Developing Countries

Question 1

Until when was economic development thought to heavily depend on what/

Answer 1

1970s.

Manufacturing

Question 2

What is import substituting industrialisation?

Answer 2

• a trade policy adopted by many low and MICs before 1980s.

- Aims to limit competing imports and encourage domestic manufacturing.

Question 3

What belief is ISI often accompanies by?

Answer 3

That rich countries exploit poorer ones through international financial markets and trade.

Question 4

What argument justifies ISI and expand.

Answer 4

Infant industry argument.

- May have potential comp adv but cannot compete in SR = need temporary protectionism.

Question 5

3 problems with infant industry argument

Answer 5

1. timing may not be right - too early/too late.
2. Moral hazard.
3. If infant industry looks promising, why aren’t private investors moving in?

Question 6

2 market failures that can prevent infant industries from becoming competitive on their own.

Answer 6

1. Imperfect capital markets.

2. The problem of appropriability.

Question 7

Explain imperfect capital markets problem

Answer 7

Inadequate financial institutions and markets = new industries cannot borrow to grow = restricted economic growth.

Question 8

1st and 2nd best polices to correct imperfect capital markets

Answer 8

1st = better functioning laws and markets.
2nd = high tariffs to increase profits to invest.

Question 9

Explain the problem of appropriability

Answer 9

Firms may not be abet exclusively use the benefits of their investments in new industries because the benefits are PUBLIC GOODS. Lack of property rights and corrupt legal system.

Question 10

1st and 2nd best policies for appropriability.

Answer 10

1st. = establish decent property rights.
2nd = high tariffs to encourage growth.

Question 11

Reasons why developing countries prefer tariffs not subsidies for ISI?

Answer 11

• subsidies are expensive

- tariff revenue is attractive

Question 12

Problem with ISI (5)

Answer 12

1. draws resources away from export sector e.g. less available labour / at a higher wage.
2. Promote inefficient small industries
3. costs and wasteful use of resources to manage trade policies.
4. do not address deeper issues - maybe not just lack of experience.
5. higher prices for consumers and importing firms.

Question 13

Did ISI promote development?

Answer 13

On average NO: countries adopting grew more slowly and new industries did not become competitive.