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The four periods. 1950s-1960s: Import substitution with strong government intervention.
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1950s-1960s: Import substitution with strong government intervention • Import substitution: growth and trade strategy where a country begins to manufacture simple consumer goods oriented towards the domestic market in order to promote the domestic industry. It presupposes the imposition of protective measures that will prevent entry of imports that compete with domestic producers.
Rationale • Independence (from colonizers) seen as opportunity to modernize. Instead of continuing to export commodities to and import manufactures from DCs: shut out manufactured imports from DCs and start producing those googs domestically. • Historical experience of DCs, which used import subs strategies in their initial phases of development.
Export pessimism in the 50s-60s caused by ↓Px and deterioration in balance of payments plus expectation of long term deterioration of ToT. • Avoiding BoP problems through curtailment of imports. • Infant industry argument.
Import-subs policies and consequences • High protection of dom firms, inefficiency and resource misallocation. Lack of competition→ high costs + inefficiencies + high prices paid by consumers. • Overvalued exchange rates, making imports of capital goods cheaper and X more expensive.
Negative effects: • Capital-intensive methods→ urban UE + growth of informal sector • X in agricultural sector more difficult →worsen rural poverty • Excessive gov intervention, leading to misallocation of resources and inefficiencies in production.
Neglect of agriculture → ↑need for food imports • Deterioration of BoP and debt position due to: • ↑need for M of cap equipment and intermediate goods • ↑need for food imports • Outward flow of financial capital caused by repatriation of profits by MNCs and wealthy elites seeking safety for their financial investments
Encouragement of cap-intensive production methods, but no effort to ↑ access to credit or support users of labour-intensive technologies. • Negative impacts on employment and income distribution.
Limited possiblities for growth over the longer term on the basis of import-subs, due to inefficiencies of production and misallocation of resources. For example, many firms enjoying protection never became efficient. • More room for corruption favoured by strong government intervention (payments of bribes to gov officials in order to secure particular policies).
Problems with import-subsitution became apparent in the 60s: • India, Egypt reacted by ↑protection for cap goods imports and other intermediate goods in order to allevaite BoP problems. • Others (Brazil, Israel, Mexico, Singapore, South korea, Taiwan, Southern European countries) moved towards export promotion.
1960s-1970s: Outward orientation with strong gov intervention • Export-led growth strategy: a growth and trade strategy where a country attempts to achieve economic growth by expanding its exports. • It is an outward-oriented strategy since it looks outward towards foreign markets and provides stronger links between the domestic and global economies.
Strong gov intervention necessary to help countries develop a strong manuf sector oriented towards exports. • Most LDCs that turned to export promotion had began their industrialization with import-substitution. The stronger export industries were in many cases the ones that had received protection.
China, Hong Kong (more market-oriented), Indonesia, japan, Malaysia, Singapore, South Korea, Taiwan, Thailand = Newly Industrializing Economies (NIEs) or Asian Tigers.
Interventionist policies • State ownership and control of financial institutions, in order to provide subsidized credit to the industries being promoted. • Targeting of industries for export. • Industrial policies to support export industries: investment grants, production subsidies to export industries, tax exemptions, export subsidies...
Some (selective) protection of domestic industries. • Requirements on MNCs in order to maximize benefits of FDI: promotion of R&D, transfer of targeted technologies into the domestic economy, training of dom workers, use of local inputs.
Large public investments in key areas: education and skills, R&D, transport and communications infrastructure. • Incentives for R&D by private sector for high tech products.
1980s-1990s: Export-led with Market Liberalization: Washington Consensus • Early 80s: • Poor econ and export performance in many LDCs and high indebtedness • Shift in thinking about econ growth and development inspired by neoclassical model, which stressed importance of limiting gov intervention and allowing private sector to operate in a competitive free-market environment. Outward orientation based on free-trade.
Based on ten economic policy items: • Trade liberalization • No restrictions to new FDI by MNCs • Sound fiscal policy (no excessive borrowing) • Tax reform • Changing priorities of gov spending towards health, education, infrastructure • Interest rate liberalization • Market-determined exchange rates • Privatization • Deregulation • Securing property rights
Rationale: reliance on market forces and free trade maximizes efficiency, domestic and global allocation of resources and economic growth. • LDCs that have adopted these policies include Argentina, Brazil, China, Chile, India, Kenia, Sri Lanka, Tanzania, Turkey. They began a process of ↓gov intervention in the market.
Strong influence of the World Bank and the IMF, which lent these countries funds on the condition of reorienting their economies towards freer trade and freer market.
Impacts of economic and trade liberalization • Limited benefits for export growth and diversification: • Countries lost export shares in world markets, especially in Africa • LDCs did not succeed in diversifying their production into manufacturing. Countries that performed best were those that had already developed significant export sectors.
Causes of these negative impacts: • Protectionist policies by DCs • Growing reliance on free market policies • Limited impacts on economic growth • No hard evidence suggesting that a greater outward orientation based on freer trade during 80s, 90s has been responsible for more rapid econ growth.
Great variability in performance. • Some economists see no link between econ growth and trade liberalization. • Some countries better able to benefit from freer trade. Low income countries perform the worst→ ↑inequalities between rich and poor.
Increasing income inequalities and poverty within LDCs. World Bank study reveals that the correlation between trade liberalization and income growth is • Negative among the 40% poorest of the population • Positive among the higher income groups So it helps the rich get richer and the poor get poorer. Reason: econ and trade liberalization give rise to winners and losers.
WINNERS Workers in exporting industries Workers in growing formal sectors Higher skilled, educated people, with more chances in the competitive environment LOSERS Less educated people Poor people with no collateral (unable to obtain credit) People in remote areas with no transport links to markets People in agriculture People affected by lower levels of social protection People forced from the formal to the informal sector ...
According to int’al trade theory, free trade originates overall gains that are likely to be greater than the overall losses. However, in the real world this rarely occurs, with the result that some people are worse off due to freer trade and freer markets. • Late 1990s: the Washington consensus was called into question even by the Chief economist of the World bank, Joseph Stiglitz.
Late 1990s-2000s: Export-led growth strategies with selective gov intervention: The New Development Consensus • Gov.’s role in LDCs should be complemented (not substituted) by markets. • Cuts in gov spending should not affect spending on education, health and infrastructure.
Gov must support education, health and infrastructure and R&D for both industry and agriculture. • Gov should pursue policies that promote income equality and poverty alleviation. • Gov must provide regulatory framework for markets to work efficiently: regulation of financial system and regulatory framework for competition (to avoid development of private monopolies.
DCs must assist econ development by ↑foreign aid and providing increased access to their markets by LDCs. • Due to their special circumstances, LDCs should receive special treatment by int’al trade agreements regarding removal of their protectionist measures.
Remarks: • Unlike the strongly interventionist supply-side policies pursued by the Asian tigers, that focused on direct support and protection against competition, the New Dev Consensus favours the establishment of institutions and conditions that assist firms to do well in a competitive market environment.
Support for: • R&D in targeted areas • Vocational training and education • Small firms • Development of infrastructure
Justification for industrial policies: numerous kinds of market failures that may prevent countries/markets from: • Setting up the needed private firms • Undertaking the necessary R&D • Innovating • Importing appropriate technologies
