3. Thesis Free Trade Zones Part 1

This will serve as the introduction to my thesis, the topic of which is tentatively "The Benefits of Free Trade Zones in Costa Rica and Honduras".

As I discussed in my first post, I want to focus my second career on sustainable economic development, reducing poverty and reducing economic inequality between and within countries, focusing on the Americas. Part of this naturally entails looking at the efficacy of existing development policies. One of the more prevalent of existing policies in developing countries is the use of Free Trade Zones (FTZ's) which are also referred to as Export Processing Zones (EPZ's) or Maquilas depending on the country, with little difference in the rules governing them. So it is a good place to start for a thesis.

I've already done a fair amount of research, both in preparing the thesis proposal last fall, and since then in searching for relevant data, although I suspect I'm still missing some data I would prefer to have. The problem is that I ran into a mental stalemate in actually wriitng down what I have (which should also help to clarify what, if anything, I'm missing). So one use for this blog is to help get over that writer's CRAMP. (Please spare the advice. i've had enough already and don't want to be an ingrate).

To begin some observations on: the state of economic affairs between developed and developing countries, prevalent development policies, major causes for relative economic weakness in the developing countries (in effect some of my current premises to be either refined or modified as knowledge progresses) and the nature of economic development, inequality and poverty.

1. THE STATE OF AFFAIRS. Economic disparity. In 2003 Gross National Income (GNI) per capita in the US was about $38,000 per year ranking #4 of over 200 countires measured. In Costa Rica (often referred to as the "Switzerland" of Latin America) this was about $9,000 (rank #79) and in Honduras about $2,600 (rank # 149). See the World Bank's 2005 World Development Indicators Report -WDI. (http://devdata.worldbank.org/wdi2005/Indexofindicators.htm). Note that these figures are restated (referred to as PPP or Purchasing Power Parity) to make them (more) comparable in US $ terms between the countries.

Further, income distribution within these countries is highly unequal. According to the WDI report for the year 2000, as a per cent of total income, the top 20% of the population received 46% of the income in the US, 53% in Costa Rica and 59% in Honduras. This compares to less than 40% in France and Germany. To put this in perspective consider the US. If the top 20 per cent of the population received 46% of the income in 2003 (their share has been growing, so this contrast is somewhat understated) their per capita income would have been $87,400 on average. Whereas per capita income of the other 80% of the population would have been $20,500. Comparable figures in Honduras, would be $7,700 per capita for the top 20% and only $1,300 for the other 80% of the population. Remember this is $1,300 stated in terms of costs (purchasing power) in the US and other major industrialized countries. Of course the major industrialized contries have social programs to offset at least some of the misery in their countries. Many poor countries don't or have very little.

Finally, the Millenium Development Goals (MDG) program (see http://www.un.org/millenniumgoals/index.asp), tracks levels of poverty in the world using standardized measurements of extreme poverty (< 1 Dollar per day) and poverty (< 2 dollars per day). In 2005, there were about 2.5 billion people living in poverty, of which about 1 billion in extreme poverty. Obviously, there are many factors to consider, but no doubt if measured by the average industrialized countries standards (in the US a working individual-no dependants- earning less than $10,000 per year is considered living in poverty), the number living in poverty would likely be closer to 4 or 5 billion of the roughly 6.4 billion people in the world.

To summarize, there is substantial disparity in levels of economic well-being between the 50 or so "developed countries" and the rest of the world; and to make matters worse for the bulk of the world's population, high levels of income inequality within most of the "underdeveloped" countries. Of course a fundamental question is whether the rich nations should concern themselves with the plight of the poor. There are numerous moral and political reasons for doing so, although many would not agree. But on a purely and coldly economic basis, is there a reason? If we are rich becasue we work hard and are very productive why do we owe anything to the poor. They should just follow our example, and if they can't or don't want to, isn't that their problem? But what if our wealth, or at least a portion of it, was due to taking unfair advantage of resources from the poor countries. If this were the case the (neo) classical economist would state that this results in an inefficent allocation of resources (due to distortions - anomalies- in pricing of the resources), resulting in LOWER economic growth. No different then the effect of subsidies (monetary or protection such as patents) given to the agro and pharmaceutical industries in this (and other countires).

Part of my future research will be devoted to this issue (unequal exchange), and I will at least touch on it in my thesis. In the next post I will give an overview of economic development policies, and also discuss some of my premises as to the reasons for the economic disparity between rich and poor countries using FTZ's as the framework (including the "unfair" or unequal exchange of resources between rich and poor countries discussed above).