Chapter 9: Globalization and the Terms of Trade: The Glass Ceiling Hypothesis
David Sapsford and V. N. Balasubramanyam INTRODUCTION This chapter is concerned with a recent development within the topic that has become known as the ‘fallacy of composition’. The basic notion in the fallacy of composition literature is that while certain macroeconomic policies may appear appropriate when viewed from a partial equilibrium perspective, the very same policies can in fact turn out to be entirely inappropriate once general equilibrium effects are taken into account (see Mayer (2001) for a detailed literature review). Although the fallacy of composition was originally introduced by Bhagwati in the 1950s in the context of his notion of immiserizing growth, the concept has been utilized extensively in the analysis of the consequences of International Monetary Fund (IMF) and World Bank stabilization and structural adjustment policies for the terms of trade faced by primary commodity dependent less developed countries (LDCs). For example, Sapsford and Singer (1998) argued that policy ‘advice’ of the World Bank structural adjustment and/or IMF stabilization sort that might be good when given to a single country may turn out to be bad when given to many countries simultaneously as part of an overall, and often similar, development strategy. Sapsford, Sarkar and Singer (1992) report some evidence to suggest that the more or less simultaneous policy ‘advice’ to increase primary commodity exports given by the international institutions during the 1980s to a number of sub-Saharan African economies under structural adjustment/stabilization type programs may have been self-defeating from the revenue perspective.1 Such a simultaneous increase in...
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