom developed to deveelopinl;economies greatl:y benefits the recipient, based upon zhe scentias as constructed in this report. It would be only in the best interests of their own long-term &velopment for ZDCs to press for such tran afsrs under any circumstances. For the developed countries, this study suggests that the benefits (if there are any) of ofikring transfers are small. Because of the limited economic incentive to initiate transfers to the pcore:r economies, altruistic, humanitarian, and probably political considerations w&d have to dominate those cf domestic welfare. Thus, the stage for contiaued North-South debate is set. This study should not be viewed as an arbitratialn of the transfer k~e in the coptext of the 1970s; rather, this research seems to su.ggestas many new questions as it has rerolved. The issue of business cycl:e position, a.rntlits implications fDr ,the results of the transfer, has already been me~~ttic~x~ed. Alternative financing schemes may also change the re!;ults. There rn\,$t include governmE:ntdeficit spending to pay for the transfer, either publkly finaizced oc monetized within the paying countiies. &so, indirect &.xes should provide a different re.suit &II direct tax&on. lk conclusion, then, this study is merely the first item on an extensive agenda for research. REFERENCES Alexander. S. ( 1952) Effects of a Devaluation on the Trade B.alanx, IMF Sr@ Papers II. 263--278. Ball, R 1. t 1973) l%e Infernolionci L,i;&age qfNatiom1 i!kcm~mic Moaiels. Amste?&un: Norxh-Ho’!land. EckJxm .7.CT.CEV4) IrtmwtionailTransmis~~;ionof Economic Flwuations and Inflntion, hfemarional Aspects o/‘Stabilizhon .Polici:~s(A. Ando et al... eds.)i Boston: FeriieraT Re:: we Bank: of Boston. Hkkman, B-G., zld Schleicher, S. (1977 9 l/he Intr:rdepem!denc: of rational Ecannomies: Evidence Urxn the L.INK Project. Prwellted aItcorlference “‘The Ec:onomic Crisk of the 1930’s: Ixsscns fair Stabilization Iblicy,” Bad en, Austrizr. lolmson, ;ci.G. (1Cj58)The Transfer Problem anIdExchange Stability, inhrtw~~aticmal Tr zde and Erb rlmic Growrh (H. G. Johnson, c:d. Csmbndge, Mass .: Harvard Univ. Pr,c~s. ~%?~?es,1. M. ; ! 138) n2 Gwman Transfer :Problem, f?c,onornic .&)urnar’(iV!arch). tindleberger. C. P. [ 1972) hternarional Economics. Homewod. 111inois: Irwin Press, 5th ed.
ASPECTS OF A NEW WORLD DEVELCXPMENT STRATEGY I
357
Klein, L. R. (19’75) The Five Year Eperieace of Linking National Econometnc h~odels. Project LINK Working Paper Iqti. 7, Univ. of Pennsylvania, Philadelphia. Klein, L&ic., and Su, V. (1973) Protecionism: Am Analyeia from Project LJNK, Jnumizl of PO/icyModelirtg 1,5-35’. Meade, J. E. (195h) The Balance 0fPu~menfs. New York: Oxford Univ. Fress. IMetzler, L. A. (I M2) The Tm
INTR.ODUC!TION
A previous study (Weinberg 1979) has evaluated a financ In!Transferof 1% of flECD gross product t,o the IDCs when the impscat on the transferring nations’ incomes is not imposed. 1.; that scenario, it was supposed that profits from the auction of gold reserves of the Int crnntional Monetary Fund be granted to dS=velopagcountries. Not surpriGng[y, !_k creation of new financial resources and the alfocstion of those rescurces directly to the developing nations had a substantial positive impact O:EL their output anr incon-kes.The increased import demands ofdeveloping nations also resulted in a significant stimulus to the OFXD nations, This article extends the previous research by dkectly imposing :k i;,ostof the transfer on the donor nations. Two altematkz scenarios are implemented. In one case the transfer is fina3ced by the diversion of yi,,blic expenditure, amounting to 1% of the total gross product of each dec ei;)ped nation, froxr.domestic uses to the developing regions. ‘inthe oth~ scenario, direct taxes are imposed in these sam,ecountries. The revenues from these ta~ce, Go amounting to 1’96of gross product, are used to finance the foreign t.ElI&~. Th:s
study WSJ limit itself to the comparison ofthe two trar&er scerr;~rio~
--Address cowesp~ ktrfeerrce to CM B. U’eir;berg, Wharton Econometric Foreczwing Associzion, Inc., 3642 S rknce Center, Phiiadel?pkiii, Pennsylvania 19104. *Any vhws cv q lin ons expressed herein are solely those of the authors aad do not reflec L
the positions of q institution or the views and opinions of Project LINK. StCarl B. Wzi !tber:g was an Assistant Rese,arch Professor of Economics a New Ir’ork University wlhen this study was carried out. huvmal ofPolicv Af&Gg I(3), 343-357 (1979) (c Society for Policy Modi:ling, Y979
343 0’ 61-&938/79/03034. +15$J1 75
described above as ahernatives to s baseline solution without transfer, QPI~ to one another. To evAWe the merits of the pohcies properly, thq sE~3uld be compared with the alternative of donrwtirt fiscal stimulation or tax relief of the same amount. Such a study is bq~ond the scope of thiaispaper, $&tough references to previous research (e.g., Hickman and 3ishleicher 1977 ) can be used to infer the probable full sys,tem government e~.penditure mu!tipliers.’ The issues that can be asssssed by these shnulations are summtized in terms ofthe Aallsystem, or open-economy, mukiplie~ of the LWK world model system.’ First, will a traulsfer be overeflected or underefTected? Second ( if&a transfer is effected, are the foreign expenditure multipliers of the LEWKmodels greater than or Sess than ,?hegovernment exglenditure multipliers or the tax mu9ti;plielrs8? Third, to what extent and with what effects will %he‘benefits‘(or Iossas) from the ,&ansfer redistribute income among the developed economies? This last issue will depend upon a combination uf the varqringbilat,eral marginal propensities to import of the tdcvelopingcountries Froaneach developed nation, and the varying fore&u trade and government expenditure/tax multipliers of each transferring economy..’ The exwsition proceeds in three sections. First, a simple kkjrmesian model is developed to illustrate the theoretical issues involved in the transfer problem. Next, a discussion of the irnplementatio~l lof these scenarios :n the LIF% models is presented, with a summary ofthe prelink up single-country results. T%en, the postlinkage or full system results are c&cussed. Some conclusions and discussion follow.
Modem @terest in the effecti of a financial transfer began with Vine:*‘s ( P924) stud!{of capital exports to Canada. The issue became important to lWeinberg (t979) and Hickman (1974) generate ikcal policy multipliers when #several economies are i.timulated simultan~nsly.. ZFor II full d~cription of the IJNK model systems, see K.kn (1975) and Kiein: and Su (1939).
The policy z spects of the simulnticns presented here have to be considered cautic&y.
It
wuid be misie &ag to interpret this study as an a.rsmpt to quantify the imoact of rvarious
r~qxw& for ckvefopment aid that are being, sqgested by national anli iwemational organizations (such as the UNCFMX Since rh.$a~aiy~is is still experimental, it is presenird soie!y zi +&eres:ilt of a simuiz;tion exercis4e in the irSe+r.ational transmission ol’bukrss cycle phencmwa. Acr.uaf policy prqwsals concerning tLd transfers from the devekqed economies involve many more comohx issues t’lan co&d be reproduced in simulatiotis of he LINK ! ystern .
AS’MCTS OF A NEW WORLD DEVELOPMENT
STRATE::G’! I
345
contenqmrary debate again dting the interwar period in ke famous debates betwn:enKeynes (1X29) and Qjhlin (lS29) over tl;#eGerman war reparations. Another focus of the transfer debate has been ‘ln the effects of American foreign aid programs after MwM ‘War Ii. T’s quote I-L G. Johnson (1956), “The transfeia problem bulks large in the hterature of international trade theory.” In this section, we shall develop a Keynesian model of the adjustment of a two-coun?ry wodd to a unilateral transfer. I!ssentially, we follow the arguments of Alex.ander ( 1Y52) and Tsiang [196 1) in dleveioping this model, even though their analyses centered on. the problem of exchange devtiluation. It hag been amply demonstrated that these two problems are formally similar (Johnson 1958). The model and analysis are al:;~oidentical to $hat of Metzler (,1942) in his analysis of the transfer problem, We begin with the equilibrium condition for the goods market i.n“‘home” country, which may be written as y= A -I- G + B,, W whew Y = current period expenditures on goods and servi,zes,AI:= the sum of domestic expenclitures on consumption and investment, LCdomlestic absolljtian, G = (exogf!nous) government expenditures, an5 lil’= home country trade balance. A!1 variables are measured at corptant pr,rices. ITkmestic absorption .4 is usually (determined a3 a function ot’income, pGces, and interest rates. For Plhiepurposes of our analysis,, price and interest efl&s will be ignloredas tifough they are negligible in the short run; thus, A = AI(Y) --=(i - s’)Y -I- A’,
m
wlhere s’ = the mruginal propensity ‘to hoard Dut of income8 and A := autono8mousidXloIptbIl. Ifall investment are defined to be autonomous, we may then replace S’ with s, the marginal propeasity to dave Thus, the new absorptron func~tion and its derivative bibComes A = A(Y) = f J:- s)Y f i’,
t
2b)
asterisi~ will be used tkoughout this lpapetr to denote the “fmei.gn” variables, v&h the same deftiI!ion as the domestic variable. The real trade balance for the home country may be written
The
.B c= iM* -- Al,
(4)
where M’ reprwwks home couc&ry imporb and @ represents foreign imjzorts. We specify knpo~ts soiely as a f%nction of income: M==D’+dnY,
@aI
d&f = mdY,
(W
propensity Ito import out of income, and D = autonomrp:s imports. By definition, B* = --B. Substkitiug, we may write our ftiI\lmodel in three equations:
where m = the margina
Y= y*=
[(l
-s&Y+
F1-I- G A [(D* + m”Y’:‘) - (D + my)],
XJ
(da)
[(1 - s*‘)Y* + I*] -+ G* -+ l[(D + HZY) ‘- (n* + mPj] (W
19= (I?
+ m’Y*)
- (0 + mY).
(W
Differentiating and collecting terms yields the following: (s
m:)dY - m*dP
t
bs’
-
= dC,
m*‘MP - mdY = de , ,, -mcsY + m*dT* = -dB.
(74 (‘W
(74
of We assume “ normal” ranges c I’vsiu~~ for s, s*, m, and II?*,so that 1111 these parameters are positive sxld less than one. This simple system may be used directly to study the impact of a trZllX&r. _A.ssume that a unilateral transit is paid by the “home” country to the “,foreign” coun~t.. The payrrent is financed by diverting government exy?en&ture from domestic uses in tie home country. ‘Ihe foreign government receives the transfer and clomplctely dis\91ursesit 69the residents of the foreign country. In thL case, we may redefine ~16follows: CicI;= -T,
(8a)
dG* = -i-T,
(81))
where I is the amount of !he transfer in red terrm4 Substitutir_g (8242) into 17a-c) and solving, yields
%ote that distributional &Tects c,f the transfer are not corkdered.
d’,vlg-
-
-p/,q
[9ll.)
d9j”llg’ :-- s/K,
W))
db/T = (m’Cs 4- ms:‘”)/iv, where K
=I
(SC)
J,,P ,-i-m*s -i- m,+‘.Tlhe imp~kx%baof -&issimple model, under
‘immd” iasrunzpticres Ekmntthe!values of ‘lhf:marginal propensnies, is that ircome in the home country ?&, and that f:mslgn country income rises. The balance of payments ~mpao~;esGorthe home countq, but by less than the aZount of the transfer, thus implying thsl; the Wansfer is effected in real terms. Total world income inGreases (decreases) as (s - se) is greater than (bss than) zero. Total wlxld trade will increase (decrease) if (srattk- s**n)is greater than (less than) zero. Thus same analytical framework can be used to evaluate the ef?fectsof a tran&r financed by direct taxation. Two changes must be made. First, absorption 6.ndimports :nust be ~writtenas a func+ionof &sposa,bte income in the paying country. Second, government gexpeniliture chakge s are IOfixed at zero in the payling countl;y,. Thus., = y -I- jr, .Y,t;, (lOa) dir.= T.
UOW
The distribution of the trzlsfer in ,the foreign country is asstrmed to be
implemented via government cxpenditurss. Thus, r16 = 0 , &l’G”
z
(Im)
:J-.
(10.1)
Tue revised system, in diEercnti,a? f;,m~, is (s + m)dY -‘.- m*rlY* z= (s + m - l)T, -mdP’
-t (s* -b m’“)dJi
mdY -
== (1 -. f?2)I’,
m:‘bdYip $- alB E=m %.
(1 la) (1 W (1 w
Solving the system yields the Golk~wing: LfY/T == :!I- s* ‘K d:E/-k/T-1 J;/K, ,$:5/T ==(s*m
1124 (12b)
-+ sm*),lK,
(12c)
--dm-e.K is def;.P;edas lbt#ore. These results gre iderncal %(I the previous case, except that the ifnpact on
the paying
country
i-s di~rr;i&wi
yrvhentax reven.ues are used to ~~~EHMX: Ihe gain fron: the transfer if s”/K is
transfer. In fact, ,3-g p ~yjng ~C~iunQ migk
Gerhard Munduch and G~nsd B. Weinberg
348
less than one. The likelihocd of this occurr!!g will increase if the foreign country’s margbal propensity to imwrt is very high and its savings propernsity is very low. These circumstances seem to match the scenarios to be presenmd in this study, where the transferring countries are d.eveloped economies anJ the rf:cipient nations are develop&: regions. It should also be noted that the “real” balance of tradealways improves for the paying country, but by less thau the amount of the transfer. The transfer wili thus be “unde~reffe~ted,“,since!a frac tioa of the giR is retained in the receiving country. In terms of the policy issues “being~~slyzed in this study, we can directly compare the transfer multipliers with the government expenditure multipliers. The government expenditure multipliers may be calculated from our original system as dr’ldg
=
(s* -tm*)lK,
(13a) (13t9) (13c)
Comparing these results with the transfer financed by government expenditure, it is clear that ‘dlcmesticincome in the home country is p;l.ways stimulated by a direct incre.srs.2 in domestic government expenditures, while tending to decrease in the transfer scenario. The foreign country income gains more (less) if (m *- S) is greater than (less thaci) zero. However, the trade balance cleterioratifess&ply as s result of dirc:ct fiscal policy.. ‘l? expected outcome ofthis simlplemodel, therefore, is that ;GI~direcr: domestic stirnubs is a rao~ effective policy than a transfer of resources. This accounts for bth the direct and indirect effects on the paying coun&ies. However, donestic fiscal policy would have the drawback {.A awa”stating the external balance of tie stimulating econoinj. Before :c-ncIuding, we should Iike to point out some limitations of the precedmg 2j.n@Jsisin the light of the LINK model simulations that follow. First, any I:.V Cer scenario is typically multilateral, involving several donor and recipbt nations. Our simple model gives no insight into the mulblateral iiiternational effects. Seconti, the model is static in nature, while th~3 full LINK system simuljations incorjpcrate a complicated dynamic structure. Third, our simple made1 ignores all price, wealth, and interest rate effects While these simp!ifj&q as:snumptionsare useful, they are naive in view Og real-world experience: LINK simulations handle the “direct effects” more eEectively than can the stylized model.
ASPECT!5 OF Pi NEW WORLD DE’t’ELOPMENT STRATEGY I
349
In this section, we describe the transfer scenarios in detail, then outline: the changes introduced in each of the LINK country models to account for them.. Finally, we discuss the effect3 of these changes in each of the co~try models when simulated in isolation (prelink simula%ica). Therefore, the simulation results mentioned here COG’1 !Ithe LINK models taken one at a time. We distinguish these from full s,,~em simulations wbere all of the coMries are solved simultaneously (postlink simulations). Hrasinglecountry sinmlations, exports, import prices, and wor,ld trade aYe fixed exogenously for each country. ‘I%esesame variables br:come endagenous when the entire set of models is solved simn~taneousl~. ‘?“heMay 1978 LINK Ettrecast :3olutionwas used as the baselire in the simulations. This 3-year fiarecast r:19?7-1979) was extended using linear or 1-3garithmicextrapolation of exogenous variables to ~btaicir: inputs where the model forecast did not already exisr. For our purposes, tie d-year period 19?8-1981 was used as the experimental wriod. Two alternative scenarios are covered in this study.
Each year, monetary resources are transrerred t.othe developing economies. The payment is financed in 13 developed market economies by diverting govetnme3t expenditures from domestic purch;dses of goods and services; to foreign transfers. Consequently, there if; no direct effect,on the governnneilBbw3Rnce.The amou# of the transfer is approximately l% of the value of nominal gross product in the contr01 solution. To implement the scenario, gn3vemmentcxpeuditures were reduced in each model by 1% of gross product, and fore@ transfers,were increased by the same amount. No adjustments were made to account for possible monetary effects in the developed market econo!mies. In t& developing regions, forei,gn aid receipts were increased by the amount of the transfer. T!le cumulative payments Tap was reduced by the amount of the transfer, implying that the payment i5 9 free gi&,not requiring amortization or interest payments. The paymen QW distributed among non-oil-exporting developing market economies in pscpoation to their marginal share of the financia3 aid received prior tcs the transfetr. By assumption, noqe of the transfer is hoarded. During 1978-l 98 1. ahe con8rcsi sol&ion values are used for develsphg and developed countries.
359
Gerhard Mundkh and cZarIB. Weinberg
Scenario II
The developing ma&et economies receive the identical transfer as in scenario I. In this case, however, the 13 developed market economiss impose a direct tax on their residents to bance the transfer. The additional flow of financial &aidreceived by all non-OPEC areas was accozzted by increasing the tixogenous capital i&low variable I**, and by manipulating the exogenously determined allocational shares in this flow to the developing African, American, and Asian regions. & a result of the higher capital inflows, prelink imports in these regions were increased by 43.7, 4111.2,51.3, and 50.2 billion dollars in the years 1978-1981, respectively. In those same years gross product increased by 3.5%, 4.0%, 4.8%, and 5.O%, also on a prelink basis. To ensure that the transfer represented a gift rather than a loan to the developing nations, an additional adjustment was made to the recipient models. Cumulative debt is calculated in these models and is used to determine the value of future period debt servicing. Automatically, the increases in foreign transfer that we specified were added to this cumulative payments gap. Constant adjustments were introduced for each period c 1re transfer in order to offset these increases. The changes in the devcjloped economies models were introduced by adjusting the appropriate policy .va!-iable for each scenario, and by km&aneously increasing ofkial foreign transfers, where they existed. Thirteen models, the developed market economies in the LINK system, were adjusted. The centrally planned economies were assumed to remain passive in these scenarios, snd their model inputs were left unchanged. The nominal amaunt of the changes, in each case, was exactly equal to 1% of nominal gross national prcduct. MULTKCOWNTRY SIMULATION RESULTS Both scenarios were simulated using the full LINK sysr.em. In such a postlinkage simulation, export and import prices are determined for each model using a world trade model. The inputs of this model are the import demands and export prices (3fall of the system’s country models. Thus, all rnrernati~tial variables are c.etermined in a consistent manner, recognizing the glabaI constraints on thz trade accounts in bath vokJmes ;bndsvalues.5 Stnce most of the LINI; country models assume foreign export and import prices exogenously, there may very well be substantial differences -
‘The rr~e&xhAogy of the LlNK system can bl- found in Ball ( 1973), Kieirl ( 1975), Klein pnd Su (1979), and W’aelbroeck I 19716).
ASFECTS IOFA NEW WORLD DEVELOPMENT STRAT@GYI
3Si
between fU system (postlinkage) multipliers and grefink results. These difI’erences are analogous to the difference between os%n economy multipliers without foreign repercussions and those multipliers with foreign repercussions. Of course, differences are more complex ~1the LINK than in a simple multiplier model, due to nonlinearities, dynamic structure, and multilateral international effects. Table 1 summarizes the predicted impact on total world trade of the alternative transfers. World trade has increased both in vdume and. value terms in each year of experiment. The world trade multiplier with respect to the two transfer alternatives may be eJnsilycalculated in nominal terms. For scenario I, these are 1.45, 1.27, 1.34, and 1.07, during 197%-1981, respectively. For scenario II, the corresponding multipliers Exe 1.58,1.44, 1.59!,and 1.40. The multipliers show an oscillation, which i!:explained by the 1~ structure of capital accumulation and productictr functions in the devek@ng region mod&. The tax financiq; alternative unambiguousl:r gener,ites the I!arger trade multipliers, as might be expected. Also, the stabi,@ of prices between the scenarios and the control suggests tha.t the mult ‘plier of the volume of trade with respect to the “constant dollar”
T&k 1: Post.linka.ge Transfer Experinnent:Total World Trade and Unit Value --YCZE i ..__. -.---19783
1979
1980
Indices
-
---.
.----~---.
-
Variable’
Cimt,rol
Value Vo:ume Price
1232.1
‘Ialue llolume PliCt?
1421 2 530.1 268.1
1481.8 ( t4.25) 554.8 (+4.66) 26’7 1 (-0.37)
1490 1 (t4 85j 557.3 (-i-5.1 3) 267 4 (- -3.26)
Valce Volume Price
1627.6 563.6 288.8
1699.3 (S4.41) 590.9 (+4.84) 287.6 (- 0.42)
1712.7 (+5.23) 594.3 (i-5.45) 288.2 (-0.2 I )
496.4 248.2
Scenario 1
-c _-
1294.4
(+S.My
523.8 (+5 52) 247.1 (-0.44)
---
Scenario II --_---1300.3 (-“5.51) 525 $ t-t 5.94) 24 I.L I -0.40)
19A5.9 (+4.35) 63a.8 (-f-6 34j 308.6 (-0 lo) ~____g -_.-.-Walues are measured in c*.rrent U.S.S. 2: rlu~ are mea>urcd in cnlstant r 1 S $ elf I Q’?fl. Price indices are 100.0 in 1~70, and are derived from U.S.% unit value indices. l?81
Value Volume Price
1832.5 593.2 3ir8.9
i 896.2 (+3.48)
616.0 (+3.84) 307.8 (-0.36)
bPtirenthetica! values show perzectage ct ange.
10.4 i.8 5.2 0.0
-0.1 3.9
Africa Asia L.A. ME.
OECD LDC
0.1 0.0
0.0 0.0
5.2 0.0
0.6 3.9
0.0
i-8
0.0
--0.:
0.2
-0.6
i0.4
0.1
3.8
0.2
-G.! -0.1 ~_G.S 0.1 0.4 -0.1 0.2 -0.1 -0.1 -1.0 0.7
I
Austria lgiwn Clanada f;inland Fiance Germany Italy !sps2! N&h. f Sweclen U.K. U.S.
II
--_ __
0.2 0.0
9.0 0.0
0.0
0.0
0.2 0.0
0.4
0.2 0.2 -0.0 0.3 -0.4 -0.1 0.7 -0.1 0.1 -0.2
II
PGDPSc
0.5 0.5 G.9 0.2 G.8 0.4 0.8 1.4 2.0 1.4 [email protected]
I ._...__
I
-_
-0.2 0.5 --8.3 -09 0.0 -0.3 -0.0 0.4 14 1.4 -1.3
Austd.
__
---
GDPS70*
--.-_
6.3 2.9
5.3 5.5 54 0.0 6.8 2.9
5.8 6.2 s.9 0.2
II - -. ..-6.2 6.2 3.7 4.6 3.4 2.7 1.4 2.G 2.6 3.9 6.2 6.8 5.5 5.0 4.2 4.6 13.5 14.2 3.4 2.8 5.1 5.6 5.6 5.1 9.2 9.6 I
Elxporh 4S)d
--
:371
0.2 18.4
5,4 22.9 3ir.5 0.0
1.6 0.5 0.8 2.0 0.4 1.3 0.2 -0.5
63.0
I _0.0 0.8 -3.9 -13.6
1.0 18.9
-0.3 4.4
9.4 2.1 6.6 0.0
0.0 1.0 -0.6 -0.9 0.0 -0.3 -0.8 -0.2 1.4 1.6 -0.8 -0.3 -0.5
1.6 0.8 2.1 -0.2 0.0 2.2 1.7 1.6 2.0 2.1 0.9 -0.3 0.0 54.4 23.3 33.9 0.3
I
0.5 4.4
0.0 0.0
0.0 0.0 0.0 0.0
---a.2 0.2 -0.2 0.1 G.3 -G.l -0.2 -8.1 -0.1 -1.2 0.8 0.2 -0.1
G.4 1.0 0.6 0.0 0.8 0.3 I.3 9.6 I.7 1.8 -W i.6 -0.1 9.4 2.1 6.6 0.0
! II
0.4 0.0
0.0 G.G G.0 0.0
0.2 G-2 0.0 0.5 -8.5 0.0 I.1 -0.1 0.3 YJ.4 Q.S 0.7 -0.1
PGDPI
-_.
Ii
GDPS’O
-----
II
Imports CSje
_-
----
k 2: Yostiinkage Transfer Experiments: Percent Dwiations4 from Control, 1978--l!%!
5.3 2.4
4.5 4.7 4.6 0.1
1.4 7.6
5.8 3.4 2” 1:; 2.3 5.4 4,3 3.4 11.2 2.2 ’ ,
I
&ports
1373
II
($1
6.0 2.7
5.0 5.0 5.1 0.3
8.2
4.3 5.0
5.8 4.5 3.5 1.6 2.3 6.3 4.9 4,3 11.8 3.4
-__.-.i”.
0.3 15.6
16.9 46.: 0.1
4G.8
-9.7 0.6 0.7 -8.7 G.0 1.3 -Cf.4 G-7 2.8 Q.5 1.9 -1.6 -0.4
I
.-
1.0 15.9
41.1 1?.3 47.1 0.3
1.3 1.3 1.8 0.0 0.0 2.0 2.6 !:7 2.6 2.3 1.1 -2.1 -9.3
I’ rl.
lmportr (S)
I_
353
354
Gerhard Munduch and Carl B. Weinberg
transfer would be approxkaately the same as the “nominal” multipliers nqorted here. Table 2 summarizes, as deviations from the control solution, postlinkage rest&s by country and region for the two alternative scenarios. For each year, tie left side represents the deviations from control solutions expressed as a percentage of the control solution values; tht: .righ: side expresses these same deviations in the original units of measurement. The essential elements of the transfer experiments may all be observed in the data for 1978. In both scenarios, a substantial increase in the imports of the &veloping regions occurs in this first year of the simulation. The impact tJf this is twofold. The developing region models, which determine output from the supply side, realize an initially large increase in their output and product. The developed nations realize a substantial increase in their export sales directly as a result of the increased imports of developing regions and indirectly through an intematioual trade multiplier effect. It may be observed from the 1978 data that a disproportkjately large share ofthe kcreased exports accrue to the United States and Japan, with France and West Germcan:y also receiving larger than average expolrr stimulus. The allocation of these exports gains introduces a distribution of the benefits of the transfers, that is, a distribution of gain in proportion to the bilateral export weights of each developed. country with the developing regions. This weighting scheme is indeper.dent of the weights u:sed to assign the burden of financing the transfer, which are proportionate tc the relative gross products. l[t should be noted that the export shares are vaj-iable in this system and are determined by the central world trade modei in the LINK system. Tke benefits of increased export sales, in percentage terms, depends upon the degree of openness of the economy receiving the increase. Thus, in *he CJnited States, the unusually large absolute increase in export !j$ak;srealized as a result of the transfer policy fails to stimulate the economy :,u#iciently to offset the financing of the trmsfer in scenario I. On the other h$md, Austria, which receives a much smaller export stimulus both in absolute level and in proportion to total exports, realizes a gain of 0.5% of real gross product. Summarizing the changes in real gross product in the f’ rst year k.‘fa transfer policy, seveil countries realize decreases of gro.;s product in scenario I, while only the Swedish gross product declines irn~c::nario II. The region as a whole SURXSa modest decline ci’ aggregate aztiv;,ty in the first case. and a slight increase of OECD gross product is realized i.nthe second case. This result is qot surprising in tight of ,the discussion in the previous sectiort, and reflects the fact that the income multiplier for tax policy is less than the income multiplier fov government expenditure changes. Thus, the real cost. to the paying nations is less For scenano II than for scenario 1.
ASPECTS OF A NEW WORLD DEVELOPMENT SI’RATE~Y I
355
The krgest losers in scena.rio I, in absolute terms, are the United States and Canada. Excluding them from the aggregate results reverses the result:: of scenar-icvI in that aggregate activity increases for the:developed regions a: a group. At best, these Pwo economies should be neutral to the secant; scenario, and certainly stand to lose from the policies of scenario I. Surveying the impacts of the policies on prices, we find very little impact on the aggregate OECD price level as measured by the GDP deflators. This result is consistent with;the structure of these models, and agrees with previous results. However, certain specific models have price reactions to specific policy alternatives, particularly the German, Dutch, and Swedish models. The following years of simulat:on reflect essentially the same pattern as the first year. There is, however, an oscillation in the pattern of imports of the developing regions. This occurs as a result of the c; nihmicstructure of the developing region models, where increased impor!s and prpduct induce capital accumulation, which enters the production function with a lag. The implications of this lag for stabilization policy, as opposed to stimulaiion policy, seem ta be rather few since there does not appear to be a corresponding pattern in ;gross output of either developed or developing regions. Anther measure of the net gains and iosses to the world as a whole can be calculated as the changes in the trade balance for developed and developing regions, adjusted for the transfer payments and receipts. Jn scenario I, Ihe developed regions balance of payments improved only in the first year. by 1.9 billion dollars, then worsened in successive years by 5.0,2.1 3 and 10.7 billions of dollars. In the second scenario, this same measure worsened in each of the four ~22~s by 0.2. 5.‘7, 2.0, and 9.8 billions of -dollars. Developing region payments improved by this same rncasure in the first scenario by 0.1, ‘5.2, 1.a, and 9.;? billions of dollars during 1978-l 98 I, respectively. In t$e second scenario, payments worsened by 1.Obillion in the first year, followed by ga’ns of5.3,1.2, and 9.2 billions ofdo!lars d:>ring 1979-1981. Taking these “net payment balances” together, we find that the balances of the developed and developing region ; improved, jointly, only in the.first IWOyears of the scenario I sin iulation. Since the world balance, of payments must come to zero, there must have been a net gain to centrally planned and residual “rest of the world” r ations. Phrased dii-rerently, the L:akages from the developed/deve1oping Y *ade flows to the other regions would be stimulative to those other economies. Note also that these trade balance gair.s reflect only static ga i ). In the longer run. imyrc;ving %c ability tu import of the developing economies improves their ability to accumulate capital goods, thus extending their ‘long-runproduction possibility frontiers.
The distribution of the benef3.s of the transfer across the devebping rq@ons is also i fint3rest. Africa brems to gain the m,ostin perGent.ageItems 9
wlhileLatin America seems to gain mos: in absolutiisterms. A truer measure of benefit is probably benefit per capita; however, appropriate population statistics are not available at this molment.
To summtize tie conclusions of this study, it is clear that a WansferTom developed to deveelopinl;economies greatl:y benefits the recipient, based upon zhe scentias as constructed in this report. It would be only in the best interests of their own long-term &velopment for ZDCs to press for such tran afsrs under any circumstances. For the developed countries, this study suggests that the benefits (if there are any) of ofikring transfers are small. Because of the limited economic incentive to initiate transfers to the pcore:r economies, altruistic, humanitarian, and probably political considerations w&d have to dominate those cf domestic welfare. Thus, the stage for contiaued North-South debate is set. This study should not be viewed as an arbitratialn of the transfer k~e in the coptext of the 1970s; rather, this research seems to su.ggestas many new questions as it has rerolved. The issue of business cycl:e position, a.rntlits implications fDr ,the results of the transfer, has already been me~~ttic~x~ed. Alternative financing schemes may also change the re!;ults. There rn\,$t include governmE:ntdeficit spending to pay for the transfer, either publkly finaizced oc monetized within the paying countiies. &so, indirect &.xes should provide a different re.suit &II direct tax&on. lk conclusion, then, this study is merely the first item on an extensive agenda for research. REFERENCES Alexander. S. ( 1952) Effects of a Devaluation on the Trade B.alanx, IMF Sr@ Papers II. 263--278. Ball, R 1. t 1973) l%e Infernolionci L,i;&age qfNatiom1 i!kcm~mic Moaiels. Amste?&un: Norxh-Ho’!land. EckJxm .7.CT.CEV4) IrtmwtionailTransmis~~;ionof Economic Flwuations and Inflntion, hfemarional Aspects o/‘Stabilizhon .Polici:~s(A. Ando et al... eds.)i Boston: FeriieraT Re:: we Bank: of Boston. Hkkman, B-G., zld Schleicher, S. (1977 9 l/he Intr:rdepem!denc: of rational Ecannomies: Evidence Urxn the L.INK Project. Prwellted aItcorlference “‘The Ec:onomic Crisk of the 1930’s: Ixsscns fair Stabilization Iblicy,” Bad en, Austrizr. lolmson, ;ci.G. (1Cj58)The Transfer Problem anIdExchange Stability, inhrtw~~aticmal Tr zde and Erb rlmic Growrh (H. G. Johnson, c:d. Csmbndge, Mass .: Harvard Univ. Pr,c~s. ~%?~?es,1. M. ; ! 138) n2 Gwman Transfer :Problem, f?c,onornic .&)urnar’(iV!arch). tindleberger. C. P. [ 1972) hternarional Economics. Homewod. 111inois: Irwin Press, 5th ed.
ASPECTS OF A NEW WORLD DEVELCXPMENT STRATEGY I
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Klein, L. R. (19’75) The Five Year Eperieace of Linking National Econometnc h~odels. Project LINK Working Paper Iqti. 7, Univ. of Pennsylvania, Philadelphia. Klein, L&ic., and Su, V. (1973) Protecionism: Am Analyeia from Project LJNK, Jnumizl of PO/icyModelirtg 1,5-35’. Meade, J. E. (195h) The Balance 0fPu~menfs. New York: Oxford Univ. Fress. IMetzler, L. A. (I M2) The Tm