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Trade and Development I: Import-Substitution Industrialization

Chapter 6 - Oatley Presentation for International Political Economy Class (CUK, Spring 2011)

Uhjai Bunao

on 24 April 2011

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Transcript of Trade and Development I: Import-Substitution Industrialization

Trade & Development I: Import-Substitution-Industrialization Prepared by: Eugen R. Bunao
Int'l Political Economy
(CUK, Spring 2011) This is MEXICO What comes to mind? Mexican food!!! What is our concern The Economic Structure of Mexico
(trade system) Post WWI-early 1980s -highly protected & directed

-high tariffs (ave.: 25%, max: 100%

-non-member of GATT

-government owns financial institutions and enterprises 1980s-present -one of the most open developing country

-market deregulation (liberalized)

-state sold enterprises

-entered GATT in 1987, NAFTA in 1990s

-deeply integrated in the world economy Is this shift in trade policies unique to Mexico? NO In other parts of the developing world... Latin America East Asia and the Pacific Sub-Saharan Africa South Asia The Pattern is generally the same BUT WHY? How did these new trade and development policies take shape among developing countries? Issues for Discussion Why did developing countries... -intervene in their domestic economies? -insulate themselves from int'l trade? -seek changes in int'l rules of trade? why dismantle these policies in the 1980s? -intervene in their domestic economies? -seek changes in int'l rules of trade? Why did developing countries... -insulate themselves from int'l trade? -intervene in their domestic economies? the political and economic changes in the developing world which gave rise to protectionist governments the theoretical basis of these policies the specific domestic and int'l policies that these governments adopted Postwar-1980s Since late 1980s PROTECTIONIST TRADE POLICIES LIBERAL TRADE POLICIES Foundation: Infant-industry case for protection

Goal: Promote rapid industrialization Foundation: Deregulated market (dismantling of protectionist system)

Goal: Economic Development Pre-WWI LIBERAL TRADE POLICIES Trade with advanced industrialized countries
or colonial rulers

Export agricultural products
Import manufactured goods Something OLD & Something NEW Competing Interests, Transfer of Power and Shifting Trade Policies Economic Structure of developing countries in 1960s LAND CAPITAL vs. Political competition shaped trade & development policies MEASURES OF ECONOMIC ACTIVITY 1. As % of GDP Agricultural products
and non-manufacturing activities
constitute 50% of GDP
(except in Latin America) (mining, construction) 2. Commodity Composition of Exports Heavily concentrated on primary commodities agricultural products, raw materials & minerals (rural-based agriculture) urban-based manufacturing MONOEXPORTERS Burundi Ghana Brazil Chile cocoa (75%) coffee (80% of exports) coffee & cocoa (69%) copper & nitrates (74%) SPECIFIC-FACTORS & THE TWO-SECTOR MODEL Assumptions: -specific factor is immobile -land: agriculture
-capital: manufacturing -labor is mobile - will go to sector which pays higher wages DEVELOPING COUNTRIES: abundantly endowed with land poorly endowed with capital ABUNDANT FACTOR: Land/Agriculture SCARCE FACTOR:
Capital/Manufacturing Export-oriented Sector Import-Competing
Sector LANDOWNERS rising income from open trade falling income from protectionist policies income gains from protectionist policies income losses from free-trade MANUFACTURERS WHOSE INTEREST WILL PREVAIL? Some Generalizations TYPE OF TRADE POLICY? Export-oriented Sector Import-Competing Sector (AGRICULTURE) (MANUFACTURING) LIBERAL/FREE-TRADE PROTECTIONIST POLICY HOW ABOUT A THIRD SECTOR? Urban residents - gov't employees, military, teachers Non-traded goods sector - health care, roads, houses Impact of int'l trade:
these consumers gain income from policies that reduce price of traded goods Trade Policies prior to WWI
(LIBERAL-OPEN) Latin America (Argentina, Chile, Mexico, Venezuela, Peru) -Export-oriented agricultural interests dominated politics

LOCUS OF POWER: Landowning Elite

Oligarchic Democracy: Landowners + alliance with military = limited participation

OR Dictatorial/Military: protected the interests of landowners East Asia and Pacific (Korea and Taiwan) -Export-oriented agricultural interests dominated politics through colonial structures Enclave agriculture - product of Japanese colonization
-agricultural sector - producers bought little from local

-centered on production and EXPORT OF RICE Sub-Saharan Africa (Senegal, Ghana) Colonizers encouraged the production of cash crops and raw materials that could be exported to the mother country Britain: promoted cocoa production in Ghana France: promoted groundnuts production in Senegal -led by indigenous professional elites

-nationalist struggle to transfer control of existing economic practices from colonial govt's to indigenous elites

-led by non-traded goods sector rather than manufacturing East Asia and Pacific Trade Policies post-WWI (early 20th Century)
(PROTECTIONIST) Decolonization period: 1950s-1960s -Economic shocks due to WWI, WWII and the Great Depression -RESPONSE: trade barriers, domestic manufacturing of previously imported goods

-RISE OF THE MANUFACTURING SECTOR: urban middle class, industry-based associations, labor unions, organized interest groups

-NEW INTERESTS: import-competing sector has strong incentive to pursue protectionist policies due to rising incomes

-POLITICIANS: new basis of political support - urban sector Sub-Saharan Africa KOREA: landowners displaced due to Korean War and a series of land reforms

TAIWAN: Nationalists assert authority over landed elites and institued land reforms

-increased power of the urban sector Latin America -Influence of import-competing manufacturing sector grew as a result of decolonization (Korea and Taiwan) Difficulty in importing goods from US & Europe
Falling commodity prices
disruption of normal trade patterns
reduced amount of foreign exchange TRANSFER OF POWER Export-oriented agriculture
(Liberal Trade) Import-competing manufacturing
(Protectionist) Building blocks and foundation (Structuralist Critique of Markets, Trade and Economic Development STRUCTURALISM
(A Theory of Economic Development) RATIONALE: GOAL: MAIN TENET: Higher standard of living can be achieved only through industrialization Shift resources out of agriculture and into manufacturing of government... the shift of resources from agriculture to manufacturing would not occur unless the state adopted policies to bring it about (a critique on the domestic and international market and trade system) Market Imperfections in Developing Countries -How to reallocate resources from agricultural production to manufacturing industries

-Domestic market cannot be expected to invest in manufacturing by itself 2 COORDINATION PROBLEMS: 1. COMPLEMENTARY DEMAND 2. PECUNIARY EXTERNAL ECONOMIES -transition from subsistence agricultural economy to manufacturing Few wage-earners manufacturing firm:
unable to sell products -diversify manufacturing industries all at the same time large number of wage-earners manufacturing firm:
can easily sell products PROBLEM: must ensure that ALL WILL INVEST in manufacturing industries ALL AT THE SAME TIME --intedependencies among market processes increased investments beneficial among interdependent firms Steel Company steel production price of steel falls Automobile Factory rising profits expand production capacity PROBLEM: investment for both firms MUST BE DONE SIMULTANEOUSLY STRUCTURALIST SOLUTION COORDINATE investment decisions INITIATE industrialization via state-led BIG PUSH (economic planning, make investment, coordinate decisions of private firms) Market Imperfections in the International Economy -International trade provided few benefits to developing countries SINGER-PREBISCH THEORY Hans Raul -harder to industrialize when a developing country joins GATT -two distinct blocks: CORE (advanced-industrialized countries) and PERIPHERY (developing world)

-Problem of Periphery: DECLINING TERMS OF TRADE (needs to increase volume of production to get the same amount of import) price of exports price of imports SOURCES OF DECLINING TERMS OF TRADE (Periphery) 1. Low/lack of productivity gains 2. Low income elasticity of primary commodities huge unemployed labor

weak unions

no bargaining power

stable wages, rising prices

low purchasing power
(need to export more to get imports) ENGEL'S LAW -when incomes rise, people WILL NOT INCREASE PURCHASE of primary commodities

-instead, they will buy MANUFACTURED GOODS (from CORE countries)

-low demand for primary commodities, price falls CONSTRAINTS ON INDUSTRIALIZATION -Deteriorating terms of trade
-Income losses
-weak purchaing power Need to IMPORT CAPITAL goods BUT EXPORT EARNINGS FALL OVER TIME GOVERNMENT: INDUSTRIALIZATION WILL NOT OCCUR... if domestic markets are left alone if countries participated in GATT-based trade sytem Setting the wheels in motion (Domestic & International Elements: Trade and Development Strategies Import-Substitution Industrialization
(ISI) -Government-led strategy Domestically-produced goods as SUBSTITUTES for PREVIOUSLY IMPORTED manufactured items TWO-STAGE STRATEGY 1. Easy ISI 2. Secondary ISI -develop manufacturing industries to produce simple consumer goods (shoes, apparel, soda, beer, etc.) RATIONALE:
-large domestic demands

-mature products (technology and capital is easily acquired from AIC)

-relies on low-skilled labor BENEFITS:
-expansion, reinvestment (increased wage-based employment)

-growing human capital
New Emphasis: consumer durables, intermediate inputs, capital goods Promotes BACKWARD LINKAGES arise when the production of one good, such as a car, increases demand in industries that supply components for that good (e.g. steel, glass, rubber) POLICY INSTRUMENTS used by government 1. Trade barriers (tariffs, import quotas) (restricted flow of foreign exhange) 2. Government Planning (5-year Economic Plans) 3. Investment Policies -state control of financial system
-create state-owned enterprises WINNERS IMPORT-COMPETING
increased income
rapid economic growth in the 60s-70s) LOSERS EXPORT-ORIENTED
pay higher-price for manufactured goods Reforming the International Trade Sytem failed to address economic problems that developing countries faced HABERLER REPORT GATT was relatively unfavorable to primary producing countries

altered political dynamics in the int'l trade system
Early 1960s
Calls for reforms in the int'l trade system (1960s) Commodity price stabilization
Direct financial transfers from AICs
Greater access to core-country markets Response of Core Countries:
modified the GATT charter
GSP (Generalized System of Preferences) BUT - this concession is limited (1970s) New International Economic Order (NIEO) more radical demands
greater control over MNCs
easier, cheaper access to northern technology
reduce foreign debt
increase foreign aids
larger role in WB and IMF Response of Core: unwilling to make significant concessions Failure of NIEO: developing countries unable to maintain a cohesive coalition OPEC refused to help BOP problems and turned to WB & IMF for financial support CONCLUSION Protectionist policies adopted by government prompted by the dominance of import-competing interests

Government intervention in trade policies through ISI (domestic) and calls for reforms in the GATT-based trade system (international)

ISI did promote fairly rapid development of modern industrial sector

Infant-industry protection
Senile-industry protection Int'l Mechanisms pursued through UNCTAD
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