Econ 336: Final Exam
Due May 20. 200 points total
Your answers are expected to draw upon class lectures as well the relevant textbook chapters and readings. Excellent (A) answers will do the following:
1. Have well-constructed paragraphs that make an argument.
2. Use diagrams as necessary.
3. Have minimal use of direct quotes, and if used cited properly as: author, year.
4. Be specific about examples (countries, numbers, etc.)
5. Avoid “hand-waving” explanations and colloquialisms.
6. Connect different readings together when required.
Please type your answers. Use 12 point Times New Roman font, single-spaced, with 1 inch margins. Answers to each question should not exceed half a page (single-spaced). If you have a hand-drawn diagram, please scan or take a picture and send it with the exam.
QUESTIONS (20 points each)
You have recently been appointed Special Economic Advisor to the government of XColonia, a small developing country in sub-Saharan Africa with an annual per-capita GDP of about $1000. XColonia has a large agricultural sector mostly consisting of small, family farms and a few large plantations. The distribution of land is very unequal. The country has a small manufacturing sector consisting of a large number of small firms with simple technology and a few big modern firms.For the past 10 years, XColonia has pursued an easy ISI policy, focusing on the development of consumer goods industry. Currently, XColonia’s primary exports are coffee and cotton textiles, accounting for over 80% of its export revenue. XColonia’s major imports are oil, pharmaceutical drugs, proprietary technology and heavy machinery.
1. XColonia has finished a round of easy ISI and has begun manufacturing its own consumer goods like clothing, shoes, cosmetics, toiletries etc. The Industry Minister is arguing that it is time to switch to difficult ISI to start reducing imports of heavy machinery. You instead want to argue for easy export substitution. How would you argue that your strategy is better than hers?
2. The Labor minister of XColonia also disapproves of the difficult ISI policies being pushed by the Industry Minister on the grounds that capital intensive industry will not be able to take advantage of XColonia’s unlimited supplies of labor. Explain what the Labor Minister means by this term. Using the Lewis-Ranis-Fei model show how the industrial sector could face a horizontal labor supply curve as long as there is disguised unemployment in the agricultural sector.
3. As the Special Economic Advisor, you are also pushing for radical land reforms. Your argument is that if a country has experienced a successful land reform program, it is easier for that country to implement export substitution policies. Elaborate on this argument using the contrasting examples of East Asia and Latin America (discussed by Kay).
4. You also argue that a land reform program will break interlinked land, labor and credit markets therebyreducing interest rates and raising wages in the countryside. Write a short note explaining how land reform would facilitate better operation of the credit and labor markets.
5. The Minister for Environment is being attacked in the press for a public statement that XColonia should not only care about development but also about the environment, i.e. it is not too poor to be green. He has asked you to prepare a short note defending his statement.
6. Europea, an advanced industrial country that also produces coffee for export, dumps huge amounts of subsidized coffee on the world market. Simultaneously, though un-relatedly, the international association of oil manufacturers hikes the price of oil on the world market. Explain the likely impact on XColonia’s balance of payments accounts?
7. To get out of the BOP crisis, the Government of XColonia approaches the IMF for a loan. The loan is approved but has certain conditions attached to it. In the IMF’s view, XColonia’s currency is overvalued. The IMF insists on a move to a floating exchange rate, which results in a large devaluation of the currency vis-à-vis the US dollar. What will be the likely impacts on XColonia’s Balance of Payments Account and external (dollar-denominated) debt?
8. Recently XColonia joined the WTO and there is now pressure to undertake trade liberalization by reducing tariffs on imported manufactured goods that were put in place soon after independence to protect XColonia’sinfant industries. The Trade Minister is a strong proponent of reducing these tariffs and has already briefed the President of XColonia that since all major developed countries like the UK, USA, Germany etc. became industrialized following free trade policies we should do the same. How would you counter this argument?
9. The IMF has also been insisting that XColonia should remove all capital controls and liberalize its financial markets. The Governor of the Central Bank strongly agrees with this. Prepare a short note arguing against this plan of action drawing upon the experience of the East Asian countries as analyzed by Stiglitz.
10. Prior to the current regime coming to power in XColonia, for 20 years the country was ruled by a military dictatorship that incurred large external debts. You are going to meet with the World Bank and IMF officials to argue that the present regime should not be made to repay the old regime’s debts. Drawing upon the studies of Boyce and Ndikumana, how you would argue these points?