CH 6: Trade & Development I: Import Substitution Industrialization PDF

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International Political Economy CH 6: Trade & Development I: Import Substitution Industrialization !

- governments in so many developing countries intervened deeply in their domestic -

economies, insulated themselves from international trade, and sought changes in international trade rules after WW2! after that, many dismantled these rules & became part of the global economy!

Domestic Interests, International Pressures & Protectionist Coalitions - Before WW1! • independent developing countries adopted liberal trade policies ! • produced & exported agricultural goods to advanced industrialized countries ! • imported manufactured goods they needed ! => Reason for liberal trade pursuit: dominance of export-oriented agricultural interests in politics! - After WW2 - 1980s! • liberal trade policies were replaced by a protectionist approach in developing countries!

- in developing countries, trade & development policies are shaped by political competition between rural-based agriculture & urban-based manufacturing!

- agriculture & primary commodities accounted for more than 50% of exports in developing countries!

- Mono-exporter: exports of a country were almost fully accounted for by one product ! => developing countries are abundantly endowed with land & have little capital! - Enclave Agriculture: export-oriented agricultural sectors that had few linkages to other parts of the local economy ! - Triggers of the shift in the 20th century: ! • international economic shocks beginning with WW1 & extending to WW2! • government mandated rationing of goods & primary commodities during the wars in developed countries made it difficult for developing countries to import goods ! • falling commodity prices associated with the Great Depression ! • disruption of normal trade patterns arising from WW2 reduced export revenues which led to the introduction of trade barriers & produce goods that were imported before ! - Result: emergence of manufacturing industries gave rise to interest groups, industry based association & labor unions that pressured the government to adopt favorable economic policies for people working in the import competing sector ! - creation of organized groups to represent the interests of import-competing manufacturers ! • saw a rise in incomes due to protectionism & therefore had strong intensive for these policies to continue! • emergence of new organized interests & growing urban middle class created opportunity for politicians to construct new political coalitions based on their support ! => governments rose to power due to support from import-competing sectors ! - political change in some parts was due to decolonization ! => political structures once dominated by export-oriented agricultural interests were now largely under the control of import-competing manufacturing interests -> clear incentives to abandon liberal trade policies & pursue protectionist arrangements ! The Structuralist Critique: Markets, Trade & Economic Development ! => protectionism did not represent a coherent economic development strategy ! - Structuralism: dominant branch of development economics & plays an important role in shaping developing countries' trade & development policies ! Market Imperfections in Developing Countries => posed obstacles to the reallocation of resources from agriculture to manufacturing industries (~inflexible developing economies), according to structuralists !

- Problems limiting investment in manufacturing industries: ! Complementary Demand: ! • arose in the initial transformation of a substance agricultural economy to a manufacturing economy! a • manufacturing enterprise will only be successful if many manufacturing industries began production simultaneously (~simultaneous investment) ! • behavior coordination to invest is doubtful according to structuralists ! => if investment is left to the market, there would be little investment in manufacturing industries ! II. Pecuniary External Economies: ! • arose from interdependencies among market processes ! • simultaneous expansion of two related industries would raise national income (ex car & steel industries) ! • coordination problem is faced, since neither will increase production capacity unless they are sure the other party will supply the required raw materials/demand (~ investment decisions need to be coordinated) ! => if investment is left to the market, there would be no investment from either firm ! - Structuralists proposed solution to the coordination problem: state led big push ! => state engages in economic planning & either makes necessary investments itself or helps coordinate the investments of private economic actors ! Market Imperfections in the International Economy ! => according to structuralists, international trade provided few benefits to developing countries! - Singer-Prebisch Theory: participation in the GATT-based trade system would make it harder for developing countries to industrialize by depriving them of critical resources; theory divides word into the advanced-industrialized core & the developing-world periphery & focuses on the terms of trade between them! • terms of trade: relate the price of a country's exports to the price of its imports; ! terms of trade improvement: means, that the price of a country's exports is rising relative to the price of its imports (~country becomes richer)! terms of trade decline: means that the price of a country's exports is falling relative to its import prices (~country becomes poorer)! => developing countries' terms of trade deteriorate steadily over time ! => periphery's terms of trade deteriorate as a result of differences in income elasticity of demand for primary commodities vs industrial goods ! - income elasticity of demand: the degree to which a change in income alters demand for a particular product ! • low for a product: a large income increase produces little change in demand for the good ! • high for a product: a small income increase produces a large change in demand for the good! => income elasticity of demand for primary commodities is low! => income elasticity of demand for manufactured goods is high! => as incomes rise in the core countries, a smaller percentage of those countries' income will be spent on imports of primary commodities, but as incomes rise in the periphery countries, a larger percentage of those countries' income will be spent on manufactured imports from the core! I.

Domestic & International Elements of Trade & Development Strategies => structuralism enabled governments to transform the protectionist trade policies that benefited the principal political supporters into comprehensive state-led development strategies ! Import Substitution Industrialization ISI => state centered approach to development, whose 2-stage strategy is based on the following logic: ! • countries would industrialize by substituting domestically produces goods for manufactured items they had previously imported ! I. Easy ISI: matter of imitation & importation of tired & tested procedures, focus on developing domestic manufacturing of simple consumer goods because: ! - a large domestic demand was there that was satisfied by imports! - these items were mature products ! - their production relies on low skilled labour which reduced investments ! => Expected Benefits: ! - expansion of manufacturing activities would increase wage-based employment !

- experience gained in manufacturing industries would allow domestic workers to develop skills that can be applied to other manufacturing businesses! => after some time, governments will need to shift to a second stage strategy because Easy ISI is not profitable anymore ! II. Second stage strategies: ! a. Export Substitution Strategy: characterized by the development of more complex manufacturing activities where labour-intensive manufactured goods industries developed in easy ISI begin to report rather than solely focus on domestic market! b. Secondary ISI: manufacturing consumer durable goods, intermediate inputs & capital goods needed to produce consumer durables ! - Backward linkages: arise when the production of one good increases demand in industries that supply components for that good ! - Promotion with 3x governmental policies: ! 1. Government Planning: to determine which industries will be targeted for development, figure out how much should be invested & evaluate how investment in one industry would affect the remainder of the economy ! 2. Investment Policy: used to promote targeted industries , invest in industries by creating state-owned & mixed-ownership enterprises ! => governments emerged as a principal in developing societies ! 3. Trade Barriers: to control foreign exchange & protect infant industries so they supported their development objectives ! => ISI redistributed income, the incomes of export-oriented producers fell while those of importcompeting producers rose, but ISI also promoted rapid economic growth in developing countries because of the manufacturing sector ! Reforming the International Trade System - GATT rules did not make provision for the infant-industry justification for protection & instead explicitly prohibited the use of quantitative restrictions & the use of tariffs, which is why developing countries pressed the GATT for such reforms ! - foundation of the United Nations Conference on Trade & Development (UNCTAD) was the first important success achieved since it was established to promote interests of developing countries in the world trade system => birth of Group of 77 - International mechanisms pursued by Group of 77: ! I. Commodity price stabilization schemes by setting a floor below which commodity prices would not be allowed to fall ! II. Direct financial transfers from advanced industrialized countries as compensation for the lost purchasing power from declining terms of trade ! III. Greater access to core-country markest ! => led to core countries incorporating specific concerns into the GATT charter (GATT Part IV) ! - Generalized System of Preferences GSP: manufactured exports from developing countries gained preferential access to advanced industrialized countries' markets under it which was of limited importance because advanced countries limit the quantity of goods that could enter under preferential tariff rates ! - Organization of Petroleum Exporting Countries (OPEC) used control of oil to improve terms of trade after the oil shock which strengthened the belief within Group of 77 that commodity power can be exploited to force fundamental systematic change ! - New International Economic Order (NIEO): represented an attempt to create an international trade system whose operation would promote development, it embodied a set of reforms that would have radically altered the operation of the international economy & it granted developing countries greater control over multinational corporations operating in their countries ! => NIEO disappeared by 1980s from the international agenda partly because governments in advanced industrialized countries refused to make significant concessions & the following reasons: ! • developing countries were unable to establish & maintain a cohesive coalition ! • heterogeneity of developing countries' interests made it easier to exploit & divide the Group of 77 ! • OPEC governments were unwilling to help other developing countries achieve broader trade & development objectives ! • need to attain IMF & World Bank assistance of many developing countries altered the balance of power !

Conclusion - developing countries insulated themselves from the world trade system ! - governments were responsive to interests of import-competing manufacturing industries due to the interaction between domestic politics, economic shocks & decolonization ! - influenced by structuralism, governments transformed political incentive to protect domestic industries & led governments to intervene in domestic markets ! - international struggle over the distribution of the gains from trade arose as a counterpart of domestic strategy of redistributing resources from agriculture to industry embodies in ISI...