Market-based vs. Interventionist Thoery

In economics, we often see battles between so-called market-based and interventionist camps.  In order to understand how each side views an economic concept (i.e. LRAS, economic growth strategies), we must first understand what drives these beliefs.

Any market-based viewpoint or strategy derives from the power of the free market, or allowing the forces of supply and demand to "solve" equilibria imbalances.  The role of the government in market-based viewpoints/strategies is limited since it basically interferes with the market clearing mechanism.  For example, in real-wage/Classical unemployment, people are out of work because a price floor is set preventing the market from achieving equilibrium.  A market-based solution would be to simply lower or remove the minimum price to allow supply of and demand for labor intersect and rid the economy of real-wage unemployment (see relevant post). 

Conversely, an interventionist viewpoint/strategy focuses on the word seen in the term: intervention.  Here, these economists argue the government must intervene in markets to achieve some goal, usually connected to protecting weaker populations in economies like the elderly or minorities.  Obviously, government intervention implies money being spent from tax revenue to help targeted groups, which causes much debate around the concept of opportunity costs to ignite in political fora.  Returning to the real-wage unemployment discussion above, interventionists believe removing the minimum wage would be is unacceptable.  Certainly, there are firms that would be willing to pay their workers the lower market-clearing wage and workers that would accept this wage (since it's better than no wage).  Yet, imagine living in a country where the wage is so low that you're basically fighting to survive even while employed!  To address this problem, Keynesians advocate for interventionist strategies like minimum wages plus unemployment benefits as a safety net for the most vulnerable (i.e. lowest paid workers) in society.

MANAGING MACROECONOMY
Market-based                         Interventionist
- reduce taxes, income           - use taxpayer money to fund
and corporate                        government spending (if needed)
- deregulate and privatize      - provide vocational training
to create private firm profit    - fund government job database
incentive, make business       - subsidize firms to educate and
easier                                      train workers
- reduce or eliminate              - subsidize workers willing to move
minimum wage, union            to region with jobs
power                                     - encourage R&D to stimulate I
- reduce unemployment          through tax breaks to firms or
benefits to force                      through payments to universities
unemployed to look harder    - construct new/better infrastructure
and to take available jobs       (see relevant post)


ECONOMIC GROWTH AND DEVELOPMENT
Market-based                              Interventionist
- export-led growth                     - import substitution
- floating exchange rate              - managed exchange rate regime 
regime                                        - protectionism
- free trade                                  - regulation and nationalization
- allow FDI to flow in        
 - IMF/WB SAPs
What has economic history shown us?  How is this topic evaluative?

Documentary: Life and Debt

Understanding Jamaica, debt and the IMF/WB (you determine if there is bias!):

http://www.livevideo.com/video/BESToftheBEST/8572389162284FFD9468AD17757C5D95/life-and-debt-1of-4.aspx

IMF and WB (not the tv station, the bank)

The International Monetary Fund (IMF), located in Washington D.C., U.S.A. and now comprised of 186 member-states, oversees the global financial system and promotes (arguable) healthy macroeconomic goals.  Established at the famed Bretton Woods conference in 1944, the IMF's "primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to buy goods and services from each other [which]...is essential for sustainable economic growth, increasing living standards, and alleviating poverty".  According to The Economist web site, the IMF responded to the breakdown of the Bretton Woods exchange rate regime by "bec[oming] more involved with its member countries’ economic policies, doling out advice on fiscal policy and monetary policy as well as microeconomic changes such as privatization of which it became a forceful advocate" and continued "in the 1980s, it played a leading part in sorting out the problems of developing countries’ mounting debt."   "More recently," the web site reads, the IMF "has several times coordinated and helped to finance assistance to countries with a currency crisis". 

Here are some "Fast Facts" about the IMF.

The World Bank, also headquartered in Washington, D.C. and born from Bretton Woods, focuses on giving loans to LEDCs (and others in crisis) as a sort of international lender of last resort.  "Collectively", the Economist web site states, "it aims to promote economic development in the world’s poorer countries through advice and long-term lending, averaging $30 ­billion a year, spread around 100 countries."  The World Bank (the International Bank for Reconstruction and Development International Development Association - IDA) is NOT the World Bank Group (the World Bank two plus the International Finance Corporation - IFC, the Multilateral Investment Guarantee Agency - MIGA, and the International Centre for Settlement of Investment Disputes - IBRD and the -ICSID).

Again, intuitively, this sounds great!  What could go wrong?

From The Economist web site:

"Critics of the World Bank say that it often worsens the problems facing developing countries. Its advice has often been guided by economic fashion, which led it to support a centrally planned brand of development economics in the 1960s and 1970s, before switching to privatization and structural adjustment in the 1980s and then to promoting democracy and economic transparency, and attacking crony capitalism, in the late 1990s. Until recently, it has generally supported big, ­high-profile projects rather than more economically useful smaller schemes. It has often failed to ensure that its loans have been spent on the intended project. Its willingness to pump money into struggling countries creates a potential moral hazard, in which politicians may have little incentive to govern well because they believe that, if they do a bad job, the World Bank will come to the rescue. The increase in private-sector lending to and investment in emerging markets has led to growing discussion of whether the World Bank is any longer needed."

So what is this structural adjustment (SAPs) with "conditionalities" used by both the IMF and WB?  Basically, the former aims to change the structure of the economy via policy changes and the latter are the strings attached to (sometimes enormous) loans.  Obviously, if countries must do x, y and z to get the loans, there are going to be debates as to whether or not these required structural adjustments are best for the countries (and to what extent they help economic agents in MEDCs). 

This link provides a fairly comprehensive overview of SAPs and "conditionalities" in words other than my own or through a source I usually cite.

Aid

Aid, from the French verb to help, is assistance usually from MEDCs (who can afford it) to LEDCs (who need it), or, as the Economist web site says, "a helping hand for poor countries from rich countries".  Aid is needed for the following reasons : emergency relief for disasters (i.e. 2010 Haitian earthquake), war relief for non-combatants (i.e. DR Congo), assist in development, provide more technology and R&D, fund specific projects (i.e. infrastructure), feed savings which leads to investment, etc.  Aid is given by nation-states (i.e. the United States, the biggest gross donor of international aid), intergovernmental organizations (i.e. United Nations), and non-governmental organizations (i.e. Oxfam).  If between two entities, the aid is bilateral.  If between more than two entities, the aid is multilateral.

There are two subcategories of aid, humanitarian and development.  Humanitarian aid is designed to help people in the short-run survive disasters (i.e. drought, floods) or war.  We see this through food aid, medical aid, and emergency (i.e. disaster ) aid.  The first two are self-explanatory.  Emergency aid includes emergency supplies like medication, clothing, gasoline, etc. to help people survive any sort of calamity.  In Haiti, we saw all three types of aid being donated and used (albeit not as efficiently as it should have : food, medical and emergency.
Important video of the disaster from Frontline (must watch, but very graphic).

Development aid, with longer assistance goals, is designed to lift people out of poverty through bigger and deeper changes within the country.  The technical term for development aid is Official Development Aid (ODA - from the OECD).  Click here for further information including the full definition for ODAs.

The following are different types of development aid (Blink & Dorton, 2007) : long-term loans (low interest for many years to provide a source of savings for LEDCs), tied (aid connected to macroeconomic goals to help the economy grow and develop), project (for specific projects like a new dam or railway system), technical assistance (via better, new technology and better human capital), and commodity (raw materials to help production of g/s).

Aid makes intuitive sense.  The more money given to LEDCs, the better able they are to overcome disaster and achieve economic growth and development.  Unfortunately, the results and evaluation of aid are not so clear.

The Economist web site reads :
"In practice, in many cases aid has done little good for its intended recipients (improved health care is a notable exception) and has sometimes made matters worse. Poor countries that receive lots of aid grow no faster, on average, than those that receive very little...
Why has aid achieved so little? Donations have often ended up in the offshore bank accounts of corrupt politicians and officials in poor countries. Money has often been given with strings attached, so that much of this “tied” aid is spent on com­panies and corrupt politicians and officials in the donor country. War has ravaged many potentially beneficial aid projects. Moreover, some aid has been motivated by political goals – for example, shoring up anti-communist governments – rather than economic ones.
The lesson of history is that aid will often be wasted unless it is carefully aimed at countries with a genuine commitment to sound economic management. Analysis by the World Bank sorted 56 aid-receiving countries by the quality of their economic management. Those with good policies (low inflation, a budget surplus and openness to trade) and good institutions (little corruption, strong rule of law, effective bureaucracy) benefited from the aid they received. Those with poor policies and institutions did not. This accounts for the growing popularity of conditionality in aid."  Authors like William Easterly in his great Elusive Quest for Growth make the same argument.

GREAT Games! Third World Farmer and Free Rice

From the web site (http://www.3rdworldfarmer.com/) PLAY NOW! -
"In the game, the player gets to manage an African farm and is soon confronted with the difficult choices that poverty and conflict can cause.
As a farm and family management game it has an emotional impact on many players because usually these types of games play out in much easier settings, where it's always possible to prosper by playing cleverly and making the right game choices. It's not always like that in 3rd World Farmer. Just like real people are dying from starvation in desperate situations that they never asked to be put in, all it takes for things to go wrong in this game is one bad harvest, an unfortunate encounter with corrupt officials, a raid by guerillas, a civil war, a sudden fluctuation in market prices, or any of the many other game events, that might never happen to families in industrialized countries.
By letting players experience this - albeit in a harmless, fictional setting - we hope to open their eyes to the problems and to motivate them to make positive social change. Our aim is to have everybody play the game, reflect, discuss and act on it."

Free Rice : 
"FreeRice is a non-profit website run by the United Nations World Food Program. Our partner is the Berkman Center for Internet & Society at Harvard University.
FreeRice has two goals:

1. Provide education to everyone for free.
2. Help end world hunger by providing rice to hungry people for free.

This is made possible by the generosity of the sponsors who advertise on this site.
Whether you are CEO of a large corporation or a street child in a poor country, improving your education can improve your life. It is a great investment in yourself.
Perhaps even greater is the investment your donated rice makes in hungry human beings, enabling them to function and be productive. Somewhere in the world, a person is eating rice that you helped provide. Thank you."

Growth Models and Development Strategies

In development economics, there are growth models, growth strategies and development strategies.  Be careful not to confuse them!

First, the IB requires the Harrod-Domar growth model and the Lewis / structural change / dual sector model be taught.  Unfortunately, at the higher tertiary level, these models are not really used anymore, so we will understand the basics.

GROWTH MODELS

The Harrod-Domar model (named for guess who) states that the rate of GDP growth equals the savings ratio divided by the capital to output ratio.  Therefore, to increase GDP growth, the model suggests consumers should save more (increase mps) or that capital should become more productive/efficient.  The rationale is that more savings leads to more investment which leads to more capital and output and thus higher GDP per capita.  However, in poor countries, many citizens make only enough to survive, so it is very difficult to increase savings (confounded by the fact that many banks in these countries are MNCs catering to the upper echelon of the socioeconomic spectrum).  Moreover, with capital flight (see relevant post) and little to no R&D, it is nearly impossible to make the capital more efficient.  These are two major reasons why this growth model (which was originally meant to be a business cycle model) doesn't really help.

Another rather outdated model is Lewis's dual sector model.  First, we assume there are two sectors: a large agricultural sector and a small industrial sector in the city.  There are far more workers in the countryside working in the fields and getting paid low wages.  The few workers in the city that manufacture products make more.  The idea is that the private firms in the industrial sector will take their profits and reinvest them which enlarges the industrial sector that can then hire people from the agricultural sector and pay them more.  This pattern repeats itself until equilibrium is achieved.  Although this model is helpful in understanding industrialization, it has fallen out of favor because of today's considerable urban poor, (possibly incorrect) assumption of extra rural labor, (possibly incorrect) assumption of reinvestment of profits and lack of known capital flight in LEDCs.

GROWTH STRATEGIES

Export-led growth is an impetus for a country's industrialization which focuses on creating, developing and selling g/s for which it has a comparative advantage (see relevant post).  For this to occur, the country needs to open its border to trade, which means we see a reduction in protectionist measures.  This is supposed to lead to economic growth through the increase in the net exports part of the GDP equation.  We have seen success with export-led growth in the Four Asian Tigers, but their difficulties during the Asian crisis of the 1990s questions the strategy's sustainability.  Furthermore, where do poor countries start?  How can they compete with MNCs and MEDCs?

A second strategy is import-substitution (inward).  The idea behind import substitution is that countries reduce trade and produce g/s that they would have imported domestically as replacements.  This would obviously lead to an increase in national output which is national income (or GDP growth).  Jobs would be created as well.  Although this technique is logical, it has several disadvantages.  These include a lack of efficiency, reduced consumer and firm choice for g/s, increased prices, and the possibility that the growth is only short-term (not sustainable?). 

Thirdly, foreign direct investment (FDI), or direct investment in a country through building a company or taking over part/all of an existing company, can assist in the growth of LEDCs.  These countries must open themselves to foreign MNCs to do this.  There are several advantages and disadvantages to FDI (analysis and evaluation!).  

Advantages - funds domestic savings, builds infrastructure, gives access to R&D and new technology, employs domestic citizens (amplified by mulitplier), can increase aggregate demand (amplified by accelerator), and gives tax revenue to the domestic government.

Disadvantages - who holds management / upper-level jobs?, negative externalities of production, possible transfer pricing, excessive power in domestic economy/politics?, possible repatriation of profits, low level of capital.


DEVELOPMENT STRATEGIES
Fairtrade
Besides growth strategy, there are also development strategies that focus on improving standard of living in LEDCs.  For example, there is the Fairtrade Organization.

According to their web site, the Fairtrade Labeling Organization (FLO) is "a non-profit, multi stakeholder body that is responsible for the strategic direction of Fairtrade, sets Fairtrade standards and supports producers".  From the web site as to what Fairtrade is, the web site says :

"Fairtrade is an alternative approach to conventional trade and is based on a partnership between producers and consumers.  Fairtrade offers producers a better deal and improved terms of trade.  This allows them the opportunity to improve their lives and plan for their future.  Fairtrade offers consumers a powerful way to reduce poverty through their every day shopping. 

When a product carries the FAIRTRADE Mark (seen above) it means the producers and traders have met Fairtrade standards.  The standards are designed to address the imbalance of power in trading relationships, unstable markets and the injustices of conventional trade.

For producers Fairtrade means prices that aim to cover the costs of sustainable production, an additional Fairtrade Premium, advance credit, longer term trade relationships, and decent working conditions for hired labor." 

Basically, Fairtrade ensures producers in "disadvantaged" countries get a price for their goods that allows them to take care of themselves economically.  This, of course, leads to higher prices due to the fact they do not have world efficiency levels of production, but some consumers are willing to pay more to help these people.

What types of products have the Fairtrade symbols?

Video examples from Uganda,  Nicaragua, and Dominican Republic.

Micro-finance 

In LECDs, oftentimes the vast majority of the population does not have access to banking services because of their lack of savings and collateral (Merriam-Webster - of, relating to, or being collateral used as security, as for payment of a debt or performance of a contract).  To address this deficiency, certain financial institutions have developed micro-finance offices (or entire banks) designed to provide standard banking services taken for granted in MEDCs (i.e. savings account, small business loans, insurance).

One example of a bank that focuses on micro-finance projects in the Grameen Foundation.  Click here for further information about this remarkable organization. 

Micro-credit is a part of micro-finance that extends small loans to entrepreneurs to start businesses.  These are designed to lift people and families, unit by unit, out of poverty.  Women have especially benefited from micro-credit because of their tendency (which is arguable and to be checked empirically) to be less risky and their certain gender disadvantage in many LEDCs.

The following are examples of micro-finance and micro-credit that have worked in Bangladesh, the "Arab World", and Botswana.

What is poverty?

poverty (n) (Yahoo Education): 

1. The state of being poor; lack of the means of providing material needs or comforts.
2. Deficiency in amount; scantiness: "the poverty of feeling that reduced her soul" (Scott Turow).
3. Unproductiveness; infertility: the poverty of the soil.
4. Renunciation made by a member of a religious order of the right to own proper

relative poverty (from Biz/ed) : "the level of poverty in a country expressed in term of certain level of income such as half of the average wage" versus absolute poverty : " level of poverty when only the minimum levels of food, clothing and shelter can be met", for example, percentage of people living on less than $1 a day.

In Luxembourg, one is relative poor if they make less than half of the GDP per capita ($78,395 / 2 = <$39,197.50) ($PPP, from IMF 2009).  Clearly, this is a much higher number than a country like Tunisia ($8,254 / 2 = <$4,128) ($PPP, from IMF 2009).  However, we can compare across countries absolute poverty because we can simply calculate the percentage of the population living below $1 PPP per day.  The following map from Wikipedia shows us these figures graphically.  Unsurprisingly, the map shows a similar pattern to countries with the most un/underdevelopment and corruption.

Videos one, two and three all provide visualizations and stories of poverty.  Watch them.  The entire blog is also informative. 

A poverty trap occurs when countries cannot lift themselves out of poverty because of the twisted nature of barriers to growth and development.  We can illustrate this using a poverty cycle like the one shown in Blink & Dorton (2007):

Stopping economic g/d...what are the major obstacles to these essential goals?

Before analyzing those barriers that are keeping poor countries poor and limiting even the richest of economies, I want to recognize the United Nations Millennium Development Goals.  The UN web site states that "the eight Millennium Development Goals (MDGs) – which range from halving extreme poverty to halting the spread of HIV/AIDS and providing universal primary education, all by the target date of 2015 – form a blueprint agreed to by all the world’s countries and all the world’s leading development institutions."  This video, "Make it Happen",  provides us with an excellent multimedia introduction to to the MDGs and the eight MDGs are here.  Please read them.


What are the barriers to economic growth and economic development?  
First, there is often a lack of a proper, well-functioning education system as developing countries lack educational infrastructure and capital and parents lack the incentives to send their children to school (see relevant chapter in William Easterly's The Elusive Quest for Growth).  Moreover, the health care system is also missing trained staff, medications, and physical infrastructure leading to increased mortality from diseases and childbirth.  Speaking of infrastructure, this term includes all the roads, railways, airports, public services (police, fire, emergency, sewage), communication services (telephones, post) and public utilities (water, electricity, gas) in a country.  Imagine how difficult business (or, more generally, day-to-day life!) is in a country where these forms of infrastructure are weak or non-existent!   


Institutionally, developing countries often lack clear and well-protected (legally) property rights and general rule of law which makes incentive perverse.  Why would an entrepreneur create if his/her creation could be stolen?  Furthermore, the financial system of less economically developed countries (LEDCs) tend to also be weak and insufficient which compromising the way savings should occur in a properly functioning economy.  In fact, banks here tend to be foreign multi-national corporations (MNCs) which only make funds available for the wealthy, which is a very small percentage of the overall population.  Once again, we have perverse incentives with people simply saving their money in cans or places other than banks.  There exist in LEDCs more informal / black markets because of these institutional weaknesses.  These transactions cannot be monitored (for safety) or taxed (for government revenue) because they are invisible.  Moreover, the tax system's tend already to be disordered and failing and do not collect the money needed for proper government provision of goods, services and welfare.  This is worsened by the fact that income inequality tends to be very high in developing countries and, thus, redistribution due to a poor tax scheme and personal tax avoidance is very hard to accomplish.


What is corruption?  Corruption is NOT having integrity, a term which means doing the right thing when no one is looking.  Technically, it is the pursuit of personal gain by those in positions of power through simple thief, money laundering, bribery, extortion, etc.  Corruption is wholly toxic to economies.  They create perverse incentives, they funnel money away from the mouths and hands of those who need it, they stop the provision of health care and infrastructure.  Where is in the worst?  Look at this map from Wikipedia from www.transparency.org which measures perceived corruption:

As you can see, the more green, the less corruption is perceived, and the more red, the reverse.  Clearly, there appears to be a correlation between how developed a country is and how corrupt it is perceived to be.  Check out the web site above for more (compelling) information.


There are a few more barriers to economic growth and economic development.  The first is the exploitation by more economically developed countries (MEDCs) of LEDCs in different international organizations (i.e. World Trade Organization) in what's argued to be a "neo-colonization".  We do observe MEDCs putting protectionist measures on developing countries' products for reasons mentioned in my previous post on protectionism.  LEDCs also tend to focus to heavily on the primary sector and raw materials which are volatile with respect to price.  This, in turn, makes their overall economies volatile.  These problems all can compel the best and brightest to leave their native countries and seek higher paying, better protected jobs in MEDCs.  We call this capital flight.  After all, why would you stay in your homeland and make 1/50th of what you could make in Canada or New Zealand or Switzerland?  This is especially true in countries whose currency (non-convertible) can't be traded for "hard" currency (convertible), because of the reduced incentive for foreigners to do business.  These are just several of many impediments to growth and development that need to be studied to answer one of economics most important questions : How do we lift the poor out of poverty?

Where does economic development come from? What are its consequences?

Economic growth does not necessarily breed economic development.  Unless the increase in national income reaches all levels of society, development remains elusive.  It is this, the pursuit of equal income distribution after growth, that is a widely accepted economic goal.

The big four sources of economic development are education, health care, infrastructure and political stability.  Education improves opportunities for all lucky enough to receive it, especially disadvantaged groups like women and minorities.  It allows people to become ever increasingly more productive and engaged as labor/human capital.  In societies where women sit idle, roughly 50% of the potential workforce is simply out of commission.  Educating and employing women can be immensely helpful in achieving growth and development as there are more and better FoPs.  A very interesting argument here involves cultural relativism with respect to whether or not treatment of women is a cultural issue or a human rights / right to work issue.

Moreover, as people learn how to take care of themselves and others, mortality rates fall.  For example, if mothers learn to wash their hands with soap before touching their child's wound or men learn to use condoms to prevent the spread of HIV, rates of infection in both cases will logically fall.

Closely connected to this issue is that of improving health care.  Imagine how difficult it would be to work when suffering from malaria!  As people become healthier, they are better equipped to achieve their maximum productivity.  Therefore, many economists argue governments should spend money to build hospitals, to acquire doctors, nurses and medications and to make health care a vital part of government spending and investment for the future.

The Economist web site defines infrastructure as "the economic arteries and veins...roads, ports, railways, airports, power lines, pipes and wires that enable people, goods, commodities, water, energy and information to move about efficiently".  As infrastructure improves, g/s can be moved around more easily and people can get to work or to school.  Simply stated, development occurs.

Lastly, stories like this can be devastating for economies since people within the country become nervous and foreigners choose to stay away.  With more institutionalized political instability, firms do not invest or conduct business at all.  Therefore, political stability is a clear step to development as economic incentives and ownership become protected and business (via foreign direct investment, FDI) flows into the country.

Where does economic growth come from? What are its consequences?

Sources of Economic Growth

As previously written, economic growth is achieved through the increase in the quality and/or quantity of FoPs.  But how is this possible?  Regarding land, an increase in "quantity" can occur when new sources of raw materials are discovered (i.e. the oil well off Brazil in 2007 and now the Gulf of Mexico) or when farming/drilling techniques become more efficient ("quality" of the FoP), i.e http://mndcnews.com/archives/222317.   

Regarding labor and human capital, a country can either let more people in through loosening immigration policies (http://thecitizen.co.tz/editorial-analysis/47-columnists/1700-in-praise-of-latin-american-immigrants.html) or improving the quality of labor through education and training (http://tvnz.co.nz/business-news/fta-brings-chinese-teachers-nz-3517955).  

Economic growth can also be achieved through improving the quality and/or quantity of the capital stock of an economy.  When savings increases, more investment can occur (more machines, factories).  When more people become educated, more advancements in technology via R&D will be made.  In this section, we use two terms; capital widening and capital deepening.  Capital widening occurs when more forms of technology are placed into more hands (not individually more productive people, but more in terms of numbers of people with technology).  Capital deepening occurs when each individual worker becomes more productive through more productive techniques / tools.  

Lastly, the improvement of political and economic institutions as described in my thesis (see post 1/1/10) leads to economic growth as innovation becomes better protected, banking becomes more monitored and infrastructure becomes stronger among other similar developments.

Consequences of Economic Growth 

- increase in incomes : GDP goes up, GDP per capita logically follows assuming equal income distribution

- better indicators of standard of living : when GDP goes up, enrollment ratios, life expectancy, GDP per capita, and literacy tend to follow

- more money for the government : as people make more and tax institutions improve, governments get more money to use for development of infrastructure, education, health care, etc.

- negative externalities and future threat : countries that are developing thanks to growth see firms that pollute more due to increased production and that may engage in practices that threaten future growth (i.e. sustainable development, or development that doesn't impact future development, for example planting trees if cutting them down).

- inequality creation : with economic growth comes winners and losers; often, the upper percentage of households get a higher percentage of income and the lower less.  This can increase the Gini coefficient which has happened following growth in South America, one of the most unequal continents on Earth in the last three decades of the 20th century (and still today).

What characteristics do developing countries share? How do they differ?

Common characteristics of developing countries:
- low standard of living (i.e. too many without access to clean water, fighting diarrheal disease, losing children to "preventable" diseases like smallbox or cholera)
- high growth rate of population and, thus, high dependency ratios (% non-working due to age/%working)
- low productivity per worker
- high unemployment
- domination by "rich" countries like the US, EU, Japan
- too much focus on raw materials / agricultural sector
- presence of black markets

Differences between developing countries:
- physical geography
          - size : Sudan vs. Lesotho
          - endowment of natural resources : Nigeria (rich) vs. Bangladesh (poor)
          - history : type of colonization : Canada (neo-Europes) vs. Vietnam (extractive) *See Schmidt's MSc thesis in economics and history: see post from 1/1/10 (first post on blog)
          - demographic factors: religion (Islamic Oman, Christian Bolivia) and racial/ethnic (Cambodia vs. Nicaragua)
          - GDP per capita (Mexico - higher vs. Sierra Leone - lower)
          - type of industry (Bangladesh - agriculture, Maldives - tourism)
          - political structure (Iran - theocracy, India - democracy, Myanmar - military junta, Tonga - monarchy, single party - Cuba)

LINK: UNDP for Beginners - UNDP for Beginners

Economic Growth and Development

Economic growth is simply the increase in the GDP (real output) of an economy over a period of time, usually a year.  This is a quantitative measure, GDPnew - GDPold/GDPold.  For example, if Angola saw 9% growth in 2009, that means the value of final g/s produced in Angola in 2009 was 9% higher than it was in 2008.

How is economic growth achieved?  Simple answer: through the increase in the quality and/or quantity of FoPs.  This increases the potential output of the country (Keynesian v. neo-Classical views) and can be shown by a rightward shift in the country's PPC or LRAS (see relevant posts from January and March).

Economic development, a qualitative measure, describes of an economy's standard of living, including information like access to safe drinking water, mother mortality and GDP per capita.  Although economic growth can lead to economic development, this isn't always the case if the rich reap the benefits of the increase in national income.

Although economic growth is very simply measured using the equation above, economic development requires numerous indices to provide a more complete picture of the development of a country.  These include the UN Development Program's (UNDP) Human Development Index (HDI), Gender-related Development Index (GDI), Gender Empowerment Measure (GEM), Human Poverty Index (HPI), and Lorenz curve / Gini coefficient.  These all deserve further description.

The HDI has three components : life expectancy at birth, education/knowledge measured via literacy rate (two-thirds weighting) and gross enrollment ratio (primary, secondary, tertiary) and standard of living measured by GDP per capita (PPP).  The following graph from Wikipedia shows current HDI levels, with zero meaning very low development and one being almost total development, followed by the link for the most current Human Development Report:

Link (look for "Annual Report"): http://hdr.undp.org/en/

The GDI adjusts the HDI for gender to show the inequalities for men and women for life expectancy, education/knowledge and standard of living.  The GEM targets differences in opportunities for women and men in different countries through a statistical calculation of political participation (parliamentary seats filled by women), economic participation (legislators, senior officials, managers; professional and technical positions) and female GDP per capita compared to male.  Please see the following image (zoom in if necessary) for countries and their GEM values.

The HPI takes the HDI and reverses it to look at the other side of the equation.  Instead of life expectancy at birth, the HDI calculates the chance that people won't live past a certain age (from 40 to 60).  Moreover, the HDI uses the adult illiteracy rate instead of the literacy rate / enrollment rate and sort of an "anti" standard of living as measured by statistics of those without access to clean water or health services and child malnourishment rates.  Click on this link for further information: A map of world poverty that includes human poverty index Development Economics.

Lastly, the Lorenz curve and the Gini coefficent it derives determine the income inequality of an economy.  The Lorenz curve shows which percentage of households earn which percentage of the country's income.  If the country was perfectly equal, the bottom 30% would earn 30% of national income and the bottom 60% would earn 60% of the income, etc.  This is shown by the line of perfect equality, the 45 degree angle from the point of origin.  The curve that exists beneath this line shows how unequal countries are, and the more bowed the curve, the more unequal is the income distribution in the economy.  This is the Lorenz curve.  Please see the following graph:

In this hypothetical (extreme) scenario, the bottom ten percent of the economy earns less than 1% of the income and the bottom 50% of the household earns just 10% of the income (compared to 50% at perfect equality).  In fact, in this example, the upper 50% of society earns 90% of the income and the top 10% earns about 50% of the income!  This would be an EXTREMELY unequal society.  The distance between the Lorenz curve and the line of perfect equality derives the Gini coefficient which quantifies the actual income inequality of a country.  Zero corresponds to perfect equality (everyone earns the same) and one perfect inequality (one person earns everything..."statistical dispersion").  Here is a graph that shows worldwide Gini coefficients (thanks to Wikipedia):

Where is your country?  How does this make you feel?

ToT = Terms of Trade

A country's terms of trade (ToT) is the weighted average of its average export prices over it's average import price times 100.  A value of 100 means the prices for both are the same, but if in the next year the country sees a ToT of 103, that means the country's exports now buy 3% more than what they did the year before and we've seen an improvement in the terms of trade.  Conversely, if the number is 97, then the country's exports can now only buy 97% of what they could wth their exports.  This is a deterioration of a country's terms of trade. 


Why do ToT's change?
In the SR...
- forces of supply and demand for exports
- relative inflation increases or decreases
- exchange rate fluctuations

In the LR...
- consumer incomes
- improvement in worker/FoP productivity

PED for exports: %∆ demand for exports / %∆ average price of exports
- if elastic, good for when export prices are falling (bigger change in demand, more export revenue)


PED for imports: %∆ demand for imports / %∆ average price of imports
- if inelastic, bad for when export prices are falling (smaller change in demand, less revenue)

Interesting article : Coping with Terms-of-Trade Shocks in Developing Countries (please read and evaluate)

Marshall-Lerner Condition and J-Curve

The Marshall-Lerner condition states that a country's depreciation/devaluation on its currency will cause exports to increase, imports to decrease, and thus an improvement in its current account (usually from deficit to surplus).  For this to occur, PED of exports plus PED of imports must be greater than one (because demand needs to be elastic for the process of going from deficit to surplus to work...think logically).  Here is the J-curve which simply shows this condition graphically:

The J-curve shows us what would happen over time if a government devalued/depreciated its currency over time.  As first, because the value of the currency would be immediately lowr, the capital account would actually worsen as less money would come in for exports.  This is the downward-sloping part of the J-curve.  However, over time, foreigners would notice these exports are cheaper and the domestic consumers/firms would notice imports were more expensive, so the balance of trade would improve theoretically until the deficit was replaced by a surplus (moving up the curve to the right).

Mmm BoP! Balance of Payments

The balance of payments, comprised of the current account and the capital account (and an error value), is a means of accounting transactions between one country and all other countries with whom it trades.  "The Economist web site defines this term as "the total of all the money coming into a country from abroad less all of the money going out of the country during the same period."

The current account is the balance of trade (X-M) + net factor income (interest/dividends) + net transfer payments (i.e. foreign aid), and "The Economist" web site states "the current account includes:

*visible trade (known as merchandise trade in the United States), which is the value of exports and imports of physical goods;

*invisible trade, which is receipts and payments for services, such as banking or advertising, and other intangible goods, such as copyrights, as well as cross-border dividend and interest payments;

*private transfers, such as money sent home by expatriate workers;

*official transfers, such as international aid".

The capital account includes the net purchase and sale of all assets between countries.  As per the famous "The Economist" web site : "The capital account includes:

*long-term capital flows, such as money invested in foreign firms, and profits made by selling those investments and bringing the money home;

*short-term capital flows, such as money invested in foreign currencies by international speculators, and funds moved around the world for business purposes by multinational companies."

Simplified example of US (2005) BoP (from FTE Program Curriculum) :

CONSEQUENCES...of a current account deficit

- countries use reserves of foreign currencies to control current account deficits, but these may run out even for the largest economy.
- if foreigners are investing largely in a country and that country's people are buying foreign g/s, then the country is susceptible to changes in foreign behavior which could turn sour.  Furthermore, foreigners can have considerable economic power over the country (i.e. China and US).
- if countries borrow from abroad with high-interest loans, then they can end up owning other countries billions of dollars.  This can lead to instability and possible default which would wreak havoc on the economy.

CONSEQUENCES...of current account surpluses

-a country with a current account account surplus funded by sales of its g/s may face a surge in protectionsist practices from those with current account deficits.
- a current account surplus tends to correspond with currency appreciation (see post on advantages and disadvantages of a strong currency). 

From "The Economist" web site:

"As bills must be paid, ultimately a country's accounts must balance (although because real life is never that neat a balancing item is usually inserted to cover up the inconsistencies).

A"Balance of payments crisis" is a politically charged phrase. But a country can often sustain a current account deficit for many years without its economy suffering, because any deficit is likely to be tiny compared with the country's national income and wealth. Indeed, if the deficit is due to firms importing technology and other capital goods from abroad, which will improve their productivity, the economy may benefit. A deficit that has to be financed by the public sector may be more problematic, particularly if the public sector faces limits on how much it can raise taxes or borrow or has few financial reserves.

For instance, when the Russian government failed to pay the interest on its foreign debt in August 1998 it found it impossible to borrow any more money in the international financial markets. Nor was it able to increase taxes in its collapsing economy or to find anybody within Russia willing to lend it money. That truly was a balance of payments crisis.

In the early years of the 21st century, economists started to worry that the United States would find itself in a balance of payments crisis. Its current account deficit grew to over 5% of its GDP, making its economy increasingly reliant on foreign credit."

Video: Exchange Rates

Exchange Rates....that'll be 10,000 Japanese yen please?!

An exchange rate is the value of one currency in terms of another.  For example, as of May 9, 2010, 1CHF (Swiss franc) = € (EU euro) 0.71.  The graph above shows the floating exchange rate of CHF as expressed in EUR as of May 2010.  In such a floating / mixed exchange rate regime, the value of the currency is allowed to be determined by the market forces of supply and demand as determined on the foreign exchange market.  In this case, it is the demand for CHF in terms of euro.  The demand curve is downward-sloping representing the demand for CHF by Europeans in the Eurozone (or people holding EUR).  The supply curve is upward-sloping and represents the supply of CHF which comes from Switzerland.  The equilibrium price, the exchange rate, is CHF1 = .71 EUR.  If the value of a currency in a floating exchange rate increased (i.e. CHF1 = 1.00 EUR), then we would say the CHF has appreciated.  On the flip side, if the value decreased, it has depreciated.  Changes in the value of currency depends on different factors and would be represented by a shift in demand or supply curves.  Factors that affect the value of the currency include an increase in exports bought by Europeans, an increase in European investment in Switzerland, an increase in European saving in Swiss banks, an interest to speculate on the value of the CHF.  

What increases the demand for a currency, i.e. Russian ruble (rightward shift in D)?

- an increase in demand for Russian g/s

- lower rates of inflation in Russia compared to other countries with similar products

- foreigners make more money, so they demand more of all g/s, including Russian ones

- foreigners develop tastes/preferences for Russian g/s

- Russian investment prospects improve and the interest rate increases (more savings)

- speculators believe the RUR will appreciate in the future, demand more now to make money (buy low, sell high)

What decreases the demand for a currency, i.e. Indian rupee (rightward shift in D)?

- Indians demand more foreign g/s

- higher rates of inflation in India compared to other countries with similar products

- Indians make more money, so they demand more of all g/s, including foreign ones

- Indians develop tastes/preferences for foreign g/s

- Foreign investment prospects improve and the interest rate decreases relative to other countries (less desire for domestic savings)

- speculators believe the INR will depreciate in the future, demand les

More generally, there are three different types of exchange rate regimes : floating, managed (mixed) and fixed.  In a floating exchange rate regime, the value of the one currency in terms of another is determined solely by the forces of supply of and demand for that currency.  Here, if the value goes up, the currency has appreciated, and if it goes down, it has depreciated.  Conversely, in a fixed regime, the exchange rate is determined by the government (or a governmental body).  If this currency gets stronger, it has revalued and if it has gone down, we say it has devalued.  In the middle, where exchange rates are allowed to float but are "managed" if their value goes too low or too high, then we have a managed exchange rate regime.  Managed towards floating is what most currencies are today.  

ADVANTAGES                  DISADVANTAGES

...of a high exchange rate (currency is strong compared to others)

- inflation is pushed downwards - export industries lose because their

because imports, FoPs cheaper   g/s become more expensive, U up

- purchasing power for imports     

strengthens                                  - domestic producers in general can

- domestic producers must be      lose because domestic consumers

more efficient to compete with    may switch to cheaper imports;

foreign producers, we win!          unemployment (U) may go up

...of a low exchange rate (currency is weak compared to others)...JUST REVERSE THOSE ABOVE FOR A STRONG CURRENCY!!!

          

 Let's continue...

ADVANTAGES                 DISADVANTAGES

...of a fixed exchange rate regime

 - very predictable (b/c    - may see unemployment through ∆i

fixed) means easier to do - hard to do, thus very inefficient because

business with respect to    market can't clear

exchange rate costs           - the government must be

of inflation because it       mindful  - needs large foreign reserves

could destroy the              to maintain rate

macroeconomy,               - can make other countries angry

so low inflation                (i.e. US v. PRC)

 - its hard to speculate 

on a fixed rate!

ADVANTAGES                      DISADVANTAGES

...of a floating exchange rate regime

- ∆i can be used as a tool to "fix"  - can create uncertainly (S and D)

economy depending on problem   - may see unemployment through ∆i

- easier to manage balance           - can be attacked by speculators

of payments                                  - can make inflation worse (if high)

ADVANTAGES                      DISADVANTAGES

...of a single currency (ie. €)

- cuts transaction costs             - country must follow union

- more certainty in value          monetary policy (i.e. no control i)

- easier to compare prices       - can be expensive to switch from

- more FDI (easier to do         one currency to another

business)                                 - hard to fight BoP deficit

purchasing power parity (PPP) theory : a theory states that different floating currencies will, over time, adjust until one unit of currency can buy the exactly the same amount of products as one unit of another currency.  "The Economist" web site defines the term as "a method for calculating the correct value of a currency, which may differ from its current market value [which...] is helpful when comparing living standards in different countries, as it indicates the appropriate exchange rate to use when expressing incomes and prices in different countries in a common currency."

PPP Map from Wikipedia :

From 2003 and using USD as the base currency, this map shows us how much more expensive (reds and oranges) or less expensive (yellows and below) the exact same basket of g/s is in the country (i.e. Scandinavian prices for the exact same basket of g/s are more than 20% higher than in the US, whereas Mexico's basket is 70% of the price of the American basket so 30% less).

Click here to discover The Economist's "Big Mac Index"!

Video: GATT/WTO

Globalization and Economic Integration

As globalization continues, countries are joining together to form trade blocs to lower or eliminate trade barriers and to try to accede to the WTO (see post).  A trade bloc is an agreement between nations to create a “free trade area” of varying integration that is formed through international agreements (i.e. treaties) and/or with intergovernmental organization help to reduce of eliminate different forms of protections.  Please see my Model United Nations blog for further information on international relations: http://schmidtmun.blogspot.com/.

There are six levels of trade areas, from the least extensive (the Preferential Trade Area) to the most extensive (complete economic integration).

1. Preferential Trade Area (PTA): a trading bloc giving preferential treatment for some g/s between some countries/groups of countries (i.e. EU and ACP countries, India and Afghanistan).

2. Free Trade Area (FTA): a trading bloc comprised of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) g/s between them (i.e. North American Free Trade Area (NAFTA) between Canada, the US and Mexico).  However, the countries can have different external tariffs to non-members.

3. Custom Union (CU): an FTA with a common external tariff (i.e. MERCOSUR in much of South America, CARICOM in the Caribbean).

4. Common Market (CM): a CU with free movement of FoPs (specifically capital and labor) and unified policies on product regulation (i.e. the European Union).

5. Economic and Monetary Union (EMU): a CM with a single market and common currency (i.e. 16 countries of the Eurozone, West African EMU and the West African CFA franc).

6. Complete economic integration i.e. think of the US from colonial times to today

trade creation: the advantage of a country joining (at least) a customs union as specialization according to comparative advantage from high-cost producers to low-cost producers occurs.

Graph Analysis:
In this example, we address what happens to Slovenia when it joins the European Union.  Before joining, Slovenia faced an EU tariff on beef (P-EU+Tariff).  When Slovenia joined the EU, the tariff was eliminated, leading to a gain in the world efficiency lost before with the tariff (the orange triangle) and a gain in the consumer surplus also previously lost (green triangle).  If there were any g/s the Slovenes placed on the EU, those would also we eliminated.  A full-fledged analysis would include the full pre- and post-tariff situation with new labels (see tariff post).


trade diversion: the disadvantage of a country joining (at least) a customs union since the country may have to put tariffs on g/s from countries they previously traded with to adhere to the new agreement (low-cost to high-cost).

Graph Analysis:
In this example, we address what would happen if Albania entered at least a customs union with the European Union.  We assume Albania had an agreement with India by which they could purchase shirts at a price of P-India.  If Albania signs an agreement with the EU, they'll have to assume the EU's tariff on the Indian shirts (P - EU+T) which is a price higher than the EU price for shirts.  In this instance, Albania ceases to trade with India and, instead, purchases EU shirts beyond domestic production.  Therefore, the red trapezoid represents the loss of world efficiency (the left triangle and rectangle) and the loss of consumer surplus (the right triangle) enjoyed before the agreement.  A full-fledged analysis would include the full pre- and post-tariff situation with new labels (see tariff post).

World Trade Organization (WTO)

The World Trade Organization (WTO) is an intergovernmental organization based in Geneva, Switzerland that "deals with the rules of trade between nations at a global or near-global level."  Born in 1995 under the Marrakesh Agreement, the WTO continues the liberalization process started by the now defunct General Agreement on Tariffs and Trade (GATT from 1947) and is currently comprised of 153 countries.

Map (from Wikipedia, dark green = original member, light green = subsequent member) :

Please see this link for information on the WTO's structure and successes.
Please see this link for the pros and cons of the WTO.  They're pretty straight-forward and logical.

Video: Protectionism

Protectionism - Tariffs and Subsides and Quotas et al.

Protectionism, whose antonym is free trade, occurs when countries use techniques (formal or informal) to prevent or to make difficult imports coming into their border for sale.  There are several forms of protectionism.  A tariff is a tax on imports and is probably the best-known way countries use to stop free trade.  In fact, the other types of trade barriers are often referred to as non-tariffs barriers (NTBs)!  These include subsidies (assistance to domestic firms by the government to cheapen production), quotas (a numerical limit of the amount of imports that can enter), and government policies such as health and environmental standards which work to keep foreign g/s out. 

There are several reasons for protectionism (can be evaluative when pros and cons are discussed):
- assist domestic producers (and thus "save" jobs and ensure votes?)
- protect an infant industry
- combat dumping and low cost labor from abroad
- make money for the government
- avoid over reliance on too few industries
- have important products in case of emergency
- fix balance of payments deficit
- protect domestic consumers against dangerous imports

Tariff:

Graph Analysis:
If this country (Domestic) were closed to trade, equilibrium would occur at a price of Pe and a quantity of Qe for corn.  However, when the country opens itself to uninhibited free trade, the country benefits from a global supply of corn, much of which is produced at a lower cost (and thus a lower price) from foreign producers.  In this situation, the domestic producers produce 0Q1 corn and foreign produces make the rest, Q1Q2.  Both groups of producers accept a price of Pworld, and by multiplying price by quantity, we see domestic producers earn box a and foreign producers earn b, c, d and e.

Let's now assume the domestic government imposes a tariff on foreign corn to protect its own producers.  The supply curve Sworld shifts up the value of the tariff to Sworld+Tariff and the new price is Pworld+Tariff.  When this occurs, moving up along the domestic supply curve, we observe domestic producers produce 0Q3.  Because these firms are more inefficient than the foreign producers who can produce more cheaply, we identify box h as a loss in world efficiency.  Moreover, we also have to move backwads up along the demand curve because the price has changed, showing us that foreign producers produce Q3Q4 since Q4Q2 is now lost.  This represents a loss of consumer surplus (see relevant post) and is labeled k.  As for earnings, the domestic producers now make a, b, f, g, h and foreign producers make c, d.  The domestic government receives i, j as tariff (tax) revenue from the foreign producers.  The combination of losses in world efficiency and consumer surplus together are called a deadweight loss of welfare because they make some people worse off.

Subsidy:

Graph Analysis:
If this country (Domestic) were closed to trade, equilibrium would occur at a price of Pe and a quantity of Qe for barley.  However, when the country opens itself to uninhibited free trade, the country benefits from a global supply of barley, much of which is produced at a lower cost (and thus a lower price) from foreign producers.  In this situation, the domestic producers produce 0Q1 barley and foreign produces make the rest, Q1Q2.  Both groups of producers accept a price of Pworld, and by multiplying price by quantity, we see domestic producers earn box a and foreign producers earn b, c, d.

Let's then assume the domestic government assists its producers by given them a subsidy (financial aid to domestic producers of g/s making production cheaper).  The supply curve Sdomestic shifts out the value of the subsidy to Sdomestic+Subsidy.  Domestic firms receive the new price Pworld+Subsidy.  When this occurs, moving up along the domestic supply curve, we observe domestic producers produce 0Q3.  The foreign producers supply the rest, Q3Q2 and earn c, d.  Because the domestic firms are more inefficient than the foreign producers since they require a higher price to produce Q1Q3, we identify box g as a loss in world efficiency (and thus deadweight loss in welfare).  The domestic producers now make a, b, e, f, g and foreign producers make c, d. 

Quota:

Graph Analysis:
If this country (Domestic) were closed to trade, equilibrium would occur at a price of Pe and a quantity of Qe for sorghum.  However, when the country opens itself to uninhibited free trade, the country benefits from a global supply of sorghum, much of which is produced at a lower cost (and thus a lower price) from foreign producers.  In this situation, the domestic producers produce 0Q1 of sorghum and foreign produces make the rest, Q1Q2.  Both groups of producers accept a price of Pworld, and by multiplying price by quantity, we see domestic producers earn box a and foreign producers earn b, c, d and e.

Let's then assume the domestic government imposes a quota (a limit on foreign g/s) on foreign sorghum to benefit its own producers.  The supply curve Sdomestic shifts out to assume production after the quota is reached to Sdomestic+Quota.  When this occurs, moving up along the domestic supply curve, we observe domestic producers produce 0Q1, foreign producers produce Q1Q3 (the value of the quota) and domestic producers pick up the rest, Q3Q4.  Because these firms are more inefficient than the foreign producers who can produce more cheaply, we identify box j as a loss in world efficiency.  We move up backwards along the demand curve because the price has changed to Pw+Quota, showing us that domestic producers stop at Q4 since Q4Q2 is now lost.  This represents a loss of consumer surplus and is labeled k.  As for earnings, the domestic producers now make a, f, c, i j and foreign producers make b, g, h.   Like a tariff, the combination of losses in world efficiency and consumer surplus together are called a deadweight loss of welfare because they make some people worse off.

Video: Comparative Advantage & Trade

Introduction to International Economics - Absolute and Comparative Advantage

Welcome to the study of international economics!

If we look at any country, say, Brunei, and we add all the FoPs (land, labor, capital and enterprise) the country can use to make g/s, we have determined Brunei's factor endowment.  Of course, these vary greatly between countries in terms of simple numbers of all four components and how advanced these components are.  For example, China has the most potential labor on Earth, but consider how productive workers are in Liechtenstein.  Moreover, think about how many valuable raw materials Nigeria has at its disposal and compare and contrast that with resource poor Singapore and its economic performace!  These are issues  discussed further in the field of development economics (see May posts).

There are two critical theories that are an excellent introduction to international economics: absolute and comparative advantage.  Developed by the great Adam Smith of “invisible hand” fame, a county has an absolute advantage in producing a g/s if it can produce more of it with the same number of productive inputs.  Although absolute advantage is helpful to know, it doesn’t explain why some countries trade since they may be able to create more of many, many g/s than many other countries.  It’s David Ricardo’s comparative advantage that explains why countries trade.  A country has a comparative advantage when it can produce a g/s at a lower opportunity cost than another country.  Consider the following example.

Switzerland                        Austria

Production of cheese              12,000 tons                        8,500 tons

with same FoPs

Production of tanks                 2,300 tanks                        2,000 tanks

with same FoPs

The opportunity cost of producing 1,000 more tons of cheese for Switzerland is about 522 tanks. The cost of producing 1,000 more tons in Austria is 425 tanks.  Austria thus has a comparative advantage in the production of tanks because it can produce them at a lower opportunity cost, even though Switzerland has an absolute advantage in both.  A trick on the graph…the country with no absolute advantage with either product will produce the product where the two lines are closer at the axis.