The four periodsThe four periods

1950s-1960s: Import 1950s-1960s: Import substitution with strong substitution with strong government interventiongovernment intervention• Import substitutionImport substitution: growth and trade : growth and trade

strategy where a country begins to strategy where a country begins to manufacture simple consumer goods manufacture simple consumer goods oriented towards the domestic market in oriented towards the domestic market in order to promote the domestic industry. order to promote the domestic industry. It presupposes the imposition of It presupposes the imposition of protective measures that will prevent protective measures that will prevent entry of imports that compete with entry of imports that compete with domestic producers.domestic producers.

RationaleRationale1.1. Independence (from colonizers) seen Independence (from colonizers) seen

as opportunity to modernize. Instead as opportunity to modernize. Instead of continuing to export commodities of continuing to export commodities to and import manufactures from to and import manufactures from DCs: shut out manufactured imports DCs: shut out manufactured imports from DCs and start producing those from DCs and start producing those googs domestically.googs domestically.

2.2. Historical experience of DCs, which Historical experience of DCs, which used import subs strategies in their used import subs strategies in their initial phases of development.initial phases of development.

3.3. Export pessimism in the 50s-60s Export pessimism in the 50s-60s caused by ↓Px and deterioration in caused by ↓Px and deterioration in balance of payments plus balance of payments plus expectation of long term expectation of long term deterioration of ToT.deterioration of ToT.

4.4. Avoiding BoP problems through Avoiding BoP problems through curtailment of imports.curtailment of imports.

5.5. Infant industry argument.Infant industry argument.

Import-subs policies and Import-subs policies and consequencesconsequences

1.1. High protection of dom firms, High protection of dom firms, inefficiency and resource inefficiency and resource misallocation. Lack of competition→ misallocation. Lack of competition→ high costs + inefficiencies + high high costs + inefficiencies + high prices paid by consumers.prices paid by consumers.

2.2. Overvalued exchange rates, making Overvalued exchange rates, making imports of capital goods cheaper imports of capital goods cheaper and X more expensive. and X more expensive.

Negative effects:Negative effects:• Capital-intensive methods→ urban UE Capital-intensive methods→ urban UE

+ growth of informal sector+ growth of informal sector• X in agricultural sector more difficult X in agricultural sector more difficult

→worsen rural poverty→worsen rural poverty

3.3. Excessive gov intervention, leading Excessive gov intervention, leading to misallocation of resources and to misallocation of resources and inefficiencies in production.inefficiencies in production.

4.4. Neglect of agriculture → ↑need for Neglect of agriculture → ↑need for food importsfood imports

5.5. Deterioration of BoP and debt Deterioration of BoP and debt position due to:position due to:

a)a) ↑↑need for M of cap equipment and need for M of cap equipment and intermediate goodsintermediate goods

b)b) ↑↑need for food importsneed for food importsc)c) Outward flow of financial capital Outward flow of financial capital

caused by repatriation of profits by caused by repatriation of profits by MNCs and wealthy elites seeking MNCs and wealthy elites seeking safety for their financial investmentssafety for their financial investments

6.6. Encouragement of cap-intensive Encouragement of cap-intensive production methods, but no effort production methods, but no effort to ↑ access to credit or support to ↑ access to credit or support users of labour-intensive users of labour-intensive technologies.technologies.

7.7. Negative impacts on employment Negative impacts on employment and income distribution.and income distribution.

8.8. Limited possiblities for growth over Limited possiblities for growth over the longer term on the basis of import-the longer term on the basis of import-subs, due to inefficiencies of subs, due to inefficiencies of production and misallocation of production and misallocation of resources. For example, many firms resources. For example, many firms enjoying protection never became enjoying protection never became efficient.efficient.

9.9. More room for corruption favoured by More room for corruption favoured by strong government intervention strong government intervention (payments of bribes to gov officials in (payments of bribes to gov officials in order to secure particular policies).order to secure particular policies).

• Problems with import-subsitution Problems with import-subsitution became apparent in the 60s:became apparent in the 60s:– India, Egypt reacted by ↑protection for India, Egypt reacted by ↑protection for

cap goods imports and other cap goods imports and other intermediate goods in order to allevaite intermediate goods in order to allevaite BoP problems.BoP problems.

– Others (Brazil, Israel, Mexico, Singapore, Others (Brazil, Israel, Mexico, Singapore, South korea, Taiwan, Southern South korea, Taiwan, Southern European countries) moved towards European countries) moved towards export promotion.export promotion.

1960s-1970s: Outward 1960s-1970s: Outward orientation with strong gov orientation with strong gov interventionintervention• Export-led growth strategy: a growth Export-led growth strategy: a growth

and trade strategy where a country and trade strategy where a country attempts to achieve economic growth attempts to achieve economic growth by expanding its exports.by expanding its exports.

• It is an outward-oriented strategy since It is an outward-oriented strategy since it looks outward towards foreign it looks outward towards foreign markets and provides stronger links markets and provides stronger links between the domestic and global between the domestic and global economies.economies.

• Strong gov intervention necessary to Strong gov intervention necessary to help countries develop a strong help countries develop a strong manuf sector oriented towards manuf sector oriented towards exports. exports.

• Most LDCs that turned to export Most LDCs that turned to export promotion had began their promotion had began their industrialization with import-industrialization with import-substitution. The stronger export substitution. The stronger export industries were in many cases the industries were in many cases the ones that had received protection.ones that had received protection.

• China, Hong Kong (more market-China, Hong Kong (more market-oriented), Indonesia, japan, Malaysia, oriented), Indonesia, japan, Malaysia, Singapore, South Korea, Taiwan, Singapore, South Korea, Taiwan, Thailand = Newly Industrializing Thailand = Newly Industrializing Economies (NIEs) or Asian Tigers.Economies (NIEs) or Asian Tigers.

Interventionist policiesInterventionist policies

• State ownership and control of State ownership and control of financial financial institutionsinstitutions, in order to provide subsidized , in order to provide subsidized credit to the industries being promoted.credit to the industries being promoted.

• Targeting of industriesTargeting of industries for export. for export.

• Industrial policies to Industrial policies to support export support export industriesindustries: investment grants, production : investment grants, production subsidies to export industries, tax subsidies to export industries, tax exemptions, export subsidies...exemptions, export subsidies...

• Some (selective) Some (selective) protectionprotection of of domestic industries.domestic industries.

• Requirements on MNCsRequirements on MNCs in order to in order to maximize benefits of FDI: promotion maximize benefits of FDI: promotion of R&D, transfer of targeted of R&D, transfer of targeted technologies into the domestic technologies into the domestic economy, training of dom workers, economy, training of dom workers, use of local inputs.use of local inputs.

• Large public investments in key Large public investments in key areas: education and skills, R&D, areas: education and skills, R&D, transport and communications transport and communications infrastructure.infrastructure.

• Incentives for R&D by private sector Incentives for R&D by private sector for high tech products.for high tech products.

1980s-1990s: Export-led with 1980s-1990s: Export-led with Market Liberalization: Market Liberalization: Washington ConsensusWashington Consensus• Early 80s: Early 80s:

1.1. Poor econ and export performance in many Poor econ and export performance in many LDCs and high indebtednessLDCs and high indebtedness

2.2. Shift in thinking about econ growth and Shift in thinking about econ growth and development inspired by neoclassical model, development inspired by neoclassical model, which stressed importance of limiting gov which stressed importance of limiting gov intervention and allowing private sector to intervention and allowing private sector to operate in a competitive free-market operate in a competitive free-market environment. Outward orientation based on environment. Outward orientation based on free-trade.free-trade.

• Based on ten economic policy items:Based on ten economic policy items:1.1. Trade liberalizationTrade liberalization

2.2. No restrictions to new FDI by MNCsNo restrictions to new FDI by MNCs

3.3. Sound fiscal policy (no excessive borrowing)Sound fiscal policy (no excessive borrowing)

4.4. Tax reformTax reform

5.5. Changing priorities of gov spending towards Changing priorities of gov spending towards health, education, infrastructurehealth, education, infrastructure

6.6. Interest rate liberalizationInterest rate liberalization

7.7. Market-determined exchange ratesMarket-determined exchange rates

8.8. PrivatizationPrivatization

9.9. DeregulationDeregulation

10.10.Securing property rightsSecuring property rights

• Rationale: reliance on market forces Rationale: reliance on market forces and free trade maximizes efficiency, and free trade maximizes efficiency, domestic and global allocation of domestic and global allocation of resources and economic growth.resources and economic growth.

• LDCs that have adopted these LDCs that have adopted these policies include Argentina, Brazil, policies include Argentina, Brazil, China, Chile, India, Kenia, Sri Lanka, China, Chile, India, Kenia, Sri Lanka, Tanzania, Turkey. They began a Tanzania, Turkey. They began a process of ↓gov intervention in the process of ↓gov intervention in the market.market.

• Strong influence of the World Bank Strong influence of the World Bank and the IMF, which lent these and the IMF, which lent these countries funds on the condition of countries funds on the condition of reorienting their economies towards reorienting their economies towards freer trade and freer market.freer trade and freer market.

Impacts of economic and Impacts of economic and trade liberalizationtrade liberalization

1.1. Limited benefits for export growth Limited benefits for export growth and diversification:and diversification:• Countries lost export shares in world Countries lost export shares in world

markets, especially in Africamarkets, especially in Africa• LDCs did not succeed in diversifying LDCs did not succeed in diversifying

their production into manufacturing. their production into manufacturing. Countries that performed best were Countries that performed best were those that had already developed those that had already developed significant export sectors.significant export sectors.

CausesCauses of these negative impacts: of these negative impacts:

a.a. Protectionist policies by DCsProtectionist policies by DCs

b.b. Growing reliance on free market policiesGrowing reliance on free market policies

2.2. Limited impacts on economic growthLimited impacts on economic growth

• No hard evidence suggesting that a No hard evidence suggesting that a greater outward orientation based on greater outward orientation based on freer trade during 80s, 90s has been freer trade during 80s, 90s has been responsible for more rapid econ responsible for more rapid econ growth.growth.

• Great variability in performance.Great variability in performance.

• Some economists see no link Some economists see no link between econ growth and trade between econ growth and trade liberalization.liberalization.

• Some countries better able to Some countries better able to benefit from freer trade. Low benefit from freer trade. Low income countries perform the income countries perform the worst→ ↑inequalities between rich worst→ ↑inequalities between rich and poor.and poor.

3.3. Increasing income inequalities and Increasing income inequalities and poverty within LDCs. World Bank study poverty within LDCs. World Bank study reveals that the correlation between reveals that the correlation between trade liberalization and income growth trade liberalization and income growth isis

– Negative among the 40% poorest of the Negative among the 40% poorest of the populationpopulation

– Positive among the higher income groupsPositive among the higher income groups

So it helps the rich get richer and the poor So it helps the rich get richer and the poor get poorer.get poorer.

ReasonReason: econ and trade liberalization : econ and trade liberalization give rise to winners and losers.give rise to winners and losers.

WINNERSWINNERSWorkers in Workers in

exporting exporting industriesindustries

Workers in growing Workers in growing formal sectorsformal sectors

Higher skilled, Higher skilled, educated people, educated people, with more chances with more chances in the competitive in the competitive environmentenvironment

LOSERSLOSERSLess educated peopleLess educated peoplePoor people with no Poor people with no

collateral (unable to collateral (unable to obtain credit)obtain credit)

People in remote areas People in remote areas with no transport links with no transport links to marketsto markets

People in agriculturePeople in agriculturePeople affected by People affected by

lower levels of social lower levels of social protectionprotection

People forced from the People forced from the formal to the informal formal to the informal sector ...sector ...

• According to int’al trade theory, free According to int’al trade theory, free trade originates overall gains that trade originates overall gains that are likely to be greater than the are likely to be greater than the overall losses. However, in the real overall losses. However, in the real world this rarely occurs, with the world this rarely occurs, with the result that some people are worse off result that some people are worse off due to freer trade and freer markets.due to freer trade and freer markets.

• Late 1990s: the Washington Late 1990s: the Washington consensus was called into question consensus was called into question even by the Chief economist of the even by the Chief economist of the World bank, Joseph Stiglitz.World bank, Joseph Stiglitz.

Late 1990s-2000s: Export-led Late 1990s-2000s: Export-led growth strategies with growth strategies with selective gov intervention: The selective gov intervention: The New Development ConsensusNew Development Consensus

• Gov.’s role in LDCs should be Gov.’s role in LDCs should be complemented (not substituted) by complemented (not substituted) by markets.markets.

• Cuts in gov spending should not Cuts in gov spending should not affect spending on education, health affect spending on education, health and infrastructure.and infrastructure.

• Gov must support education, health and Gov must support education, health and infrastructure and R&D for both industry infrastructure and R&D for both industry and agriculture.and agriculture.

• Gov should pursue policies that promote Gov should pursue policies that promote income equality and poverty alleviation.income equality and poverty alleviation.

• Gov must provide regulatory framework Gov must provide regulatory framework for markets to work efficiently: for markets to work efficiently: regulation of financial system and regulation of financial system and regulatory framework for competition regulatory framework for competition (to avoid development of private (to avoid development of private monopolies.monopolies.

• DCs must assist econ development DCs must assist econ development by ↑foreign aid and providing by ↑foreign aid and providing increased access to their markets by increased access to their markets by LDCs.LDCs.

• Due to their special circumstances, Due to their special circumstances, LDCs should receive special LDCs should receive special treatment by int’al trade agreements treatment by int’al trade agreements regarding removal of their regarding removal of their protectionist measures.protectionist measures.

RemarksRemarks::

• Unlike the strongly interventionist Unlike the strongly interventionist supply-side policies pursued by the supply-side policies pursued by the Asian tigers, that focused on direct Asian tigers, that focused on direct support and protection against support and protection against competition, the New Dev Consensus competition, the New Dev Consensus favours the establishment of favours the establishment of institutions and conditions that institutions and conditions that assist assist firms to do well in a competitive firms to do well in a competitive market environmentmarket environment. .

Support for:Support for:– R&D in targeted areasR&D in targeted areas– Vocational training and educationVocational training and education– Small firms Small firms – Development of infrastructureDevelopment of infrastructure

• Justification for industrial policies: Justification for industrial policies: numerous kinds of market failures numerous kinds of market failures that may prevent countries/markets that may prevent countries/markets from:from:– Setting up the needed private firmsSetting up the needed private firms– Undertaking the necessary R&DUndertaking the necessary R&D– InnovatingInnovating– Importing appropriate technologiesImporting appropriate technologies