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Should Countries Worry About Immiserizing Growth?

by

Stephen Tokarick1

May 1, 2006

Abstract

It is well known that in the presence of tariff protection, factor accumulation could reduce a countrys real income if it is biased sufficiently toward production of a tariff-protected good. This paper examines the exact conditions under which immiserization could occur in the specific-factors model with more than one import good and a nontraded good. A key result is that in this type of model, if factor accumulation is biased toward the mobile factor, then immiserization cannot occur. This result has policy relevance in that if the mobile factor is labor, then immigration cannot immiserize the recipient country in the short run with capital immobile. Also, the likelihood of immiserization is greater the larger the degree of tariff dispersion. Therefore, in reforming a countrys tariff structure, this result provides a justification for moving toward a more uniform tariff structure. JEL Codes: F13, C68 Keywords: immiserizing growth, protection, factor accumulation, welfare

1 Senior economist, International Monetary Fund, Research Department, Trade and Investment Division, 700 19th Street N.W., Room 9-700A, Washington D.C., 20431. E-mail address: stokarick@imf.org. Phone: 202-623-7590. FAX: 202-623-7590. The views expressed in this paper are those of the author and should not be attributed to the International Monetary Fund, its Executive Board, or its Management.

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I. Introduction

The theory of international trade has pointed out at least two situations under which

economic growth or technical progress could reduce a countrys real income. The first,

attributed to Bhagwati (1958), is if factor accumulation is biased toward a countrys export

sector, it will deteriorate the countrys terms of trade. And, if this effect is sufficiently large,

then factor accumulation could reduce welfare. The second situation, attributed to Johnson

(1967), is one in which factor accumulation takes place in the presence of tariff protection.

Johnson showed that if the accumulation is sufficiently biased toward the tariff-protected

sector, it could indeed reduce real income. Prior literature has examined the conditions under

which immiserization could occur in both situations, but the analysis has been largely

confined to the standard two-good, two-factor model of international trade, in which all

factors of production are intersectorally mobile.2 An exception is Miyagiwa (1993) who

derived the conditions for immiserization in the specific-factors model, but he only

considered one imported good and did not allow for nontraded goods.

It turns out that the choice of model structure is crucial in examining the conditions

under which immiserization could occur. This paper examines the conditions under which

factor accumulation could immiserize a country in the presence of protection in the context

of the specific factors or Ricardo-Viner model of international trade which allows for more

2 The conditions under which factor accumulation could immiserize a country by deteriorating its terms of trade are presented in Woodland (1982). The conditions under which accumulation could immiserize in the presence of protection are presented in Bertrand and Flatters (1971) and Martin (1977).

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than one imported good and for a nontraded good. In this model, if factor accumulation is

biased toward the factor that is intersectorally mobile, it cannot lead to immiserization. This

result has implications for policy discussions about the desirability of international factor

movements. For example, if the mobile factor is thought of as labor, then immigration cannot

harm the recipient country in the presence of protection in the short run when capital is

immobile. In the long run when capital can adjust, immigration could reduce welfare. Thus,

the welfare impact of an inflow of labor could differ depending on whether one adopts a

short-run or a long-run time frame. Furthermore, with more than one tariff protected sector, a

high degree of tariff dispersion will make immiserizing growth more likely. This result

provides a justification for moving toward a uniform tariff structure.

II. The Model

This section presents the conditions under which factor accumulation could

immiserize a country in the presence of protection. For the case of two goods, exports (E)

and imports (M), the economys budget constraint is:

*( , , ) ( ) ( , , )E M M M M M E MG P P V t P E G E P P U+ = (1)

where ( , , )E MG P P V is the economys GDP function, ( , , )E ME P P U is the expenditure

function, and jP and *jP are the domestic and world prices of good j respectively. The

domestic price of exports ( Ep ) equals the world price (*Ep ), while the domestic price of

imports ( Mp ) equals the world price (*Mp ) multiplied by (1 )Mt+ , where Mt is the ad-valorem

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tariff rate on imports. A subscript next to the expenditure or GDP function represents partial

differentiation with respect to that variable, e.g. ME denotes the derivative of the expenditure

function with respect to the price of imports. The term * ( )M M M Mt P E G measures tariff

revenue on imports. The vector V denotes the supplies of factor endowments and U denotes

the level of utility.

Totally differentiating (1) gives the welfare effect of a change in factor endowments,

dV:

* *U M M MU V M M MVdU E t P E G t P G dV = (2)

where UE measures the marginal utility of income, MUE captures how the demand for

imports changes when utility changes, VG is the derivative of the GDP function with respect

to factor endowments, and MVG measures how output of the import good changes when

endowments changethe Rybczynski derivative. Since the bracketed term on the left-hand

side of equation (2) is positive assuming imports are normal, the effect of a change in

endowments on welfare depends on the sign of the bracketed term on the right-hand side of

(2). Equation (2) can be written as:

* * *U M M MU E EV M MVdU E t P E P G P G dV = + (3).

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Thus, the welfare effect of factor accumulation depends on whether the value of output at

world prices rises or falls. The sign of the right-hand side of (3) depends on the Rybczynski

terms EVG and MVG and how outputs of each good respond to changes in factor endowments

depends on the model structure. Equation (3) can be written in the following percentage

change form:

* * * ( ) ( )U M M MU E E E M M MdU E t P E P X X P X X = + (4)

where a ^ denotes proportional change, i.e., EEE

dXXX

= .

A. Mobile Factors: Two Goods and Two Factors

In the standard two-good (exports and imports), two-factor (labor and capital) model

of international trade, with both factors intersectorally mobile, the expressions for EX and

MX are well known (see appendix), so using equation (4), the condition for factor

accumulation to immiserize in the presence of a tariff is:

* * * *( ) ( ) 0( ) ( )M M KE E E KM E E LM M M LE

LM KE LE KM LM KE LE KM

P X P X P X P XL K

+ (6)

which requires:

(1 ) LEMLM

t

+ > (7).

where ij is the share of factor i in the cost of producing a unit of good j.

B. Specific-Factors Model

In the specific factors model, the response of sectoral outputs to changes in factor

endowments differs compared to the all factors mobile model. In general, increases in the

amount of a specific factor will cause output of that sector to rise, and outputs of all other

sectors to fall. An increase in the endowment of the mobile factor will cause outputs of all

goods to increase.

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Using the expressions for the changes in the outputs of the two goods in the specific-

factors model, and equation (4), the conditions for immiserization depend on the type of

factor accumulation. In a two-sector model, factor accumulation will lead to immiserization

if:

* *

* *

* *

( ) ( )

( ) ( )

( ) ( ) 0

E LE KM KE M LM KE E E LM M LE KE M M E

LE E LM KM E E E LE KM M LM KE KM M M M

E LE KM E E M LM KE M M

P X P X K

P X P X K

P X P X L

+ + +

+ + +

+ = = :

Assuming that factor accumulation occurs only in the export sector, it will immiserize

if:

* * ( ) ( ) 0E LE KM KE M LM KE E E LM M LE KE M M EP X P X K + +

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which can only be negative if the bracketed term is negative. This can only occur if

1LE Mt > + , which is not possible since by definition, 1LE < . Therefore, factor

accumulation biased toward the specific factor in the export sector cannot immiserize the

country in the presence of a tari

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