Resources and North-South Trade: A Macro Analysis in Open Economies
Resources and North-South Trade: A Macro Analysis in Open Economies
Resources and North-South Trade: A Macro Analysis in Open Economies
Chichilnisky, Graciela
1988
Online at http://mpra.ub.uni-muenchen.de/8120/
MPRA Paper No. 8120, posted 06. April 2008 / 22:42
Challenges of South - South Cooperation
Edited by H Singer, N Hatti, R. Tandon
Ashish Publishing House, 8/81 Punjab Bagh, New
October 1981 Delhi-110026, 1988 . p. 263-290
Revised April 1982
by Graciela Chichilnisky*
Columbia University
Abstract
The results give conditions both for positive and for negative outcomes
from moves towards world equilibrium with higher volumes of resource exports .
Under certain conditions, increased resource exports produce price distortions
with negative consequences . When the South's technologies are dual and its
traditional sector uses mostly labor, and the North has a more homogeneous
economy and a high rate of profit, at the new equilibrium real wages, employ-
ment and consumption decrease in the South, and its terms of trade and real
revenues worsen . This is traced to the negative impact of increased resource
exports on the domestic terms of trade between the traditional and the in-
dustrial sectors . However, the profits of the south increase, thus explaining
in part the existence of trade . More favourable outcomes are obtained when
the exporting economy is more homogeneous, and sufficient conditions are
given for an export policy to improve the welfare of the exporting country,
as well as its international terms of trade and export revenues .
* This research was supported by NSF grant No . SES 7914050 and a Rockefeller
Foundation International Relations Award .
I thank R . Brecher, P . Dasgupta, R . Findlay, G . Heal and A . Wierzbicki
for helpful comments .
I Introduction
macro variables of the exporting and importing economies . These impacts are
total. real revenues . The paper thus belongs to the increasing body of
countries . The resource exporting region has a dual structure, and its
traditional sector uses mostly labor, and very few capital or oil inputs .
The industrial economy is more integrated, and uses more homogeneous technologies ;
it does not produce resources . For completeness, however, one of the results
(theorem 3) relates to the case where the resource importer is also a developing
country . .
T'.e policy problems explored here are common to ar extnnsine iitcrt_ture on resource
trade, a literature that has gained increasing attention in recent years as the
economic role of resources has become more visible, and it became apparent that the
conventional one country one sector macro models where inputs are capital, labor
problems in mind: hose that are typical of a developing country that trades its
that there exists a problem at all . This is in part because the issues involved
In'this sense, resources represent almost a "pure rent" good : they are almost
revenue obtained from this almost costless operation is then added to the
abundant, an d they are traded for industrial goods, there are in principle no constrai:
for the developing country's growth perspective . Nor should resource extraction:
affect negatively, in principle, the more traditional sectors of the econom=y, since
Neverthele-ss the experience of the last few years indicates that oil
exporting countries have not fared as well as the above reasoning would
example, the possibly harmful effect of resource exports on the domestic economy
has featured on the economic agendas of the United Kingdom, Holland and Australia,
and the Gregory syndrome . Resource exports seem to have a 'knack' for affect-
in ways that can only be per-
ing the domestic economy of the oil exporter
carried out . This is not because
ceived when a general equilibrium analysis is
resource exports compete for scarce resources and affect factor prices in
this manner but rather, it appears, because they affect sometimes perversely
(labor and capital) are thus also affected, but from the demand rather than
A resource exporter may find that the expansion of its exports undermines
its subsistence economy (e .g . domestic food output) and thus its domestic
demand structure, through its negative impact on the domestic "terms of trade"
employment and output in the more traditional sectors may all decrease . This
appears familiar in the light of the recent experience of several oii expo=tinC7
bring about worse terms of trade and even lower real export revenues as the
of industrial goods traded for resources may also decrease . In order to keep
the trading economies that can help us understand whether a certain export policy
the exporter, or worsen all or some of these variables . The conditions under wt
one or the other outcome can be expected may yield useful information, since
these may be the subject of policy within the exporting country .
that use very few capital and resource inputs in their traditional sector and
economy with high rates of profit,will in general find their domestic welfare
total profit income and the rate of profit may improve within the resource
exporting economy, perhaps explaining why trade takes place at all in these
the domestic welfare impact of increased oil exports will in general be positive
for the oil exporter, even as its terms of trade worsen with increased exports .
The most positive result for the exporter is achieved when it trades with a
dual economy . Here its real revenues will in general increase as it increases
export vol=es, but the welfare impact on the domestic economy of the oil
the , role of exchange rates seems rather crucial, at least in short term
behaviour . The usual defence for not including money will be invoked here :
the sake of simplicity and the implicit belief that at least in the medium run
real variables are the most important in explaining market behaviour as well as
of these
Finally, it could be useful to explore the possible changes
resource
results if one allows for a balance of payment surplus of the
determined 1 (which may not exceed a given bound) ; in a world equilibrium the
determines the price of industrial goods which the North exports, as well as
exports from the South(plus the South's domestic . consumption) do not exhaust
' Each region produces and consumes two corm-iodities, basic consumption
and labor . Therefore there are five markets in each region, and, in
factor prices (labor and capital) may be different across regions, even though
and losses from resource trade discussed above is the same that explains
duality in the economy and W is the real wage . If the importer has the opposite
PB
> 2W
condition namely more homogeneous technologies ) and a high rate of
D PB
profit
D < 2r then the cross equilibria relation between oil exports and
crease in the (equilibrium) amount for oil demanded by the North . As will be seen
c2 - 2w
in the proof of theorem 1, the sign of the expression determines
the slope of the relation between rates of procits and real wages across
of the economy, i .e . the extent to which the rewards to capital and labor
c2 2w
the condition of duality - < O was seen to bring about factor price
' D PB
inequalisation as exports of basic goods increased .
However, the similarity with the results in [4] does not go much further,
essentially because an important factor in those results is that the export good
is very labor intensive and is also the domestic'wage'good, which accounts for
There are two regions called the 'North' and the 'South' . Each region
good denoted I (also called the 'industrial' good), and in addition the South
produces a resource, v:hi.ch from now on we shall call oil, deneted .8 . Gods
B and I are consumed ; oil is an input of production . The other two inputs are
capital K and labour, L. The North exports industrial goods in exchange for
IS I
(2) min(L I /a 2 , 8 /b 2 , KI/c2 ),
oil supplies
0S
The supply of factors K and L are price dependent, . given by the following
relations
(3) L = a(w)
pB
(a) K = $r
where w denotes wages, r the rate of profit or quasi rent of capital and pB
the price of B .
can be seen not to be crucial to the results of this paper : all that is required
From the production relations (1) and (2) one obtains the demand for
(6) LD = BS a 1 + ISa2
(8) BS = (c 2L - a 2 K)/D
and
(9) c
1vD
a
l
Let the super indices S and D denote supply and demand at the equilibrium of
the South . Then the solutions of the model are given by the equilibrium con-
ditions -
w
(11) LD = LS . i . e . a BS + a IS = a
w
(12) BD = BS , i .e . L = (c L - a K) /
2 pB 2 D
S
Where X8 denotes exports of oil,
(15) balance of payments :
XS _ p XD
p0 0 I I
pBBD pIID
(16) + = wL + rp IK + p 00, where 0 denotes total oil
pI(IS
(16') pB BD + + X1) = wL + rpLK + p(OD
0 +
X0
the solutions to the model of the domestic economy of the South are given by
The model of the North is specified similarly to that of the South, but
The 2-region model is therefore specified by two sets of 14 equations plus the
in parenthesis are used to distinguish variables for the North and South
when needed) :
and
(20) XI (N) = XD (S) .
Note, however, that in view of the balance of payments condition (15), only
three of the four equations (17), (18), (19) and (20) are indeperdent, for
instance, (20) is always satisfied when (15), (17), (18) and (19) are . For
equations : 7 for each region and 3 for the international market . The
the South (K, L, B . 1S , O S , r, w, PB ) ;7 for the North (same as for the South but
with OS=0), and 4 international market variables : po, PI , XG, XI, making a
total of 19 . Since there are 17 equations and 19 variables, for each value
of a given variable, say, the volume of resource exports X0, the solutions
be shown below that this is indeed the case, and therefore that as the
oil exports vary, the equilibria of the North-South model describe a one
parameter family . Along this our comparative statics exercises will be carried
particular that the set of equilibria describe a one parameter family . The
material of this section will also be useful in the study of the welfare
the domestic market for basic consumption goods in each region . These
(21) BD a( P,
B
)2
(22) =
(c2L - a2K)/ D
-
(act
P-
B
Ra2r)/D~
i .e .
w
(23)-
-BS
- BD (act - Ba2 r) /D a ( W) 2 = O.
p pB B
= 2/2D + ( _l
c2 - 2
(24) w/pB 2D/ aD
Therefore, (24) gives two equilibrium values of real wages for each given rate
Note that the smaller :root of w/pB in (24)-is an increasing function of r, and
(26) XD = ID - Imo .
I
By the national income identity (15) and the demand condition (5), we
(27) = + PO
XI (S) r K 8 - IS (s) .
.
I .
- 14-
the South :
p0 D S
(28) r K + 0 - I = O. Substituting in (28) the equations
pI
for supply of labour and capital (3) and (4), and (9) for supply of I,
(P2 ( pl (p2 -
(29) or (r + - 1) ) + aP -- D 1) O.
D P
I B B I I
w
Since as we saw in (24), -- .i s a (two branched) function of r, substituting
PB
(24) into (29) one obtains an. expression relating the rate of profit of the
equilibria .
For the North, consider the equation for exports of industrial goods
XD(N), Recalling th~.t the North does not produce oil, we obtain the equilibriin
relation .
(30) , =
-
XD (N) = I S ID (a1 K - cl L) /D - r K
- (alr - r2) - cl w
We shall now show that for each given value of oil exports from the South
Since X8 (S) = X8 (N) in equilibrium, from (14)r(3) and (4) one obtains an
S6abr cb
2
(31) (p
X8 (S) = + a ( bl
D
B B
(the right hand side refers to variables and parameters of the North) .
Therefore for each level of oil exports, (31) gives an implicit relation
w
between two factor prices in the North r (N) and --- (N) .
pB
From equations (3) and (4) one then obtains total employment of labor and
capital L(N) * and K(N) * . Equations (8) and (9) are then used to compute
* *
the output of the consumption good B in equilibrium B (N) ., and that 'of 1,Z(N) .
From (31) we determine exports of industrial goods XS (N) . From equation (14) we 'hen
determine the . demand for oil from the North 6 D (N) * , and using the balance of payments
D * S *
condition, 6 (N) = X 6 (S) = p X S (N) * , we obtain the international
I
*
equilibrium price of industrial goods pI ,
Finally, we consider the following two price equations (for the North)
which derive directly from the production relations (1) and (2) under the
Recalling that oil is assumed to be the numeraire, since both pl (N) and
r(N) are already known, we can obtain the nominal wage w(N) from (33) and then
from (32), the equilibrium price of B,pB(N), as well . This completes the
computation of an equilibrium for the North, for each given volume of oil
exports Xe (S) .
We now compute the equilibrium for the South, .noting that for each given XS (S)
we have already determined the level of imports of the South, . since XDD (S) _
these imports pI . Equations (24) and (29), give therefore two (independent)
relations between real wages and the rate of profit of the South, whose
equilibrium values we can then compute, . (S) * and r(S) * . From equations
* B *
(32) and (33) we_then obtain pB (S) and w(S) ; from (3) and (4) K(S) and
L (S) . from (8) and (9) 1 (S) * and BS (S) and from (14) _ © (S) *, This
.01
completes the computation of a general equilibrium of the North-South model.
Note that for each level of oil exports XS(S) there will exist in. general more
than one solution for the North-South model, depending on the initial
' parameter values anc: the characteristics of both economies, but only a finite
number, i .e. the solutions are locally unique . Therefore, as the scalar
shall be studied in some detail in the following section . Note also that at some
equilibrium a level of oil supplies below the feasible bound 8 may be obtained .
This can be seen as follows . For each level of oil exports from the South
XS (S), .from the equilibria of the North (computed as above) we obtain the level
S* S*
in the South is then determined, _B and I , and then, .tl-ie domestic
used does not imply that all the oil potentially produced is extracted,
however, to remark that the fact that even though there may be "excess supply"
of oil in equilibrium the relative price of oil need not be zero because of
the fact that the relative price of oil is determined by the international market
equilibrium condition,
PO XI (N)
PI X8 (N)
world trade equili`-)rium with a higher level of oil exports from the South,
of the South may affect rather strinkingly the outcome of such export
traded, as well as the real wages, and the overall consumption and employment
implications are discussed later in the next section . The following stylized ..
A.2 The South's basic consumption uses mostly labor and very few oil and
relatively more oil intensive and the industrial good more labor
North are services or certain manufactures, and the good I consists of consumer
Theorem 1
Assume that the economies . of the North and of the South are as specified
In the South
c2 .< -
2w - a1
- < 2r
D D
pB
e.g . the technology is 'dualistic' in its use of capital and labor, and thus D is
e .g . there is a relatively
homogeneous technology, and the . rate of. profit is
Then a rnmve towards a new world equilibrium with increased oil exports
will necessarily worsen the terms of trade of the South and decrease its
real, revenues. Real wages, total employment and the domestic consumption
Within the North, the new equilibrium produces more employment, and
increases both. the real wages and the domestic consumption of basic goods .
The rate of profit and total profit income increase in both regions with
Proof :
this rate of profit raises, the volume of the exports of industrial goods
from the North XS (N) falls across equilibria e due to income effects in the
will necessarily decrease . Thus the terms of trade of the South will worsen
and its real revenue (in terms of industrial goods) will fall as oil
exports increase . The rest of the proof then traces the welfare impact
We establish in the first place that the rate of profit in the North
ax") (S)
> O.
3r(N)
Note that the fact that p - 1, and both w/rB and r increase in the North
o
does not imply that all factor prices move in the same direction in the North,
since -we are considering here .real wage's w/pB deflated by the price of the good
B, which is not the numeraire .
- 2 0-
Consider the equation for oil imports by the North X8 (N) . Since
Now the total volume of oil demanded by the North is the sum of oil demanded
In order to find the relationship between oil imports and the rate of profit
b
2
(35) X8 (N) (al K
D
b
2
(a1 K = c 1 L) + bl a ( w ) 2 .
D
B
where we have made use of equations (5), (8) and (9) . Since factors
b a b
(p) 2 P Cl D 2 .
(36) X8 (N) = B D 1 r + a`bl -
B B
so that
3w/p B
Salb2 clb2
(37) 3x8
D
(N) = D + a b1 2w
pB
-
3r (N) 3r
3w/P B (N )
3r (N)
- 2 1-
aw/ % (N) _
_ aa2
(38)
Dr (N) c2 2w
D a ~ D
_pB~
(39)
Zr (N)
c2 _ _2w pB
D(
D P
B
the rate of profit in the North increases with the volume of oil exports
across equilibria . Note that (39) could also be positive when E < O . Since
the assumption E > O is only used in this pert of the proof, this shows that it
Next we consider the relation between the rate of profit in the North
aXS (N)
.r(N) and the volume of its exports of industrial goods, I From equation
Dr (N)
(30), we have
` cl aw/pB
(40) aXI (i4) al 2r
a _
ar(N) S (D ~ D ' ar~
and we shall now discuss the sign of both terms in the right hand side in order
From (38) and assumption C .?_, the rate of profit and the real wage in the North
aw/PB
ar
" > O. Furthermore, since by C .2 D
a
<2r, both terms in the right hand
side of (40) are negative . It follows that as the rate of profit r(N) increases
A
axS (N)
I < 0 Since the supply of industrial goods I S is an
(41)
ar(N)
increasing function of r, and = I S - ID , it follows that as . r(N) increases,
XI
the demand for industrial goods in the North increases proportionately more
than its supplyIunder the assumptions . Thus the negative sign of (41) is due
axS(N) axD(S)
(42) _ < O, i .e .
aXe (N) axe (S)
there is a negative association between the volume of oil exports and that of
axe (S)
(43)
ap I
South increases the relative price of industrial goods, i .e . worsens the terms
of the South XI (S) = XI(N) decreases with the volume of oil exported, so that
the real revenues obtained by the oil exporter, in terms of industrial goods,
have decreased as well . This completes the proof of the international market
on the domestic economies of the North and of the South . The proof will
- 2 3-
goods p l which accompany larger exports of oil on both economies . Linder the
related to
condition C .1, the rate of profit in the South r(S) is negatively correlated with
South . This will then establish the stated effects on welfare of the South of
in the rate of profit of the North r(N) is seen to be associated, instead, with
higher real wages, employment and domestic consumption of B in the North . This will
= (al K - cl L) /D
a3S __ Sal _ cl
(45)
ar D D ,ar}
(IL
aw
/pB
az
-24-
aw
/ps
which is positive since by the duality condition and (38),
Dr
< O in the
South.
As the supply of industrial goods I S increase with r, so does the demand for
oil in the South,since B uses very few oil inputs (b 1 small),and oil demand is :
8D (S) = b IS + b BS . Therefore,
'2, 1
(46)
8D
(47) _-
pI S ;
I -rK
a
2~§ the rate of profit in the South exceeds D1 (C .1), the
difference between industrial output and the return on capital decreases with
r, since
(48) ar_
(IS _
rK)
a
( D. - 2r) -a D
c aw/
arB
when cl is small .
apI > O.
(49)
ar (S)
_25_
This implies that increases in oil exports are accompanied by :a higher rate
Now, by duality (C.1) and (38), such an increase in r(S) has the
opposite effect on real wages : (S) will decrease with oil exports .
pg
From (3) this implies that total employment decreases in the South as
well, and thus since BD = wL (by 5) it follows that the consumption of basic
The welfare impact of increased oil exports on the economy of the North are
S
the opposite . Since as exports of oil X (S) increase the rate of profit , in the
North r(N) increases (by (39)), and this rate of profit r(N) is positively
associated to real wages (by C.2 and 38), it follows that both factor prices
(for labor and capital)increase in the North with oil imports . As real wages
w/p.(N) increase, by (3) total employment of labor L(N) increases in tjie North
possible answer is that such an economy may export oil because the welfare
effects of increased oil exports are not the same across all income groups :
as seen above both the rate of profit and the total profits income of the
South increase with increases in oil exports, even as total real revenues
of the region as a whole decrease . The next corollary sharpens this result
oil
Consider a move towards .a new world equilibrium with increased
exports from the South and lower real export revenues . Then if the
Proof
d X6 (S )
revenues of the South have decreased, D < O.
aXI (S)
worsened .From (4°) this implies that the -rate of profit in the South r(S)
has increased . Since by (4) K = (3r, total capital employed also increases
of the corollary .
on the South can be expected from increases in oil exports . The next
Theorem 2
Assume that the economies of the North and the South are as in theorem
c
2 2w , e .g .
is replaced > more homogenous technologies. Then an
D PB
increase in oil exports will worsen the South's terms of trade and decrease
its real revenues, but real wages, e,-rpZoument and domestic consumption of basic
goods will all increase in the new equilibrium of the Sovth, as well as its
profits . .
Proof
of industrial goods XD and the South's terms of trade . This is because these
increased oil exports from the South, aid' the Northern economy is assumed to
rate of profit in the South in this case as well, even though for different
reasons .
From (47)
D
e
PI ° In this case the expression
D
ai c aw/P
(IS - a 9
(50) rK) = S(D - 2r ) -
ar(S) Dr
. c aw/pB
aeD aIS (S) __ _al _ a l
3r(S) - bl ar(S) (D D ar )
-28-
increases with oil exports because as seen above 3XS (S) > O .
2pI
Now, consider equation (38), that determines the relation between the
aw/P _ Sa2
B
ar(S)
1 > 2w
PB . this derivative is positive, so that real wages increase
with the rate of
D
profit .
employment in the South also increases, and from (5) domestic consumption of B
Fl.nally, we explore condition .: under which the real revenues of the oil
must of course require different characteristics of the oil importer than those
Theorem 3
Then an increase in oil exports will increase the real revenues of the
oil exporter and improve its terms of trade. Within the oil importing country,
the rate of profits and the domestic use of industrial goods both decrea- but
Proof
ax, _2w
ar PB
E 0.
which implies that the rate of profit decreases in the oil importing country
axS cl a ;.r
I
, - a <
ar 2r
D ( PB )
O,
ar
which implies that the volume of industrial goods exports increase with oil
imports, across equilibria . Thus, the real revenues of the oil importer
c2 `w
Since - is now negative within the oil importing country, from
D
pB
(38) and (3) and (5) lower rates of profits are associated to higher real
c
From (45) and the fact that
D O, it follows that the domestic
- 3 0-
policies . This section will summarise our findings and suggest ways in which they
1 1,
In the first place we shall discuss the impact of the general equilibrium
of the trading economies is applicable, then both the terms of trade and the
volume of its exports expands when the importing economy has the following
economy with a relatively high rate )f profit, and where capital and resource
similar . This result is less than immediate, and may be worth discussing its
causes .
correlation across equilibria between the price of industrial goods,' and their
similar to that demonstrated in[ 4 ], but in that case, it was valid only for thf
Both cases, however, are due to general equilibriuun income effects as shown in
than the price effect within the industrial economy . This is an effect that
industrial goods _rises, their domestic supply increases, but their domestic
demand increases and relatively more, thus lowering the surplus available for
exports . Now, since a higher volume of oil exports is shown (in theorem 1) to
the final result is that higher volumes of oil exports are associated with
integrated, the increased domestic demand and supply for industrial goods leads
both goods . The impacts of increased resource imports are thus unambiguousl ;
Eowever, these results are reversed when the resource importing economy
capital and resource inputs in its basic consumption good sector . These are
the exporter can expect higher real revenues and better terms of trade .
The impact of higher resource imports on the 'importing economy are however
country's rate of profit and the volume of industrial goods it uses at the
new equilibrium , are both lower . However, real wages, employment and
the importing country and on the international economy . We shall now discuss the
Theorem 1 explores the case where the resource exporting economy has a
dual technology, uses few capital and resource inputs in its basic consumption
sector, and has initially a relatively high rate of profit . In this case ,
profit income, This occurs aven as the export revenues of the region as a whole
fall .
Yet, due to the dualism and lack of integration of this economy, these
increased profits lead to lower levels of employment, real wages and wage
income, and a decreased output and consumption of basic goods within the
increase its domestic output, since its imports have decreased . The
- 3 3-
Under the conditions studied here, a region that exports resources for
which it has no use in the bulk of its economy (the subsistence sector) and
linked industrial sector, can only see its international position worsen in the
competition for scarce inputs between the subsistence and the resource
into higher profit income that does not necessarily 'circulate' through the
model seem possible and desirable, in particular, some of the dynamic aspects
REFERENCES