A week after the earthquake, the Haitian people now speak of day zero plus seven.  Day zero was the day when an earthquake rumbled and shook the shallow bay near Port-au-Prince and crumpled the many fragile houses, hospitals, churches and hotels. The quake did not discriminate against the rich and the poor, but in the months and years to come the world needs to ensure that the country gets a fair chance to rebuild.

Some consider the day of the quake, as the day a new nation began. As Economists we can offer insights about the path to improved living standards, through our understanding of what has worked, and not worked, in other countries.

Haiti has a history which is more turbulent than most.  In 1697 when Spain ceded control of Haiti to the French, much of the land was deforested and the ecology wrecked as sugar fields were planted. In 1804 the republic was founded, and later the dominant political figure was Dr. François Duvalier, and his son who reined as Presidents of the country from 1957 – 1972 (François) and his son till 1987. In 1990 the ruling military junta gave up power and President Clinton sent in 20,000 troops to a country ravaged by HIV and entrenched poverty. Hurricanes in 2004 and 2008 displace hundreds of thousands of Haitian’s and ruined existing infrastructure. But the recent earthquake might be the biggest challenge yet for most fragile and poorest nation in the Caribbean. On the Human Development Index, Haiti is classified as one of the least developed nations in the world at 149th of 182 countries (HDI Report, UN 2009).

After the mourning and eventual stabilisation, the government will need explain what the future holds for Haiti. This is a window of unfortunate opportunity that the government will never see again and mustn’t squander. The developed world has made promises of aid to support the reconstruction, but health care and education, skills and employment must be offered to the people to help the nation grow from the depths of this disaster in a sustainable way. From our learning about Development Economics we can explain strategies appropriate to Haiti.

Former President Bill Clinton who is the UN’s Special Envoy to Haiti, offered a good insight on the nations challenge in his excellent essay in last weeks Time Magazine.

Time Magazine – Jan 14 2010 – Bill Clinton: The Haiti Earthquake

We’ve got to all work together toward a common goal (for Haiti). We have to relentlessly focus on trying to build a model that will be sustainable, so we don’t plant a bunch of trees and then revert to deforestation, or adopt a program to bring power to the country that can’t be sustained, or adopt an economic strategy that is going to wither away in two years.

What the economic strategy will be for Haiti will likely be influenced by the trade agreement with USA called the Caribbean Initiative. This has recently provided an impetus for the clothing industry in Haiti. Hanes, which sells T-shirts throughout North America, produces part of their stock in Haiti in the factories, which are now being protected from looting. These labour intensive industries are important in a nation with approximately two-thirds of labour force unable to find work. The quake and eventual rebuild also offer opportunities to build on existing plans as Clinton explains,

Haiti isn’t doomed. Let’s not forget, the damage from the earthquake is largely concentrated in the Port-au-Prince area. That has meant a tragic loss of life, but it also means there are opportunities to rebuild in other parts of the island. So all the development projects, the agriculture, the reforestation, the tourism, the airport that needs to be built in the northern part of Haiti — everything else should stay on schedule. Then we should simply redouble our efforts once the emergency passes to do the right sort of construction in Port-au-Prince and use it to continue to build back better.

It is evident that Haiti can use this opportunity to develop the country as Clinton explains. In addition, there are many other ways that the country could improve the living standards of the Haitian people. These development and growth strategies could include;

• The development of Fair Trade schemes to improve Haiti producer’s access to world markets.
• Facilitating the provision of small loans through Micro Finance schemes
• Developing the export sector by investing in the transportation infrastructure to transport products.
• Exploring new trade agreements with nations.
• Promoting foreign direct investment in Haiti by multinational companies.

Nevertheless the task is daunting for Haiti. As a UN staff member recently explained to a New York Times reporter, the immediate recovery is complex. The future reconstruction and redevelopment will be difficult, and the road long.

“You’re talking about a country that pre-earthquake had limited resources and capability, and what resources it did have were concentrated in the capital,” said Kim Bolduc, who is coordinating the relief effort for the United Nations. “This context helps explain why this emergency is probably the most complex in history, more than the tsunami, more than the Pakistan earthquake” of 2005. Link

Here are some interesting facts about Haiti

• 40% of the population is under 14 years of age.
• The nations main exports are coffee, mango and other agricultural products.
• 66% of all Haitian’s work in the agricultural sector on small subsistence farms.
• Before the quake foreign aid made up a large proportion of national income. In 2004 over $1 billion was pledged by USA, World Bank and Canada and France. Partly in loans but also in direct assistance.
• In 2006 Haiti was ranked as the most corrupt nation in the world by Transparency International, followed by Burma and Iraq.

Sources:

http://www.nytimes.com/2004/07/21/world/1-billion-is-pledged-to-help-haiti-rebuild-topping-request.html

http://news.bbc.co.uk/2/hi/business/3522155.stm – Haiti: An economic basket-case.

http://news.bbc.co.uk/2/hi/business/6120522.stm – Transparency International

https://www.cia.gov/library/publications/the-world-factbook/geos/ha.html – Haiti – CIA World Factbook

http://www.flickr.com/photos/un_photo/ – UN Photo stream, Creative Commons

http://topics.nytimes.com/top/news/international/countriesandterritories/haiti/index.html – New York Times, Haiti News.

Discussion Questions:

1. In your opinion, what is Haiti’s most valuable resource endowment? Explain.
2. Choose two development or growth strategies and explain how these could be implemented in Haiti.
3. Evaluate the strengths and weaknesses of each strategy.
4. How could corruption be a barrier to the future development of Haiti?
5. What do you think Haiti will be like in 20 years?

Related Unit: IB Economics Unit 4.7 – Balance of Payments

Topic: The Marshall Lerner Condition and the J-Curve

Learning Goals/Objectives:

• For students to understand that the levels of price elasticity of demand for a country’s imports and exports determines whether a depreciation or devaluation of the country’s currency will move the nation’s balance of payments towards a surplus or a deficit.
• For students to understand the impact of time on the effect of a depreciation or devaluation of a nation’s currency on its balance of payments in the current account.
• For students to evaluate the argument that a country will always benefit from a weaker currency.

Success Indicators:

• Students will present their PowerPoint presentations of their exchange rate research, explaining how elasticity, exchange rates, and the balance of payments are related.
  
• Students will be able to outline their answers to three IB Economics examination questions relating to the Marshall Lerner Condition
  

Test of prior knowledge:

1. Define ‘price elasticity of demand’ and explain how it is measured.
2. With the use of examples, explain why some products have low price elasticity while others have a high elasticity. With the use of examples, explain why the price elasticity of demand for some goods changes over time
3. Explain how the depreciation of a country’s exchange rate might affect its current account balance.
   IS THIS ALWAYS THE CASE?
4. How might the PED for exports and imports influence the balance on the current account following a change in the value of a nation’s currency?

Process: Students should work in groups of four

• Each group chooses two countries
  • US and Canada
  • Switzerland and Great Britain
  • Euro area and Japan
  • Brazil and US
• Complete three pre-readings:
  • From BizEd:
    The Marshall Lerner Condition and The Economic Effects of a Devaluation
  • From Welker’s blog: The Marshall Lerner Condition and the J-Curve
    
• Using Yahoo Finance, research exchange rate data from the two countries two years ago up to today.
• Use Yahoo’s software to create two line graphs plotting the value of Country A’s currency against Country B’s, and Country B’s against Country A’s. For example:

The exchange rate of US dollars in Australia

The exchange rate of Australian dollars in the US:

• Finally, Create a PowerPoint presentation of your answers to the following questions. Include in the presentation the graph of the exchange rates created in the step above.

Of the four members of each group, two should prepare the section of the PowerPoint answering the following questions from the perspective of Country A and two from the perspective of Country B

Country A: ____________________ and ______________________

Country B: ____________________ and ______________________

Questions the PowerPoint should answer:

1. What is the Marshall Lerner Condition? Why is it important to consider the price elasticities of demand for exports and imports when examining the impact of a change in exchange rates on the current account balance?
   
2. Describe two periods of time from your line graph: One in which your country’s currency strengthened and one in which it weakened against the other country’s currency.
   
3. Using your knowledge of economics, explain TWO factors that may have caused the changes you have identified.
   
4. Given the changes identified, what would you predict would be happening to your country’s current account of the balance of payments over the three periods you specified above?
   
   1. Period 1: _______________________
      
   2. Period 2: _______________________
5. For both the periods of change, explain the impact of the change in exchange rates on the following:
   
   1. a firm that imports its raw materials from the other country
      
   2. a firm that exports its finished products to the other country
      
   3. consumers who buy imports from the other country
      
   4. a firm that produces good for the domestic market and competes with firms from the other country
      
6. Consider the impact of changes in the exchange rate on amount spent on imports and the revenue earned from exports (and thus, the current account balance). Assume the following for the three periods from your chart:
   
   1. Period 1: The price elasticity of demand for imports is 0.35 and the price elasticity of demand for exports is 0.55.
      
      1. Import spending will __________________
         
      2. Export revenue will __________________
         
      3. The current account will move towards DEFICIT or SURPLUS (identify which)
         
      4. Is the Marshall Lerner Condition met? Explain
         
   2. Period 2: The price elasticity of demand for imports is 0.5 and the price elasticity of demand for exports is 2.6.
      1. Import spending will __________________
      2. Export revenue will __________________
      3. The current account will move towards DEFICIT or SURPLUS (identify which)
      4. Is the Marshall Lerner Condition met? Explain
7. Think about the period in which your country’s currency weakened. Assume that the currency remains weak. How would the balance on the current account change over time following the depreciation of the country’s currency. Draw a J-Curve and explain its shape, referring to your country’s currency.
8. Look at the following article: ‘How Far Will the Dollar Fall?’ by Richard W. Rahn.
   1. Explain how the fall in the dollar might help to reduce the US trade deficit.
   2. Assess Dr Rahn’s argument that taxation and regulation are the principle causes of the potential for the limits to growth in the world economy.

You’re now prepared to consider the elasticity implications for balance of payments. Test your own understanding of the Marshall Lerner condition by answering the following IB questions:

1. With reference to the Marshall-Lerner condition, explain how the depreciation of a country’s exchange rate might affect its current account balance. (Total 10 marks)
2. An economy is currently experiencing a deficit on the current account of its balance of payments. The government is considering either allowing the exchange rate to fall or reducing aggregate demand. Evaluate the relative advantages and disadvantages of these two policies. (15 marks)
3. Explain how, in theory, balance of payments deficits and surpluses on current account are automatically adjusted under a system of flexible exchange rates. Illustrate your answer using supply and demand analysis. (Total 10 marks)

The above lesson was inspired by the Biz-Ed activity “International Trade: The Falling Dollar or Rising Pound?”

US president Barack Obama made a speech directly to Wall Street today. In his speech, Obama reflected on the many lessons America has learned in the last year since the financial crisis began. He urged his audience of investors, bankers and brokers that

“Normalcy cannot lead to complacency,” Obama said. “Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them.”

“They do so not just at their own peril, but at our nation’s,” the president added.

In addition to his warnings about the threat posed by overly risky financial markets to the US economy, President Obama expressed his commitment to free trade and “the fight against protectionism”.

Obama says:

…enforcing trade agreements is part and parcel of maintaining an open and free trading system.

The enforcement of existing trade agreements Obama refers to is his way of justifying a decision his administration made over the weekend that actually limits free trade between America and one of its largest trading partners, China.

Trade relations between two of the world’s biggest economies deteriorated after Barack Obama, US president, signed an order late on Friday to impose a new duty of 35 per cent on Chinese tyre imports on top of an existing 4 per cent tariff.

In his first big test on world trade since taking office in January, Mr Obama sided with America’s trade unions, which have complained that a “surge” in imports of Chinese-made tyres had caused 7,000 job losses among US factory workers.

So, in his speech today, Obama decries protectionism and calls for expanded trade and free trade agreements which are “absolutely essential to our economic future”. But only three days ago, he supported a blatantly protectionist measure aimed at keeping foreign produced goods out of America in order to save a few thousand American jobs.

Obama’s decision is a bad one for several reasons. As an economics teacher, I will turn firstly to a diagram for an illustration of the net loss to the American people of higher tariffs on imported tires:

The key point to notice in the above graph is that a tariff on imported tires results in a net loss of welfare in America. The blue area represents the increase in the welfare of tire manufactures (this could be interpreted as the jobs saved in the tire industry and the profits earned due to higher prices); the black areas, on the other hand, are welfare loss. Since all tire consumers in America pay more for their tires due to the 35% tariff, real income is affected negatively for the nation as a whole.

One effect of the protectionist policy the graph does not illustrate, and perhaps the most serious negative impact of the tariff on America, is the response the Chinese are likely to take to what they interpret as a violation of existing free trade agreements between the US and China.

“This is a grave act of trade protectionism,” Mr Chen said in a statement. “Not only does it violate WTO rules, it contravenes commitments the US government made at the [April] G20 financial summit.”

Beijing said it had requested WTO-sanctioned consultations with the US over Washington’s new duties on tyres. Yao Jian, a commerce ministry spokesman, said the duties were in ”violation of WTO rules”.

China said it would now investigate imports of US poultry and vehicles, responding to complaints from domestic companies.

The problems with protectionism are myriad. Clearly American consumers suffer through higher tire prices. In addition, Chinese manufacturers will see sales fall as their product becomes less competitive in the US market. According to the CCTV report below, as many as 9,000 workers in the Chinese tire industry will lose their livelihoods due to declining demand from the US. But the unforseen effects of the US tariff on Chinese tires is the retaliatory measures China will almost certainly take. If China imposes new tariffs on American automobiles and poultry, the scenario in the graph above will be reversed, and Chinese consumers will face higher prices, Chinese car and poultry producers will experience rising sales, while the American auto worker and chicken farmer will suffer.

Free trade tends to result in net benefits for economies that choose to participate in it. American tire manufacturers are certainly harmed by cheap Chinese imports; however, America as a whole benefits through cheaper goods, more consumer surplus, higher incomes in China and therefore greater demand for imports of products made in America. The road to protectionism is a dangerous path to take for the Obama administration. Justifying these new tariffs by claiming that they “enforce existing free trade agreements” is a political maneuver aimed at covering up the truth, which is that the Obama administration has sided with a special interest group to save a few thousand jobs and garner political favor at a time when 700,000 American jobs are being lost each month. By doing so, he is calling into question his own commitment to free trade, and harming America’s image as a global proponent of global economic integration.

Discussion Questions:

1. Why is the Chinese government so upset about a new tax on such an insignificant product as automobile tires?
2. “Self-sufficiency is the road to poverty”: Do you agree?
3. Some would say that it is a small price to pay for Americans to face higher prices for one product like tires in order to “save” 7,000 Americans’ jobs. Would you agree? Why or why not?
4. If 7,000 Americans were to lose their jobs due to free trade with China, what would we call the type of unemployment experienced by these workers? Is this the same type of unemployment experienced by the 700,000 workers who have lost their jobs each month during the last year of recession in the United States?