Growth and trade: immiserising growth and Prebisch–Singer

The “dynamic factors” in trade are changes in factor endowments, technology and tastes (Hyderabad 2012). Any of them shifts a country’s offer curve, and if the country is big enough in world markets, its terms of trade. What matters is which way the growth leans:

• Export-biased growth raises the capacity to make the export good more than the import good. The country wants to trade more, offers more exports, and their world price falls: the terms of trade worsen.
• Import-biased growth raises the capacity to make the import-competing good. The country needs fewer imports, and the terms of trade improve.
• Neutral growth raises both in proportion. The terms of trade move only through demand: as people get richer they want more of both goods.

Rybczynski (Lesson 5) says which kind of growth a factor increase brings. More capital in a capital-abundant country raises its exports and shrinks its import-competing industry: ultra-export-biased growth.

Jagdish Bhagwati asked in 1958 whether the fall in the terms of trade could ever outweigh the growth that caused it. It can, and he called the case immiserising growth: an exogenous growth is welfare-reducing if it worsens the terms of trade so much that the country’s real income falls (JNU 2015). Try it below.

It helps if the country is very open, with exports a large part of its income, and spends little on its own export good. Those conditions fit a developing country that exports one primary commodity, which is why Bhagwati’s case sits next to the Prebisch–Singer thesis in UGC NET’s lists (2024, 2025). A small country, facing a fixed world price, can never be immiserised this way.

Raúl Prebisch and Hans Singer, independently in 1950, argued that the terms of trade of countries exporting primary products and importing manufactures decline over the long run: a secular deterioration (Hyderabad 2020; UGC NET 2024). Their reasons:

• Low income elasticity. As the world grows richer, demand for food and raw materials grows more slowly than demand for manufactures (Engel’s law).
• Who keeps productivity gains. In industrial countries, unions and firms with market power turn productivity growth into higher wages and profits. In primary production, with many competing sellers, it shows up as lower prices, passed to buyers abroad.
• Substitutes. Synthetic rubber, fibres and plastics cut demand for natural materials, and technology lets factories use less raw material per unit.

Critics of free trade drew the conclusion that many poor countries stayed poor because they remained primary commodity exporters (Hyderabad 2018). Their remedy was import-substituting industrialisation: protect new industries so as to move out of primary exports. India’s planning after 1951 took that path.

The Netherlands found large natural gas fields in 1959. Gas exports boomed in the 1960s and 1970s, and its manufacturing shrank. The Economist named the pattern “Dutch disease” in 1977, and W. Max Corden and Peter Neary modelled it in 1982. A boom in one export sector hurts the country’s other traded goods in two ways:

• Resource movement. Labour and capital move into the booming sector, as Rybczynski predicts: more of one sector means less of another.
• Spending. The extra income raises demand and prices for non-traded goods and services, and the currency appreciates in real terms. Other exports become uncompetitive.

When the resource runs out, the lost manufacturing doesn’t come straight back. That is the worry for oil and mineral exporters.