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Chapter 13 Tr,rrie rrnd rlle Enr-rronncrrr :1Jrl

polluting process (e.g." foreign steel) or by taxing exports of products that generate pollution when consumed 1e.g., gasoline),

The rest of the chapter takes up discussion of each of three fypes of sources of externai costs noted in Figure 13.3. First rve look at issues when the external costs are ones we impose on ourseives-domestic pollution and similar national eKternalities. Then we analyze cases in which the activity of another country irnposes an external cost on our corlntly-transborde| pollution and simriar cross-country externalities. F'inally. we examine the challenges of global external costs-giobal pollution and similar rvorldwide externalities.

f" iq'+ $ il Fa f'* i3 f,} * *;? H S"ni { F* g- L L* "g' f i; fu Economic activities so;netimes produce significant arnounts of drtffiesti{: pollution (or sin"riiar ent'ironmentai degradation). That is, the costs of the pollution f-all only (or alnrost completely) on people within the country. If'there ure no policies that.fbrt:e nurket rlecision-nwkers tts internalsa these external costs" then we reach two surpris- ing conclusions about trade with domestic pollution. First,.free trude cun rechtce the wetl-being of'the t:ountt1,: Second the countt"l' cat entl up exporting the wrutng prod- ttr:fs: it exports products thatit shouid import, for insiance.

To see this. consider fhe case of an induslry whose production activify creates sub- stantial pollution in the local rivers. lakes. and *{roundrvater. For instance" consider the paper-rnaking industry in a country like Canada. It is very convenient lblpaper com- panies to dutnp their chemical wastes into the local lakes, and the firms vi"ew this as a fi'ee activifv iif the Canadian governrnent has no policy limiting this kind of pollution). The Canadian companies are happy that the lakes are there, and the firms'operations thrive, producing profits, good incornes fbr their workers. and good products for their' custolrers at reasonable prices.

Othel Canadians have a different view olcorirse. Having the lakes 1lrn brcwn with chemical \vaste spoils the scenery the srvimrning, the fishing" and other services that tliey get frorn their lakes. The dumping of rvastes into the lakes imposes an external cost on other users ofthe lakes.

The top haif of Figure 13.4 shou's the Canadian market for paper, with the dontes* tic supply curve reflecting the private marginal cost ol production and ttre domestic demand curve reflecting the private marginal benefits of paper consumption (which are also the sccial ntarginal benefits if there are no external benefits). The bottom half of'Figure 13.4 shows the additicnal costs imposed on the country by tire pollution that results fi'otn producrion of paper in the country. We keep track of this legative externality using the niarginal external costs (MEC) ol the pollution. (This ligure is the analo-* of Figure 10.2, which showed tlre case of external benefits.l 'lo keep thc: analysis sinrple. \\.e assume that the exlernal cost of the pollution is constant af $0.30 per ream ofpaper.

trVirh n* irilernarional trade (and na goyernment policies iinriting pollufion), the papc'r rttarket clears at a pdce of $1 per reanr, lvith 2 bilfion reams produced and consumed per vear. Because there is no recognition in the market of the cost of the pollution. this is overproducion of paper.

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,-;i:i.;ii:: .r i,'l When Domestic protluction Causes Domestic pollution

1.10 1.OO

Marginal external costs from domesti{ production



Quantity j..'] ]..]: l :]::. .. \

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Chapter 13 fiirJe rinJ rlr Enlironnrerrr .:lr:l

Consider the shift to free frade, with an international price of Sl.l0 per ream {and sti1l no government policies iimiting pollution). Don:estic production expands to 2.3 billion teams. domestic consumption declines to 1.8 biiiion. and 0.5 billion are exported. For the case shown in Figure i3.4, free trade unfbrtunaiely makes the cormtrY rvorse otT. f'he usual gain from trade is shown by the shaded triangle ir in the upper graph, a gain of $25 rnillion. But the extra production brings pollution that has an extra cost of tlre shaded arca h in the lower graph" an externai cost of S90 nrillion {S0.30 per reant on the additional 300 miiijon rearns produced). Free trade reduces the well-berng of the country by $65 million.

The country's gorrernrnent could avoid this loss by prohibiting expc|l1s of paper. But we know from the specificity rule that this is not the best govermrent polic1.. The best policy attacks pollution directly, fbr instance, b1, piacing a tax on pollution from paper production. If there is no way lo reduce pollution per ream producecl thet the tax should add S0.30 per reanl to the firrns'cost of production, Tire tax forces the firms to recognize the cosl of pollution, and it alters their behavior. l-he domestic suppiy shilts up by the amoltnt of the tax, to 5n + $0.30. This ner.v suppiy curve now reflects allsocial costs, both the prtvate production costs and the external pollulion costs.

If this govemment policy is in place. what happens with free trade'J Donestic consuiners stiil buy 1.8 billiori reams of'paper, but ttow domeslic producers supply only 1.4 billion rearrs. As shou,tt. it is actually best lor the countrv to import paper. not export ii. Because the nerv supply curve irvith tiie S0.30 tax) includes the external ccst of pollrttion. we can read the efJ-ects of trade on the coiintr),'ti"on-r rhe top hali'of Frgure l3.4.withoutreferringtothebottomhalf.Weiindtheusuaitrjangleof gains fiom importing. the shaded tliangie e.

From this example 1ve see that pollution that imposes costs oltly on tlie local economy can still have a nta-ior i;npact on hor,v rve think about interrlational trade. With no goyerntltenr polic.v linititrg pollufion, the country can end up worse olf with .{ree l-rlrL'. :,rr-cl the trade pattern can be u/rong. }n the case of ,pollution caused by production that rve examined the coLrntry exported a product that it sliould instead imporl, (lf-, insteacl, the pollution cost is not so higli. then the problem is that the country exports too much.)a

The coLrnfry carl correct this type of distortion by using a poiici, that fbrces po11ut- ers to recogttize the extental cost ol'their pollutiori. In our papet exantple. the goyerrr* inent used a polh-rtion tax. bul instead it could establish propeffy rights. For instance^ people could be given the right to the rvater. Polluting firms then ntust pav the orvners lbr the right to poilute. Or a limited number of riglrts to pollute coulcl be created bv the government, so that firms need to buy these rights if they rvant to pol1ute.

If domestic fin-ns must pay the pollution tax (or pay tbr the right to pollLrte), the;r probabl-r' u,ili not be happy. The pollution tax raises their production costs. and tliey prorluce and seil iess. ltr addition. the-v face competition li'om inrports at the rvorld pr:ice of S1.10. Even if they accept the reason for the pollution tax, thev nray still c*mplain about the iniports. lf other countries do not impose a simiiar pollution

jlVl-r;rt ran h;rppen if polluircn is causecj by consurnption, rrot prorjirctioni lri tiris case the couni.y tends to consume ioo much of the prodirct, so the country could imporr a product tl-ral it should instead expori (o; at least, it irnpcrts too muclr cf the pro<luct).

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tax on their producers, then the donestic finns often complain fhat tlie impofs areunfair' They claim that the lack of foreign polluiion contiols is a fbrm of impilcit subsidy, 01'that the foreign rirms are engaged in" uaseo on rax fbreigngo\.ernlnent poli cies,

what are rve to make of these complaints'? should the country impose collnter-vailing duties on iiuports fron a coLrnti;, wjrh different poffuiton petliciesl) I;ront fhenational perspecfive of the inrporring *u,rtry. the answer is genelariy ,o. Foreignproduction nlay create poilutioir in tlie foreign .o,,nrty" u,rt ,iri, has no irnpact on tlieitnporting countrv if the costs of this foreign pallution affectonly tbreigler.s. As withrnany other complaints-about r'rnfair exports, tie best policy fbr tle impiirting .o.,nr,lfts sin-rply to enjoir tlie.low-price impor:ts. Indeed, under tlie rules of the worlcl Tradeorganization. lax foreign pollution policies are not a legitirnate ieason ibr inposing countervaii ing duties.

Fron the perspective of the whole ivorki, it depends on wh}, the foreign polliltiorr policies are diflerent fiom tliose of the intporting corintrv. lt may be etllcient {br thefbreign country to have ciifTerent. and perhaps more lax, poliution policies. The poliu- lion caused by foreign production nlay not be so costll,, uarow* irr* foreign productio' itseif creates less polrution, because ihe tbreign enviiorurent i,

"rr ,*"n?0,;;fi#,;

or because foreigners place ress value on thelnvjronruent. .ln ou, prp.. e_rainpie. trreprocluction process or tire raw naterials used in foreign production nrav crcate lesspollution. or the foreign courltrv nrav have larger r,vater:r:*rour.*r of r"iJirri'i, ,rirfu, case the pollution is not,so clanraging because the foreign environineni has a lareer "assinriative capaciry.".orthe fbreign country may assig'a high value to p.oarrlig income tc purchase basic gootls beciuse its people ur. p-oo. unjor* therefbre willing to accept sorne extra poliution nrore rearlilv.

o' the other ha'd- the foreign co'nhJ may simply have policies rhat are too lax. From the point of view of the tbreign counfi'y ind tire $'or"td,ii unuld be better if ir hail tougher pollution policies. As a type of secor:d-best approach, impilrr limits by other countries can improve things. But these limits r.vill nL? mate'the inpor-ting country better o{f. even though theiz nright mise world well_being.

'l it si 1* 5 # {_;r ri i""! ia i1: * i": i- !.. i"i T" i # $,,.i

In the previous section we considered pollution that had costs only to the courlty doing the pollution. whiie rve reacheci iome surprising conclusitxs ab6ut fr-ee trade itt the absence of governrnent policies limiting poituuori, we aiso had a ready sol'rion. The governrnent sirould implenient some foim of poliry aOO.essing pollution rlat is occurring in its countt'y. If each country's government addresses its orvn local pollution problenrs. then each can enhattce its own narional well-being. lu the process, worlci ivell-being rs also raised.

Horvever, nlany types of pollution har.e fransborcler eiTects*efl-ects not jLrst on the country doing the poliutioli brii also on neigliboling countries. Exanples inclrrcle airpollution like particulates and sulfur dioxide that Jritts across national borders and water pollLition wiren the body of water (river or lake) is in twa or irlorc co'ntries.'i l''-:';-r:ilrr-.i'j'r,l r:lili.;1ii-;ltr4j5ggrnajorissr-iesfbrgoveillmentpoticiestgyarcipoliutiog.

lnternational Economics, I 5th Edition

Chapter 14 fr,tl: /)olicir.s f ;r Dcuclripnrg L--ouncric: ,:,;i i

2. Similarl.v, lahor nturkets v,tx* less ef/icientlv in tlevelopirzg crruntrie,r'. The wage gaps between expanding and deciining sectors are greater than in higher-inconre countries. The wider wage gaps are an indirect clue that some lalror is being kept lrom moving ro its most productive use.

These differences impiy some special tasks tbr the government of a developing country. There is a case for considedng rvhich sectors to protect or subsidize or give cheap loans to, if the government camot quickly eliminate the barriers tcl efficie nr capital and labor markets. Tire government must also decjde u'hether it is realistic to try to change the nation\ comparative advantage. for instance, by increasing its investntent in education and health care to expand the country's endowment of hu:nan skiils. The shift ftom central pianning to a market economy requires yet other policy decisions, as discussed in the box "special Challenges of Transition."

We now explore the altelnatives for trade policy for a developing country in the order that we presented thern for Ghana: focus on exporlrng prirnary products, ilse export taxes or international cattels to influence the r,vorld prices of these prirnary products, use import protection to develop new manufactiiring industries, or encour- agd the development of export-oriented new manufacturing indristries.

j.\ ili L:'i +t i; A- {} f\$ fi * Ft t$ ru r- # $ f, fi T ffi il i'\i t: S A # }e i P; L :" Fii ; i'!t AF?,\' FFE# il? # s;ff ffi S ?

It seems natural that developrng countries export primary products (agriculture, for'- estry, tuels. and minerals), and these are often- ealled tt'aditional ex.ports. The maior- ity of developing countries get half or mol'e of their export revenrles from primary products. Many developilrg countries have exports concentrated in one or a i'elv products like peh'oleutn, coffbe, cotton, gold. sugar, timirer, diauronds, and bauxite/ alurniuurn.

A recurring idea is that developing countries'growth is held back by relying on exports of prirnary products. In the 1950s, Raul Prebisch and others argued that devel- opittg countries are hurt by a downward trend {and instability) in primary-product prices. Intemational markets, ran the argument. distribute income unfairly. Since developing countries are net exporters of primary products, thev are trapped into declining incomes relative to incomes in the industrialized worid.:

Does the fear of falling prices sound reasonable'l Economic anaiysis shows that there are at least two major forces depressing. and at least two forces raising, the trenc{ in the prices of primaries relative to matrufactures.

The relative price of prirnary products is depressed by Engel's law and syntfietic subslil utes.

;Be care{ui not to assLrme, as many discussions inrply, that there is a tight link betlveen berng a de'veloping coLrnlry and bein,g an exporter of prirnary products, Overali, the clevelopinq conntries are oniy mcdr:raie rei exporters of primary products ancl import sigr-rificant amci.tnts of them frorn Nortlr Arnerica, Ausiraiia, and Ne$.r Zealand. An<j iheir comparative ach.,antage rn primary prociucts varies greaily. 5onre developing r:ountries ie.g., Saudi Arabia) export lnosily primary products, while others (e.g.,5oullr Kcrea) export -lirlost no prin-:ary prodr.rcls ancl are heavily dependent on inrporting thenr.


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ln 1989, a ma5sive tr"ansition from central planning to market economies began in the forrnerly:ocialist countries of Centraj and Southeastern Eurcpe. With the breakup of the Soviet Union in 1991. the former Soviet Union countries joined this transition. This is the most drarnatic episode of econornic liberalization in history" What role have changing policies toward international trade played in th€ transition?

Prior to 1989-199i, central planning by each government directed the economies in these countries. National self-sufficiency was a policy goal. lmports were used tr: close gaps in the plan, and a state bureaucracy controlled exports and imporis. When trade was necessary, the countries favored lracie among thrmselves and strongly disccuraged trade with outside coun_ Uies. They tended to use bilaterai barter trade, with lists of exports and imparts for each pair of countries. The trade pattern had the Soviet Unron specializing in exporting oil and natu- ral g;rs (at prices well below v';orld prices) and other countries exporting inclustrial and farm products.

As the transition began, these countries had a legacy of poor decision-making under (entrai planning, including overdevelopment of heavy industries (like steel and defense), outdated technology, environmental problems, and little established trade with rnarket economies. They needed to remove state control of transac_ tions and undertake a major reorganization of production.

Transition involves accomplishing three chal_ lenging tasks: (l) shifting to competitive mar- kets anci market,deterrnined prices, with a new process of resource ailocation; (2) establishing private ownership. with privatization of state businesses; and {3) establishing a legal system. with contract laws and property rights. For suc- ress, the transition pro{ess must

, lmpue discipline an firms inherilerf from the era of centrai planning,

. Provide encouragernent for new firms that are not dependent cn the qcvernment.

Opening the econonry to 'nternat;onal

trade and direct investments lry foreign firms can be part of both the discipline {through the competition provided by' imports) and the encouragement (through access to new export markets ancJ to foreign te.hnology and know-howl.

Domestic and international refsrms usualiy advanced together in a transition country, and success requires a consistent combination of reforms. We can identify severai different groups of countries that pursued reforms in different v..,ays and at different speeds.

The Centrai €uropean countries (Czech Republic, HL,nqary, poland, Slovak Repubiic, ancl Slovenia), the Balti{ countries {Estonia, Latvia, and Lithuania), and the Southeastern European countries (Albania, Bosnia, Bulgaria, Croatia, Macedonia, l,/lontenegro, liomania, and Serbia) pursu_ed strong, rapid liberalizations {except for Bosnia, Serbia, and Montenegrr:, which were involved in fighting). As we discussed in Chapter 12, the Central European and gaitic countries joineci the European Union in 2004, and BulEaria and Romania joined in 2007.

The members of the Commonweaith of lnd*pendent States {ClS, the eountries that were formerly part of the Soviet Union, excluding the Baltic countries) have inste*d foliowed paths of less liberalization. Three countries, Belarus, Turkmenistan, and Uzbekistan" continue to resist enacting reforms. The other CIS counr tries {Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic. Moldova, Russia, Tajikistan, and Ukraine) enacted partial refornrs that were adopted slowly over time and that sometimes were reversed.

How do trade pattrrns evolve during tran:i- tion? One pressure is clear, toward rapid growth of imports, especially consumer goods, based on pent-*p demand. Transiticn countries mus'i expori to pay for their rising imparts, and West€rn Europe and other industrialized coun- iries are crucial as majcr markets for expanding their exports. However, exporting to demand- ing customers in the competitive markets of the industrialized countries was not going to be easy. Under central planning these countries had rrrajor deficiencies in their products and br-rsinesses, includinq poor product quaiity, lack af marketing capabilities, and lack of trade f irlanc;ng.

HG\F/ suc(essful have the transition eountries been in recrienting their trade patterns? By 1998 the Central Iuropean, Saltic. and Eoutheastern European ccuntries on average were seiiing over 60 percent cf their exports to buyers in industri- alized countries. Rapid and deep liberalizations, along with favarable geographic location close to the markets of Western Europe, have facili- tated the shift by these countries ts a desirabie export pattern. They increased their exports of

\iqh\ man*iat\ure$ g()ads \ike tex\\\Eg, L\Qtfl'' ing, and iootvreat. They a\so ustd the\{ \oy,l-ios\ skitled iabat to expand export of surh products as vehicles and machinery.

ln eontrast, most CIS countries did not reorient their exports much. and on averag€ only about fi quarter af their exports went to industrialiaed {ountries in the [ate 1990s. Many Cl5 countries resisted trade liberalizaiions and continued to produce low-quality manufa{tureci products that could not be exported out:icje tfre region. A: oi early 2011, only five ClS coi..rntries had i:ecome members of the Worki Trade Organizatir:n.

Horv doeE all o{ thi! cornbine to determine the sLiccess of *concmic lransilian? One broad indicator is the grcwth or decline of domesiic

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Chapter 14 Tr"iti. 1'r,lirrls i;r Ilrtrsiiit;ln,a (,-rrulrrits

prociuction ireal GDP). ln the beginning iransi- iion is likely to cause a recession, as bus!ness prac- tices and economic relationships are disrupted. Only alter reforms begin to rake hold tan the economy beEin to grow. This ilrocess is like that of the shi{t from no tracie to free international trade. As w'e sa\r beginning in Chapter 2, the gains f rom opening to trade are Lrased largeiy on disrupting previous patterns of production and consunrption activities.

The evidence indicates that the depth and speed of reforms matter for the sutcess af transi- tion. 1n addition, as with develcping countries generaily. vv€ see gr€ater success for those coun- tries adopting more cpen and outward-oriented trade policies.

The fast and deep reforn:er: in Central and Southeastern Europe suffered thraugh early- transiiion recessions that were not that de*p and not that long. The recessions in the Baltic countries were somewhat longer anci somewhat deeper. Then, starting beiween 199J and 1996. each of these col,ntries has generally had sr-lb- stantial and sustained growth.

The nine partiai-reform and less open ClS Luul rlr 1tj - rroh e't,' br ccrl t'p,::'crrf n rmpd- .th tr l^/.ll(i.

e\ef, ra{nFa{e{ rdRh tht \hree i\oNe\*\tft t\\ countries. Most partial-refarm Cl! countries experienced deep early-ttansitian recessions, and three (inciuding Russia) cjid n*t return to sustained growth until 1998 or later. They seemed to be caught in a trap in which spe- cial interests, oligarths, and insicers whc !:en- efit {rom the partia{ reforms gafn the politkal power to block or slow further reform. One advantage of speed in reform is that the reforms are enacted and the increased interr:ational trade and greater market competition impose discipiine and offer encouragement, before sucit special interest groups have time to coale5ce and exert their powtr.

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1. Engel| lavt. ln the long nln. per capita incomes risel As they rise, demand shifts toward luxuries-goods for which the income elasticity of detrand (percent rise in quantity demanded,,percent rise in income causing the change in der:rand; is greater than 1. At the same time, the world's demand shifts away ftom staples--goods tbr which the ircome elasticity of demand is less than 1 . The l gth-century German economist Ernst Engel (not Friedrich Engels) discovered u.&at has becone known as Engel's iaw: The income elasticity of dernand tbr food is less than i (i.e.. food is a staple). Engel's law is the most durable law in economics that does not follorr'fi'om definitions or axioms. lt means fl:ouble for food producers in a prospering world. if the world's supply expanded at the exact same rate for all products" the relative pnce of fbods wouid go olt dropping because Engel's law says that demand would keep shifting (relatively) away fiom tbod torvard luxuries.

2. S.vnthetic .guhstitutes. Another force depressing the relative prices of prinary products is the development of new human-made substitutes ior these natural materi- als. The more techlology advances, the nlor"e lve are likely to discover ways to replace trttirsrarb attu'ulrlcr taw * ?lht r?a-r-Jr+.Cr?r?ta"+i,+ g.?s'-,"3: ,rhg del'elclalfetft Af synthetic rubber around the time of

'World War I, which ruined the incomes of rubber

producers in Bmzii, Malaysia. and other countries. Another case is the clevelopment of synthetic ilbers. which have iowered dernand for cotton and rvool.

On the other hand, two other basic forces tend to raise the relative prices of primary plodr"rcts:

1. Nuturels lirnits. Primary products use lancl. water, mineral deposits. and other limited natural resoLlrces. As population anil incomes expan{ the natural inputs become increasingly scarce, other things being equal. Nature's scarcity eventLially raises the reiative price of primary products, which use natuml resoruces nrore inten- sivell' than do manufactures,

2. Relutivel)' s/ow prutdttr:tittir,vu growttlt irz the prifitory sector: For several centuries prodLrctivity has advanced more siowly in agriculture, mining, and other primar5r sectors than in manufacturing. A reason is the tendency for cost-cutting break- throughs in knowledge to be inore important in nanufacturing than in primaries. Slow productivity advance translates into a slorver reiative advance of supply cllrves in prirnary-product matkets than in ntanufacturing markets, and therefore a rising relative ptice of prirnaries (or a falling relative price of manutactures), other things being equal.

So we have two tendencies that depress the relative price of primary products, and we have trvo that raise it. Horv does the tug-of'-war rvork out in the long rrur? Figure 14.2 sunrmarizes the experience since 1900.

It depends on wher you look at the data and how far back into lristoly you 1cok. Studying Figure 14.2A, we can understand why the fbar of f'alling relative prirnary prices was greatest in the 1950s (when Prebisch's argument achievedpopularity) and the 1980s. Those were periods of f'allin-e prirnary prices. On the other han4 little was written about falling primary prices just before worid War I. the historical he3'day of high prices for farm producls and other raw materials. Nor was there inuch discr.rssion

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of depressed pdces cluring world war II, the Korean \&hr of 1950,-1g53^ the troonr inprimary-product prices in the earl1, 1970s. or the rlrn,uf in'.on_,rnodiry prices durin-r:the mid- and late 2000s. Dur"ing ,,,.h ti,,',.r, many writer.s revived the Malthusian argu-ments about the linrits to planet Earth. To stand back frorn the,volatile swings in cornnroditv prices. let,s look over as long

a periorl as possible. For Figure 1+.2. irli can scan rire peririd :ga0-2a10, though fol-lorl'ing some price sedes back to 1870 ivouiri tell a siinilar story. For the rop panei. we also have to alrow fbr the vely rarge increar. in.n*.g1: pr.r.., silce r999. rvhich canses a divergence bet$een the relative price of all ptirri.y prodr-rcts and rhe rejati'cprice of nont-uel prir'ary producrs at the ind of the time p..iJo.

Figure 14,2 shows a fairry clear long-term trend. Fix the {'p paner, we can seethat the general trencl for ielative nnitu.l prinrary-proar.t pri.*u is ciownrvar<i. Statisticaily, if rve f-it the best trend line to the clata orier this entire tinre periocL rvefind that these prices are declining at about 0.8 perceirt f.t y.ut. (Fbr all irrinrarvproducts, including enegy fuers, the general trend is arso dorvnwarc1, but the spike since the laie 1990s pr-rlls the tlend line up somervhat. Statisticaily. the best trend iine shows a price clecline of about 0.5 percent per year.) soinehow. Engel.s law ancl the technological biases torvard replacing primary products huu. o,,trun nature's ljmits attd the relative slowness of productivity gro*in in primary sectors. (or. in shorthand. Prebisch olltran Malthus. )

Some commodities have declined in price nrore seriously than others. The price ofrttbber snapped downward benveen 1 9 1 0 and 1 920 and has never really bounced back since' The relative prices ol r.vool. cocoa. alunrinum. .i.r, .o1ton. and sugar declrned by more than half during the 20fh centur,v. In confrast. the relative p,ice, ot la1rb" timber, and beef more than doubled.

while the net dorvnward trend in primar,u- prices stands as a tentative conclusion" there are rwo biases in the avairabre rneasures. ilke ttrose preilnrJi; ii;; i;;."'

1 ' The .filll in lrunsport r:o,rLr. The available data tend to be gathered at nrarkets inthe indilstrial countrjes. Yet technological inrprovemenrs in trairsportation have beengreat eiiough to reduce the share of transport costs in those final prices in l,on6on. NervYork. orTok_v-o. That has lefr nrore and nrore of rrre firial pr.-!..i."1;;1.,* h;;: of the prirnary-product exporters. Quantifying ttris tnown ci,uig. ,"oul,t tilt the rrendi* the prices received bir producers torvard a flatt*r, iess downrvlrd fend.

2. Faster unutu.tured tpralit"v thange in rwnztfltr:ttLrar. We are usiug long runs ofprice data on prcducts tltat have been fetring betier tiine. euatity improvemeilts(inclucling those in the form of'nerv products) are thought to have been more impres- sive in tnanufachtres (and services) tiran in primary proiucts. So lvhat might look like a rise in the relative price of manrfactures migtrt ue just u .ir* in their relitive quality, with no trend itt the relative price for given quality. This clata problenr is potentialll, serious. given that rnany 2Oth-century data have, ror r"ampt., lollowert the prices ol.nlachinery expofis per ton cf exports, as if a ton of today'rcornputers ivere …