chapter  3
10 Pages

The Theory of Immiserizing Growth: Further Applications 1

WithJagdish N. Bhagwati

This chapter examines the paradox of a reduction in the welfare of a 'small' country, with a domestic distortion in production, when its terms of trade improve exogenously. This, and related, paradoxes are seen to be nothing but special cases of the general theory of immiserizing growth. The chapter discusses the paradox of a reduction in the welfare of a country following a tariff-induced inflow of capital. This paradox again follows from the theory of immiserizing growth; besides, it is clearly of immediate and direct relevance to policymaking. The application of the theory of immiserizing growth arises from Harry Johnson's demonstration that a 'small' country, growing subject to a constant tariff, can experience immizerising growth. Batra and Scully have added yet another paradox to the theory of trade and welfare in showing that immiserizing growth can occur, despite endogenous-growth-induced improvement in the terms of trade, if wage differentials are present.