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3a. Industrialization and industrial policy
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Overview
Rationales for industrializationSEA industrialization patternsIndustrial promotion policies, esp. tariffsEffects of a tariff on industry growth, welfare and
distribution
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Motives for industrializationModernization, technology transferDiversification
Less reliance on season/climateLess price risk – manufacturing prices are stableLess dependence on foreign sources
(Belief in) increasing returns in some industries - lower unit costs permit more output using same resources.
Marshallian interfirm/interindustry externalities (shared infrastructure, agglomeration externalities)
Overall aim: capture 'long-run comparative advantage' as an industrial economy.
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Why so much variation in industriztn and employment rates and patterns among apparently similar economies?
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GDP Share 1990 Output per worker 1990
Country Agric Ind. Serv. Agric Ind. Serv.
Indonesia 22 40 38 0.4 2.9 1.2
Philippines 22 35 43 0.5 2.3 1.1
Thailand 12 39 48 0.2 2.8 2.2
Source: World Development Report, various years. Y/L in $’000
Industrial promotion strategiesWhy? Promote industrial growth, get growth
dividendHow? Mainly, but not exclusively, trade policiesEconomics of protectionism
Tariffs are most popular, if not best, way to protect favored industries. Easier to monitor trade flows at the port Raise revenue for G. Easy to levy (many losers, but per capita losses are
small) Some of the biggest losers may be foreigners anyway.
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A tariff boosts production by raising domestic price from p* to p*(1+t)-- Diverts demand from imports to domestic products (a)-- Reduces total demand (consumers must pay more)-- Raises gov’t revenue (c)-- Causes deadweight losses through misallocation (b + d)
0 Q1 Q2 Q3 Q4
p*(1+t)
p*
S
D
a b c d
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• Supply of forex comes from exports; demand is to cover imports• Tariff on imports reduces the demand for forex
-- Floating exchange rate: tariff causes ER appreciation• Lerner symmetry: a tariff discourages both imports and exports
D = import bill
D'
S = export earnings
For. exchange
Exch. rate(Rp/$)
E0
E1
F1 F0
Philippine protectionism and development In SE Asia, the Philippines had highest and most persistent
tariffsHigh rates of nominal protection on imports produced
negative effective protection for traditional exports (agriculture)
Effective protective rates by import category:
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Import category
1960 1970
Consumer items
Nonessential 349 354
Semiessential 149 57
Essential -15 5
Producer items
Nonessential 173 203
Semiessential 52 14
Essential 50 19
Trad’l exports -27 -33• What effect would these have had on incentives to produce and invest?
Static gains and losses from protectionProtected industries grow, at expense of
foreigners, consumers and other industriesGov’t revenue will probably be higher due to
tariffsInward orientation: domestic markets for all
goods become relatively importantIndustry structure: protection tends to create
monopolies“rent-seeking society”
• Distortions to investment and FDI incentives
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Dynamics: growth implications of protection
Does inward orientation have long-run effects on growth?
Answer depends on how protection is usedDo infant industries really do grow up?Do the costs of protection inhibit/enhance growth
in other sectors?Protection and growth in the long run
Incentives & opportunities for rent-seeking (infant industries fail to grow)
Investment follows rents rather than seeking efficient opportunities …
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The Bhagwati effect in Thailand
Bhagwati hypothesis: rent-seeking FDI creates fewer productivity gains than efficiency-seeking FDIHigh tariffs and monopoly power attract rent-seeking FDIProtected industries are more capital-intensive than average,
so there’s a ‘technology gap’ as wellGrowth dividends from this FDI are small – or even negative
Kohpaiboon (World Dev 2006) finds this for Thailand:At the mean rate of industry protection, labor productivity is
lower by 0.15% for every 1% higher foreign ownership shareImplication: protection “damages” the growth effect of FDIAny comparisons with Vietnam?
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Protection and income distribution (1)
Supply side (factor markets) What are the characteristics of industries most likely
to be awarded protection?Which industries display least comp. adv?
What are the likely factor market effects of expansion in these industries (& contraction/slower growth in others)? Factors used intensively in expanding industries enjoy
price rises (demand for their services has risen)Factors used intensively in contracting sectors lose
In SE Asia, which factors are likely to gain most from industry promotion? Lose most?
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Demand side (product markets)Consumers of goods produced in protected industries lose
thru higher prices. Industries using inputs produced by protected sectors lose. Consumers of goods whose prices are indirectly affected
(N goods) lose. Protection and non-traded goods: if T and N goods are
substitutes, raising some T prices will increase N demand and price
Combined distributional outcomesLosers from protection are owners of factors not
intensively used in protected industries, and/or consumers of protected goods and/or non-traded goods.
Winners and losers from protection
Given the chance, which groups would vote for industry protection, and which against? Why? (at least 3 reasons…individual interest and national interest)Manufacturing sector capitalistsFarmers in export crop sectors (coffee, coconut, tropical
fruit)Skilled workers/middle classUnskilled workers 16
Industrialization and protection: summary
Development benefits of industry growth are clearBut ISI in SE Asia was not the most efficient path to
industrializationUncompetitive industries rely on (small) domestic marketProtected industries are capital-intensive, their growth
does not generate many jobsSpillover costs to other industries, including exportersProtected industries attract ‘bad’ (rent-seeking) investmentProtection favors owners of capital against owners of labor
Any alternatives? Under what conditions might industry grow successfully without protection?
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