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Lecture 6: Development and Trade - EOI
Terms in this set (22)
What is the structuralist argument for ISI?
The shift of resources from agriculture to manufacturing would not occur unless te state adopted ISI industria policy
Why would the state need to adopt ISI policy instead of just letting it happen?
Because of market imperfections, it will otherwise not happen. Both domestic and international
According to structuralists, what are the domestic market distortions?
1. A market for manufactured goods requires people to have well paying jobs producing.. manufactured goods
2. Markets can't do this on their own (why should entrepreneurs take a risk when they cannot coordinate efforts - but a government can!).
3. if two interdependent companies grow together (cars and steel), they can increase income - however they face barrier to cooperate in a private market.
What are the international market distortions?
1. Terms of trade
2. Singer-Prebisch theory (primary commodities decline in their value relative to mfg goods)
What was an advance by the G77?
Pushed for the generalized system of preferences (GSP) - manufactured exports from developing countries gained preferential access to advance industrialized countries' markets
What is the G77?
Groups of developing and emerging market states looking to alter the trade rules
What is a G77 failure?
New International Economic Order - an attempt to create an international trade system whose operation was subordinate to development needs of the world's poor countries
- inspired by OPEC (rate of success has been mixed)
What are the results of ISI?
In Asia: abandoned for an EOI approach
In LA: advanced until the 80s
Asian tigers are relatively wealthy today while LA has only seen income gains in recent years
Who controls policy?
Pre WWI: landowners
Depression & WWII: state had to produce, land owners lost income because of tough times. Capital and labor grew as political forces. - because of their new economic importance
After WWII: Capital now had the political control and thus imposed protectionist measures to maintain their income
Why did the Asian Tigers reform and not the states of LA?
Interest & Institutions:
- "losers" from globalization gain power with great depression world wide
- WWII decimated the political power of interest groups in Asia
- in LA, interest groups remain in tact (namely "losers" of globalization)
What is a neo-liberal criticism of ISI?
- States are bad planners; they don't now which industries will be competitive/succesfull
- Gov't had to cover industry losses: created budget deficits & funded through borrowing
- Persistent trade imbalance (current account)
Can you elaborate on ISI in LA?
Through marketing boards & sovereign borrowing
LA debt crisis; starting in 1982. Couldn't repay the loans from funding ISI.
IMF intervenes and forces reform. (Washington consensus)
What led to different outcomes between the Asian tigers & LA?
Both countries, the role of agriculture diminished.
Asian countries focused on EOI (Export Oriented Industrialization), rather than ISI.
Can you elaborate on the East Asian model?
After WWII they adopt easy ISI.
Late 50s-early 60s, shift emphasis to exports. Forced manufactures to worry about international competitiveness. Invested in domestic industries that were profitable in world markets.
for their domestic markets. BUT allowed selective liberalization to lower costs for critical inputs, also benefited from a stable macroeconomic environmnt.
What are the stages of the EAM (=East Asian Model)?
1. Industrial policy promotes labor-intensive light industry (Easy ISI: textiles)
2. Target heavy industries (steel, automobiles, chemicals)
3. Target high skill, R&D heavy industries (high tech)
What is the East Asian Industrial policy?
1. Reduce investment funds for industries
2. Incentivize exports
3. Protect infant industries
4. Promote acquisition and application of skills
How do you use monetary policy to promote EXPORTS?
• Exporting firms paid interest rates of 6-12%
• Other borrowers paid 20-22%
• Short-term loans unlimited for confirmed export orders
• Credit also made available to exporters input suppliers
(and the suppliers suppliers)
Why didnt states move away from ISI?
Politics: primary motivation of leaders is to remain in power (good politics doesn't mean good policies)
Leaders that tried to adopt policies against the interests of their political
supporters were removed (or threatened with removal) from office
ISI was adopted not because it was good policy but because those in political
power would lose from liberalization.
- Workers grew dependent on the mfg industries and subsidies
- Farmers (who would benefit) lost power and couldn't support politicians that
would adopt export oriented approaches.
- ISI became entrenched
How did states move away from ISI?
Trade imbalances and debts couldn't last forever. Eventually, creditors stopped financing loans (and thus the goods stopped)
In danger of losing power, they sought aid from the iMF & WB.
IMF & WB made loans conditional on adopting neo-liberal policies
Has reform worked?
Meh.. in many states reforms weren't implemented as the costs brought to a political backlash.
IMF & WB now adopt a more gradual approach that recognized that shocking states out of an economic equilibrium is self-defeating because of the political backlash.
Now: safety net so that the "losers" aren't too aggressive.
What is structural adjustment?
• Attempt a stable macroeconomic environment:
- Transform budget deficits in to surpluses, raise interest rates,
devalue exchange rates
- Cut demand; change current account deficits into surpluses
• Liberalize trade
• Privatize state-owned enterprises
• Neocolonialism (dependency theory?)
- Some argue that this was a way for the West to impose policies that
favored its industries over the development of the country
What are IMF & WB austerity programs?
• Policies have helped creditors regain investments
- US and EU have most control over IMF policy
• Helped governments stay in power
- Good or bad depending on your view of the
• Associated with a number of "bad" short term
- Less respect for human rights
- Increase in protest, rebellion
- Less access to health and education among poor
• However, there are some long term benefits
- Increased growth
- Improved human rights
THIS SET IS OFTEN IN FOLDERS WITH...
Lecture 6: Development & Trade I
Lecture 7: Institutions and Development
Lecture 1: What is Development?
Lecture 11: Natural Resources and Development
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