The increased interaction of countries all over the world through international trade in goods and services has left lasting effects on both developed and developing nations. Globalization, as this emerging international integration of political economies is popularly termed, carries with it numerous benefits and opportunities as well as corresponding costs and risks. In general, the opening up of economies to global trade brings with it either developmental or anti-developmental influences. Identifying the effects of international trade on a country’s development requires the inspection of four important economic concepts, namely, efficiency, growth, equity, and stability which can be best studied under the neoclassical theory of international trade.

           First, efficiency in the economy ensuing from the global exchange emerges from the acknowledgement of variable factor proportions and differing factor endowments that leads nations to specialize and trade instead of moving into isolation. An improvement to the comparative advantage model, the neoclassical theory suggests that countries adhere to specialization of products that use their abundant resources intensively and consequently import products instead that would originally require the use of (their) scarce resources. This very much gives way to economies of scale within countries and among regions. Although complete specialization could not occur due to the domestic price pressures, it is certain nations not only gain more from trading but likewise their participation in the exchange contributes to the increase of world output.

           Secondly, by enlarging nations’ consumption capacities (via factor endowment specialization) and progressively providing better access to scarce resources within the auspices of an expanding world market, trade is assumed to stimulate economic growth. These conditions are especially necessary for the growth of poor countries whose production possibility frontiers are almost always hampered by the scarcity of resources and the inability to secure capital. Not only are nations able to benefit from the exchange of consumption goods and services, the ability to obtain expensive materials, products, technologies, and even ideas with the added benefit of market signals from international clients allow for self-sustained growth in the developing countries.

           A repercussion to this economic growth is the issue of equity and distribution. According to the factor endowment theory, the domestic specialization based on the abundance of resource would mean higher shares of national income going to labor for the developing countries. Hypothetically (as contradictions have been widely observed in real world scenarios) international real wage rates and capital costs are predicted to equalize. Through the equalizing of factor prices within and among economies, alongside the appraisal of real incomes and more efficient utilization of resources, trade encourages greater equality domestically and internationally. Also, developing nations benefit the most from the emerging global culture that allows them to catch up via the diffusion of productive ideas that have been fundamental to the frontier growth of the developed world.

            Lastly, the stability impact on a country’s development denotes the self-sustaining growth accruing from international trade. Increased domestic production capacities brought about by the accessibility of (relatively less endowed) capital enables countries to attract investments and spur industrial growth. Both domestic and international stability is attained by the maintenance of the efficiency of participating economies and of the system that directs the global market.  

            However, the limitation of the neoclassical model is attributed to its assumptions of fixed quantities and constant qualities of productive resources and technologies, the mobility of factors, the presence of a non-interventionist government, the flexibility of international prices, and the accruing of benefits to nationals. The criticisms would point out flaws in the prediction of the effects of trade on the country’s development. Nevertheless, the weaknesses of the model do not necessarily non-operationalize the theory but serve to point out that, in real world affairs, the effects of efficiency, growth, equity, and stability do not happen to all nations participating in international trade. 

 

Source:

Todaro and Smith, 11th ed.

 

The People’s Republic of China stands to be one of the most impressive models of development in the world. Its successful economic-political formula cannot be attributed to just one development scheme as it has been employing a variety of strategies that has allowed it to achieve remarkable economic growth and poverty reduction in a span of three decades. Classical and contemporary analysis can thus be done on its development narrative.

The PRC’s performance is observed to fairly follow Rostow’s stages of growth model. This is evidenced by its transition from a traditional agricultural society, to fulfilling fundamental (classical) market pre-conditions for take-off, to actual take-off in the 1990s, to its drive to industrial maturity, and finally to its current age of high mass consumption that is its popular face globally. True to the Harrod-Domar model, China’s speedy economic growth can be attributed to its progressively high rates of domestic savings and investments over the decades. From 35% in 1990, it is now saving close to have of its national income. However, the PRC violates some of the important assumptions made by these linear stages of growth model. One of the major issues is the active and necessary involvement of the Chinese government in the processes in setting up the very conditions for capital accumulation (i.e. savings and investment). The government played a crucial role in attracting investors to its shores and in shaping the socio-cultural attitudes of the citizens towards saving through various political tools. Thus, capital formation, although indeed indispensable in the case of PRC’s economic growth, remains insufficient in the analysis as institutional requirements have likewise been necessary. Furthermore, the growing economy has precautions on the levels of poverty and income inequality (which will be discussed shortly).

The Lewis theory of development manifests in the PRC case. Structural transformation was evident as the economy’s industrial sector started gaining momentum during its economic transition in 1978. The transfer from traditional to modern sector was ushered by the saturation of labor in agricultural areas and the incentive of higher wages in the industrial centers. The transformation was aided by infrastructure development (i.e. construction of roads, bridges, and trains) which increased mobility and cut transportation costs for both workers and industries. With the investments coming in and building up, agglomeration transpired that gave incentive to companies to widen the industrial scope further west, thus increasing the wages and bringing in all the more people from the traditional sector. However, financial analysts have warned that China might be reaching its Lewis turning point where the marginal product of rural labor is no longer zero.  Again, this transformation was only ever possible with the intervention of the PRC government that carefully maneuvered market forces to its advantage.

The PRC miracle cannot be assessed on solely economy-wide basis as regional demonstration proved critical in its development.  The strategies of Japan, Hong Kong, South Korea, and Taiwan had become the template of China’s international scheme, mostly involving export-oriented industrialization in the late 1980s. In the maturation and spread of the industrial centers driven by pouring investments into China, the principles of Romer’s endogenous growth model alongside development coordination strategies surface. Through state incentivized investments, China had received extensive technology transfers and business partnerships from the region. The regional spill-over was not only financial but involved the flow of productive ideas. Within the nation, the reallocation of labor and the expansion of industrial centers made possible the same spill-over effect. True to the O-Ring theory of development, the presence of high-skilled labor in China afforded for it higher productivity than other economies. Within its boundaries, the high-value skills of the modern sector account for its relatively higher growth than its traditional agricultural sector. We note, however, that although these schemes resemble classical conditions for growth, the role of the State must be emphasized. Alongside the economic reform (most specifically during the investment boom) was policy-led reform by the Chinese government that had coordinated the expectations of all sectors to shift from a low-growth to a higher-growth equilibrium. The “big push” involved in the PRC experience is owed to the partially kept (central) planning system of the government which had regulated market forces to a fair degree for an extended time.

China had indeed experienced its own unique pattern of development in its developing years. In the replacement of agriculture by new industries as the engine of economic growth, it had to face and regulate socioeconomic factors such as urbanization and the growth and distribution of its population. The trade-off of economic growth is income inequality. Growth prescribed that some had to “become rich first”, necessitating income gap. Although the political system  taken  up by the PRC had been  frowned upon by many of the developed nations, arguing on the basis of the loss of individual freedom, it cannot be denied that the socialist politics used prior to 1978 had been necessary to ensure that it would start with low initial inequality. The emphasis on equality over efficiency (a major Chinese cultural tradition) had dampened the effects of growth before the reform. However, during the economic transition that eased the reins on market forces, efficiency began to override equality between and among rural and urban spaces. It can be then said that the role of government and institutions captured for its citizens a more inclusive development not only through guarded market conditions throughout the economy but also through emphasis on basic health, education, and even fertility that secured the welfare of its citizens.

The coexistence of both planned and market systems worked astonishingly well in the PRC case. It had achieved even without adhering to popular conventions (i.e. neoclassical counterrevolution) of the 1980s. However, despite the success, China’s development story is truly just unfolding.

A Review of a Case Study from Todaro and Smith's Economic Development, 11th Ed.

 

           The neoclassical counterrevolution was a response to the interventionist dependence revolution of the 1970’s which had diagnosed the problem of underdevelopment to be due to the predatory behaviour of the developed world. The neoliberal school of thought redefined underdevelopment instead to be a result of poor allocation of resources brought about by the distortionary price controls and regulations used as tools of state intervention. It posited that too much state involvement in the economy is at the root of slow economic growth. The fundamental assumption in this perspective is that an unregulated market performs better than one with government regulation. It is convinced that although markets also run the risk of failing; market failure is much less costly than government failure.

           Where the dependency theorists advocated the reform in the international economic system, the counterrevolution thinkers insist that the speedy solution is the promotion of free – or freer – markets that are supported by permissive governments that allow the market to perform its self-regulating functions. The prescription of the neoliberals to stimulate economic growth include not only include the promotion of competitive free markets but also the privatization of state-owned enterprises, the promotion of free trade, the expansion of trade through advancement in exports and the well reception of investors, and most saliently, the elimination of government regulations on prices.

           Commanding Heights: Battle of Ideas contextualizes the arguments of the neoliberal school of thought as it emerged and influenced economic policy in the 20^th century. The documentary particularly contrasted the neoclassical counterrevolution approach to the structuralist-interventionist modes that depicted socialist struggles in the developed world. The Keynes-Hayek rivalry of ideas also surfaces as the major themes for the battles in economic thought.

            Socialism and its variants basically adhered to the policy of state intervention or central planning to promote equitable development. Soviet Russia has marked history to be the pioneering nation to unite against the market economy and smash capitalism. Lenin had introduced  the tenents of state control which was largely the control on what he called the commanding heights of the economy – steel, railroads, coal, the heavy industries which are obviously the capital goods needed in promoting industrialization. Stalin had furthered the agenda through central planning, the control of every aspect of the economy by the government. Almost a third of the world followed Russia’s example and commanded Communist regimes with China as the best example.

The United States of America, on the other hand, which was then enjoying the golden years after the First World War began to experience market failure in the capitalist system which inevitably turned into the Great Depression in 1929.  The stock market crash was rooted to the inability of people to consume and save causing the banks to crash. The excesses of the market economy became apparent and so Keynes prescribed that the government had to step in. President Roosevelt, working on Keynesian principles that sought to save capitalism from itself, began to involve the state in the economy. In order to stabilize the industries, the US government regulated banks, the stock market – basically reining in the market forces to eliminate the boom and bust cycle. The Keynesian macroeconomic thought prevailed through the Second World War and beyond. The prescription that government can manage their economies was felt through most parts of the developed world. Even Great Britain adhered to the interventionist principles through its Labour Party which worked on national regeneration (after the war) towards the common good, a principle which was called scientific socialism. Hayek had contested these moves as they clearly compromised freedom and democracy. Only competitive systems work, he said.

            The foreseen trouble came in the decades after WWII where both Europe and America began to experience the flip side of the interventionist approach. Germany and Austria which were both on reparation states experienced intolerable hyper-inflation caused by the printing of money by the government. Britain which played with mixed economies also began to feel the effects of the government regulations on the money markets. In the 1970’s, the U.S. suffered from stagflation. Presidents Kennedy, Nixon, and Carter tried to remedy the situation, but only ever temporarily during each of their terms, by persisting with practical economic management still following the Keynesian ideals. Hayek and his school of thought then emerged as the second-opinion of the politicians who were next in line.

            The (counter)revolution in economic thought was much a political move as Germany, for instance, gave up price controls without permission of its overseers at the peak of the hyperinflation. This almost instantly alleviated the situation and thus began the German economic miracle whose positive effects persist to this day. The presidency of Ronald Reagan had once again unleashed the free market in America enforcing policies on sound money, deregulation, modest taxation, and limited government spending. Margaret Thatcher pushed for the liberalization of the British economy arguing that the market harnesses the people’s initiative best and is therefore most productive.

These historical results seem to suggest that indeed the neoclassical counterrevolution perspective seems to get it right, at least for the developed world. But how can the relative economic success of the communist/socialist states of Russia and China be explained? How come India, following the Soviet style central planning mixed with democracy, able to stand and compete? These grey areas suggest that there is no one way of handling the affairs of nations although the germinal ideas that fuel economic thinking have serious implications on development. The counterrevolution is just one way that has its limitations.

 

A person’s welfare is heavily affected by location. The large premium on ‘place’ makes it the best indicator of income across the globe. As such, location is critical to the development of an economic unit. Three salient attributes of development that have often been set aside are indeed relevant to the discussion of the influence of economic geography to development. These are: geographic unevenness, circular causation, and neighborhood effects.

The wide disparity of incomes and standards of living in the different geographic scales shows one of the most important characteristics of economic development is its geographic unevenness. This means that prosperity does not transpire simultaneously in all places as economic production cannot be fostered and spread out smoothly as governments would wish them to be.  Economic production tends to be concentrated in urban spaces such as cities (local), provinces/states (national) or in developed countries (international), leaving the country side and even developing nations lagging behind in terms of income and standards of living. The increasing concentration of economic productions in developed areas matches the convergence in living standards. Incidentally, the market forces of agglomeration, migration, and specialization give way to these two conditions which also further these forces’ potency – such is the circular causation. The third attribute which is the neighborhood effects pertain to the spillovers of ‘economic activity from the prosperous places to nearby provinces, countries, and region. An important condition granting this effect is that the peripherals are well-connected to the centers. However, this connection may also have some detrimental effects like poverty, instability, and conflicts which might also spill-over.

Economic integration effectively implemented may lead to convergence. However, pursuing such policies will require the identifications of the suitable market forces and government actions depending on the location of the economic unit. Economic geography, therefore, is a major consideration in such undertaking.  The problems faced can be analyzed in three geographic scales namely, local, national, and international which use the units of area, country, and region, respectively.

Urbanization is the manifestation of the concentration of economic mass in local areas, specifically cities. However, it runs the risk of leading to prosperity or congestion. Living standards may also diverge instead even within these spaces of prosperity leading to the rise of slums. The current response to this is to slow down urbanization, but even this policy has been ineffective in addressing the situation.  In the national level, there is imbalance in the economic growth of provinces, for example, such that those closer to large markets prosper sooner than those in significant distance. Governments tend to disapprove such inequitable growth in their domestic jurisdictions and pursue programs that reduce the disparities between states and provinces. Such interventions also fail to address the situation as the policies hamper growth in leading areas and do not effectively alleviate the standards of living in the lagging areas. Global production has been likewise largely confined to selected regions. International aid and multilateral efforts have been pursued to allow nations to catch up.

            Density, distance, and division represent the dimensions of economic geography that have to be transformed to address the development challenges. These three help identify the market forces and proper policy responses at each of the geographic scales. At the local scale, density is the most important dimension as the physical and political geographies are negligible up to a certain point. Getting density right in the localities means harnessing market forces to boost concentrations and support convergence. Distance, on the other hand, is most crucial to the national level. The challenge in this dimension is to reduce the distance from density by enhancing the mobility of labor and reducing transport costs through investments in infrastructures. Although density and division remain to be relevant in the international scale, division in the form of impermeability of borders and differences in currencies are barriers to integration of regions.

            Given these dimensions of economic geography which are reshaped to meet the challenge of development at different geographic scales, general patterns in the economic production and convergence of living standards have been noted by developers. Economic production, on one hand, becomes more concentrated as countries develop. Concentration is observed to be fastest locally, steadier nationally, and slowest but more sustainable internationally. Living standards, on the other hand, have been noted to diverge before converging such that essential household consumption converges soonest, followed by access to basic public services, and lastly, wages and income.

            The presence of bigger cities, wider markets, and more borders in today’s world do not necessarily contradict historical patterns of development as described. They only imply spatial transformations happening in the economies where in markets reshape the economic landscape. Market forces of agglomeration, migration, and specialization are at work. The emergence of scale economies or agglomeration economies along with the movement of labor and capital, and the decreasing transport costs altogether promote rapid economic growth in cities and nations. These agglomerations can be classified into internal economies, localization economies, and urbanization economies.

The growing prominence of such scale economies attracts people and investments to the prosperous areas to benefit from the opportunities of profit. Migration of people into nearby agglomerations signals other people to follow. In the local level, people migrate to the density of fast-growing economies. Workers usually migrate to their job locations to reduce distance to markets in the national scale. Regional migration also is part of international mobility of labor. The mobility of people is essential to the prosperity of nations as it is an indicator of their ‘desire for advancement’.

Highly reduced transport and communications costs have allowed for not only greater mobility but also the even greater concentration within countries. This is the polar opposite of the anticipated more even spreading of economic productions and trade. It happens that the growing importance of agglomerations compounded by the falling of transport costs has allowed for greater specialization and even the radical changes in the nature of trade and placement of firms. This is true to all geographic scales. The local areas grow bigger and denser. In the national level, concentration towards scale economies continue but the distance problem between leading and lagging areas is addressed. Internationally, greater specialization creates greater competitiveness, thus promoting concentrated trade.

Amidst the discussed scenarios is the growing concern that the economic concentration creates great disparities in the welfare of people, countries, and regions. Instead of discouraging the unbalanced growth, it might be better for governments to allow it and ensure inclusive development. The government may have policy instruments that can reduce these disparities and promote economic integration (or the convergence of lagging and leading places closer in economic terms); namely, institutions, infrastructures, and interventions.

Spatially blind institutions are crucial to economic integration as their universal coverage may increase welfare as they spread out the transfer and reception of benefits to constituents both near and far. Infrastructures that are spatially connective such as roads, ports, railways will allow for greater mobility of people, goods and services, communication, and even ideas.  Interventions that are spatially targeted may be used to increase or reduce the occurrence of elements in the geographic scales (an example would be the clearing of slums). This last policy instrument is usually the most discussed among the three. Granting that the challenges of economic integration are by no means only one-dimensional, all three should be taken into consideration and prioritized accordingly. Institutions should be the response to one-dimensional problems; institutions and infrastructure for two-dimensional challenge; and all three for a three-dimensional issue.

These policy instruments can significantly influence the patterns of development mentioned if done deliberately. These instruments must ensure efficient and inclusive urbanization, support territorial development policies that integrate nations, and promote the regional integration to increase access to global markets. The alignment of spatial transformations towards inclusive development is not only a matter of increasing figures in the economy but a matter of people’s lives that depend on them.

 

A Review of the Journal:

Cannot Earthquakes Be Predicted?

Max Wyss, Richard Aceves, Stephen Park

 

 

There is a high social premium globally on scientific research regarding disaster risk management with the greatest attention given to natural earth hazards such as volcanism and earthquakes.  Of late, much is attention is given to earthquake science as many parts of the world have been devastated by large magnitude shocks over the century. Among these infamous catastrophes are the 1960 Valdivia earthquake that affected Valdivia, Chile with the magnitude of 9.5; the 1964 Alaska earthquake in Prince William Sound, USA at a 9.2 magnitude; and the 2004 Indian Ocean earthquake, wrecking Sumatra, Indonesia with a 9.1 in the Richter Scale.

 

Valuable to mitigation strategies on these areas of interest is the powerful tool of prediction. Being able to predict earthquakes for example allow for improved preparations in the communities to better ensure human safety and the minimization of loss in productive assets. Ideal as this may sound, reality strays from such capacity because of the incomplete and limited human knowledge on the science behind the earth processes. Although the scientific community has been trying all they can to improve the prediction science, they have not come close to a technique that could produce acceptable predictions by means of the available knowledge. Over a century and counting, the debate on whether or not earthquakes can be predicted is still very much alive in the scientific community. Such is what we encounter in the technical comments article authored by Max Wyss, Richard Aceves, and Stephen Park, with a response from Geller et.al. whose work “Perspective” is being criticized.

 

In summary, Geller et.al. propose that earthquakes occur at random. The main points of the argument include that (1) “The slip on geological faults is sudden”, (2) “There are no objective definitions of anomalies and that statistical correlation is lacking”, (3) “No quantitative mechanism links the alleged precursors to earthquakes”, and that (4) “The leading seismological authorities of each era have generally concluded that earthquake prediction is not feasible.”

 

Wyss invalidates the above claims by Geller et. al. by recalling the works of reviewed seismologists who are working on the science of earthquake prediction. He corrected the statements by saying that in the observed occurrences of precursory events and processes such as foreshocks and stress differentiation in rocks, there is basis to say prediction is possible despite the low probability of identifying the precursors. Rigorous laboratory and field experiments have been and are continually observing and monitoring quantitative mechanisms to link these precursors to earthquakes. And despite authorities claiming the infeasibility of predictions, the statement should include the fact that the basis of their claims are within the current knowledge of seismology. In the presence of progress in the knowledge and innovations in the technology, the debate cannot be closed in favor of those that claim unpredictability.

 

Aceves and Park, on the other hand, stress the highly pessimistic approach of Geller et. al. and at the same time, criticize the seismological attitude towards earthquake predictions. The authors claim that although there should be refinement in the standards of the science (such as treating earthquake prediction research to be earthquake monitoring instead), the scientific community should not let down their guard and give up on the promising capacity of predicting earthquakes. If what has been worrying many seismologists is the fact that experiments have not yielded hopeful results, then what should be more meticulously planned is the design of the experiments, making sure that they are objectively defines to make sure anomalies are differentiated. There will be uncertainties in the wake of such experiments but then it would be the turn of the scientists to judge the acceptability of these uncertainties. Aceves and Park conclude that despite the failure in the previous century (which Geller et. al. attribute to be a valid argument to the failure of future successes), the potentially large pay-off in terms of science and societal implications from the realization of earthquake predictions is enough motivation to keep prediction research running.

 

Geller et. al. responds, and I quote: “Earthquake prediction would have to be reliable (producing few alarms and few failures to predict) and accurate (with small ranges of uncertainty in space, time, and magnitude) to justify the cost of responses such as declaring a state of emergency or ordering evacuations.” Clearly, the authors have gone beyond the rigidity of the science. They have concluded the infeasibility of the earthquakes in clear view of the socio-economic and political realities dominating reality. They also write, “Predicting individual earthquakes is a still greater challenge, because we lack detailed knowledge of the relevant parameters (fault geometry, strength variations in the fault zone material, rheological properties, and state of stress)”. The precise objectivity of the statement indeed presents a loss-loss scenario in the face of limited knowledge in the already widely exhausted natural sciences. Geller et. al. acknowledges the limit of human faculty in such great visions of grasping nature. They are also critical with what “prediction” entails and they write that a prediction method can only be validated when experiments show that it is successful beyond random chance. So far, in the past 100 years, no positive results have been sufficient to raise the claim of predictability. With the bleakness of the situation, it seems to the authors that such prediction science may not be possible. They instead recommend emphasis on more basic research in earthquake science such as “real-time seismic warning systems, and long-term probabilistic earthquake hazard studies”.

 

Judging by the debate in the article, one is likely to take the side of the optimistic scientists – Wyss, Aceves, and Park – and much with popular reason. As mentioned in the start of this paper, the high social premium on predictions research is quite powerful in triggering vigilance of the scientific community and the demand from global citizens to continue the relevant studies. We are solution-oriented and, thus, likely to exert all efforts – money, time, and resources – just to reach a vision (in this case, the productive value of earthquake prediction in saving lives and assets). However, Geller et. al. grounds these ideals by simply reminding that there are limits to both the science and human faculty and that perhaps instead of obsessing on predictions research, mitigations research would be less costly and more beneficial.

 

In my opinion, the debate presented is not enough to convince a reader on whether or not earthquakes can be predicted. But as far as hope and current knowledge testify, I would say that chances are earthquakes CAN be predicted but the method is still finding its way into articulation. Wyss, Aceves, and Park are wise in saying that the hope should be preserved because there can be scientific miracles in the hands of man who persevere.

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