lect 6 - trade and development, sanctions

Question 1

brief history of trade and development

Answer 1

up to WW2 = developing countries had liberal trade policies

• for many bc colonialism (colonist forces open markets to import and export)
• for some also by choice

by late 1950s, turned protectionist as part of “import substitution industrialization”

by mid-80s/90s = many developing countries had opened back up to trade

Question 2

what is ISI

Answer 2

Import Substitution Industrialization

= substituting previously imported manufactured goods with domestically produced goods

• As opposed to focusing on producing goods that can be exported to international markets (export-oriented industrialization)
• substitute imports by industrializing

trying to grow industries replacing imports, aiming to sell for domestic market rather than for export

Question 3

the stages of ISI/EOI

Answer 3

everyone starts with EASY ISI:

Domestic manufacturing of relatively simple consumer goods (soda, beer, apparel, shoes, furniture) for the home market

• Technology and machines easily acquired from abroad
• Relies on low-skilled labor
• stuff you can do with low-skilled labor and not too much industry

Once benefits of easy ISI exhausted, two options:
exhausted bc only so many that you can sell on your market

1. Start exporting easy ISI products to the world (East Asian development Model) = Export Oriented Industrialization (EOI)
2. Secondary ISI: manufacture less simple goods for the home market (e.g.cars) (Latin American Model)
   - things more complicated to produce: more machinery, capital and skill

Question 4

EOI

Answer 4

Export Oriented Industrialization

exporting domestic manufacture products to the world

• East Asian Model

Question 5

government policies to promote (secondary) ISI

Answer 5

Trade barriers: protect home market from imports

Investment in activities the private sector would not produce (invest in):

• public infrastructure: Roads, transportation networks, electricity, telecommunications
• Large-scale operations: steel plants, auto plants
  requires development and cooperation -> private actors won’t start this

State-owned Enterprises (& mixed-owned) = when gov has some stake in the industry
- private investors may not take the risk bc the country is not good at that industry yet

• Chemical, telecommunications, electricity, railways, metal fabrication

Tax policies:

• “Taxed” agricultural exports through “Marketing Boards”
• Marketing Board: purchased crops from farmers at below-world market prices, then sell them on the world market at world market prices (in essence taxing it)

Question 6

marketing boards

Answer 6

purchased crops from farmers at below-world market prices, then sell them on the world market at world market prices

Question 7

“neoliberal” criticism of ISI

Answer 7

think that states are bad at planning the econ:

• can’t foresee which industries will be competitive and which will be successful
• state are poor at distributing resources efficiently

gov’t had to cover industry losses bc ISI

• created budget deficits bc industries weren’t profitable
• funded through borrowing: increased national debts

persistent trade imbalance (current account) => importing more than exporting:

• agriculture was taxed and thus less efficient (less exports)
  ???
• MFG goods not competitive internationally (more imports): the goods were not good enough so not much export

industries never became competitive

Question 8

example - the Yugo (worst reviewed car in US history)

Answer 8

from Yugoslavia,
terribly unreliable bc Yugoslavia did not have the skills to make good cars + there was no competition in Yugoslavia to force innovation (bc gov cut of imports with tariffs)

Question 9

why ISI? why implement a policy economists will tell us lead to poor growth (lack of competitiveness)

• structuralism

Answer 9

= dominant theory in development economics:
industrialization -> development

based on Prebish-Singer Hypothesis: Free trade does not benefit developing countries
(based on diff in elasticity in the market)

• developing countries exports are commodities like agriculture or metals, as world becomes richer, the growth and demand for these products is not that strong (if you are richer: you will not eat that much more food, you will start buying stuff like electronics, clothing = not for basic needs, but nice to have = tend to be produced by industrialized countries)
• global development (becoming richer) -> demand for manufactured goods + lower demand for commodities

slide: Developing countries’ terms of trade (price of exports vs. price of imports) diminishes over time because demand in primary commodities is less elastic than demand in manufactured good

most research disputes this claim, but govs believed it

belief that industrialization wouldn’t happen by itself, required “big push” by governments:

• coordination problems: you need consumers/costumers -> will only work if there is a lot of industrialization (then you create your own consumer base) + industries require other industries: you need inputs (e.g. cement plant necessary for building buildings)
• infant industry arguments: on the onset industrialization is not competitive, you need to produce enough (e.g. with airplanes) + expertise and skill: the longer they are doing it, the more succesful they will be (so: argument that industry should be protected for some time so that they can develop = protectionism does not have to be forever)
  *book calls these: complementary demand and pecuniary external economies
• need for government provided infrastructure

-> without these, industrialization unlikely

!this is not just in developing world, e.g. also Japan and Germany developed industrially with a lot of gov intervention

Question 10

interests-based explanations for ISI - who benefits/loses from ISI?

after independence, who were the winners from globalization?

Answer 10

trade politics in developing countries dominated by urban-rural cleavage

generally, developing countries are abundantly endowed with land and poorly endowed with capital

• agriculture = land-intensive sector + export-oriented
• manufacturing = capital-intensive + import-competing

-> land owners should be pro free-trade
-> owners of capital should be anti-free trade

Question 11

who held political power?

Answer 11

pre-WW2 = land-owners (abundant factors) had political control (through less than democratic means)

depression + WW2 = led to price shocks and closed markets

• state had to produce their own goods
• land-owners lost income because of tough times
• capital and labor grew as political forces (bc of their new economic importance)

after WW2 = capital (and some labor) now had political control and thus imposed protectionist (ISI) measures to maintain their incomes

Question 12

how did ISI perform?

Answer 12

easy ISI -> relative growth rates in all developing regions

eventually growth per capita and exports high in East Asia and the Pacific, but not elsewhere

• East Asia: 5.3 (1965-1990), 7.2 (1985-1995)
• others: between 0 and 2, to 3

Question 13

East Asian Model

Answer 13

= Export-Oriented Industrialization

After WWII they adopt “easy”-ISI

Late 50s-Early 60s: shift emphasis to exports

• Forced manufacturers to worry about international competitiveness
• Invested in domestic industries that were profitable in world markets (LA & Africa didn’t)

Path to development: Labor intensive -> capital intensive -> technology and skill intensive
- labor -> capital intensive pivot only when the industry was ready for export, when it was competitive

Relied on protectionism for their domestic markets (infant industry argument)

BUT allowed selective liberalization to lower costs for “critical inputs” (just like Latin America)

Also benefited from a stable macroeconomic environment:

• Low inflation (helped encourage savings)
• Fairly valued exchange rate (helped promote exports)
• Conservative fiscal policies (didn’t run deficits that required sovereign borrowing)

Question 14

why did the Asian “Tigers” reform and not the states of Latin America

Answer 14

One explanation: Interests and Institutions

• “losers” from globalization gain power with Great Depression/World Wars worldwide: industrialized countries were not producing as much
• WWII decimated the political power of existing interest groups in Asia: lot of capital in Asia was destroyed unlike in Latin America = In Asia, they start from a clean slate
• In Latin America, interest groups remain intact: “losers” of globalization remain in power18

Question 15

why didn’t states move away from ISI quicker:

Answer 15

politics:

• leaders wanted to remain in power
• good politics is not the same as good policy (would be export oriented industrialization)

leaders that tried to adopt policies against the interests of their political supporters bc that was eco better, but were removed from power or threatened to be removed from power

• e.g. when Ghana’s prime minister attempted to devalue the currency in 1971 to address the current-account deficit, the resulting rise in prices for urban consumers contributed to his ouster by a military coup

ISI persisted not bc it was good policy but bc those in political power would lose from liberalization

• workers grew dependent on the manufacturing industries and subsidies
• farmers (who would benefit) lost power and couldn’t support politicians that would adopt export-oriented approaches
• ISI became entrenched

East Asia didn’t have this problem bc WW2 provided a cleaner slate

Question 16

how did states move away from ISI?

Answer 16

states financed ISI through marketing boards, but also sovereign borrowing,

trade imbalances and debts couldnt last forever

eventually Latin-American and Sub-Saharan African countries experience debt crises (80s)

• creditors stopped financing loans and politicians couldn’t provide the goodies that individuals had grown accustomed to

IMF and WB “washington consensus” = made loans conditional on adopting neo-liberal policies

Question 17

core take-aways

Answer 17

two divergent policy paths:

1. import substitution industrialization
2. export oriented industrialization

ISI and EOI adoption are a product of domestic interests/institutions, economic ideas and global forces

• great depression, WW2
• IMF intervention in 80s/90s

good politics is not good policies

• leaders (eventually) knew ISI wasn’t a strong path to growth but couldn’t adopt reforms without losing office

Question 18

economic coercion

Answer 18

= use of state’s economic power, rather than military power, as a tool of foreign policy

goal = force another states to change policies or behavior

Question 19

5 forms of economic sanctions:

Answer 19

1. trade sanctions (most common)
   - export sanctions (e.g. stop exporting inputs to maintain oil pipelines to Russia)
   - import sanctions (close of market from imports of the country you are sanctioning)
2. aid
   - positive (incentivize to change behavior to aid, but with sanction it is more likely negative) or negative (withdraw aid)
3. finance
   - lending and investment restrictions
   - positive (offer more if a country changes its behavior) or negative
4. currency (monetary)
   - destabilize the value of country’s currency (if a central bank has a lot of a specific currency, it could sell it all at once and thereby tank its value)
5. asset targeting
   - seizure of a country’s or individuals’ assets (e.g. airplanes)
   - often also freezing international bank accounts leaders

further distinction =

• unilateral = one state imposes sanctions
• multilateral = many states impose sanctions: the more the better bc few alternative markets

Question 20

western sanctions against Russia

Answer 20

2023 tough year for Russia: sanctions started to bite

but recently: GDP seems to have restored (image is kind of distorted: all from military products??)

failed bc Russia still has lot of markets: countries would rater have cheap shit than take part of sanctions

Question 21

sanctions and (inter)dependence

Answer 21

sanctions usually require (inter)dependence

• existing ties or dependence on another country is (often) necessary for sanctions to be useful

the US and EU give aid to many countries and have large consumer markets that are a magnet for imports
- many countries are dependent on their aid and market

!domestic economic cost sanctions:

• with interdependence comes mutual costs
• sanctions hurt the target state but also hurt the sending state
• lost trade and investment
• winners and losers are sometimes politically important constituents
• sanctions can be costly signals if they impose a significant cost on the sender (the more it hurts the more resolved/serious the sender is)

Question 22

do sanctions work?
do they force countries to change their behavior?

Answer 22

no?
: many in the policy community believe sanctions are ineffective: often they don’t achieve their goals
- are they right or do they have bad quantitative reasoning skills?

Haubauer, Schott & Elliot (1990, 2009): Economic Sanctions Reconsidered

• collected data on each imposition of sanctions and stated goals
• found that 34% of sanctions have been effective
  -> is it worth it?

Pape (1997): economic sanctions do not work

• but wait: most ecnomic sanctions compliment military threats/actions
• when we consider only economic sanctions, only 4% is effective

PROBLEM: only look at cases where sanctions actually occurred -> overlook the effect of threatening to sanction

• we see sanctions when threats don’t work

imposition is the failure of a threat: we have a selection bias problem in observing only imposition effectiveness

• if sanctions get states to change behavior, simply e threat of sanctions should do so
• states should be capable of determining, before imposition, the costs of sanctions > cost of policy change
• succesful sanction events should end at the threat stage

Question 23

to sanction or not to sanction (slide 32 picture)

Answer 23

sender -> do nothing = status quo ante

sender -> threaten sanctions -> target can back down without sanctions being imposed (target acquiescence) OR it can stand firm

target stands firm -> sender can back down (sender acquiescence) or can impose sanctions

if the threat is credible/bad, you should never get to actual sanctions

Question 24

why do we see sanctions then?

Answer 24

miscalculation by the target

• thought costs of sanctions for target < cost of policy change
• imposed sanctions can eventually work if the cost > cost of policy change

miscalculation by sender:

• thought costs of sanctions were higher than cost of policy change -> sanction not big enough (miscalculated how certain the target was)

resolute target: is never going to back down, but sender has alternative goals other than trying to alter behavior

• make an example
• demonstrate meaningful threat
• appease domestic audience
• punishment
• deprivation of important military equipment (stop exports)

Question 25

the costs of sanctions (for target state)

Answer 25

costs often fall on average citizens

• often intentional as senders hope the people will overthrow or put pressure on the regime
• e.g. US sanctions on Iraq 1990s: food prices increased x25 -> 100k-227k deaths + did not lead to uprising

elites can benefit from sanctions (through corruption):

• they have a monopoly on essential products and can control black markets
• e.g. corruption in UN food for oil program (Iraq): traded oil for food stocks meant to alleviate hunger, but there was corruption (Iraqi officials were making profits by controlling what food got in the country and selling it)

unless violent uprising, this will make sanctions inefficient: the elites agains twho the sanctions are are beneficial for elites

Question 26

rethinking the imposition of sanctions: comprehensive sanctions vs targeted sanctions

Answer 26

comprehensive = target an entire economy (impose widespread costs)

targeted sanctions = direct costs on policymakers or key supporters of the government

• e.g. 300$ million Yacht of Sanctioned Russian Oligarch seized

targeted sanctions -> hard to tell if it works better, it is more humane but maybe less effective

• anecdotal evidence that in a few cases it might have mattered: Libya, Angola

comprehensive sanctions probably work better on democracies, bc it attacks the voters -> change political change

Question 27

limits of economic coercion

Answer 27

• “weaponized interdependence”: countries can pivot away from your market/economy = avoid interdependence with countries that abuse eco relationships
  = more sanctions -> less effective

e.g. US/China abuse of eco leverage may backfire int he long run

some problems so fundamental to a regime’s survival that eco power is not sufficient

• North Korean Nuclear Weapons: believe that only reason they still exist is that they have nuclear weapons (otherwise invasion South Korea)
• US sanctions on Cuba: they required regime change, which is a huge ask, esp in autocratic regime
• Russia backing down from Ukraine War: it is too important for identity

human rights sanctions can make repression worse when leaders see them as threat to their political survival

• though some success stories: Apartheid South Africa (partially ended bc economic sanctions)
• sanctions against human rights violations

Question 28

take aways sanctions

Answer 28

• sanctions come in many forms
• impossible to determine sanction effectiviness by looking at the effect of imposition : threats matter
• sanctions require dependence and thus often imply costs at home
• there are important limits to economic coercion

Question 29

Prebish-Singer Hypothesis:

Answer 29

Free trade does not benefit developing countries
(based on diff in elasticity in the market)

developing countries exports are commodities like agriculture or metals, as world becomes richer, the growth and demand for these products is not that strong (if you are richer: you will not eat that much more food, you will start buying stuff like electronics, clothing = not for basic needs, but nice to have = tend to be produced by industrialized countries)
global development (becoming richer) -> demand for manufactured goods + lower demand for commodities

slide: Developing countries’ terms of trade (price of exports vs. price of imports) diminishes over time because demand in primary commodities is less elastic than demand in manufactured good
most research disputes this claim, but govs believed it

Question 30

random shit from reading

Answer 30

state-led dev. policies = domestically ISI + internationally, push for changes in the GATT-based trade system to address trade imbalances

• United Nations Conference on Trade and Development (UNCTAD) 1964, developing countries—the Group of 77—demanded fairer trade terms, including commodity price stabilization and financial aid to counterbalance declining trade terms
  -> GATT Part IV acknowledged developing countries’ needs but brought limited practical gains (still in favor of developed states)

easy ISI = expected to lead to shift towards manufacturing + increase human capital manufacturing + increase wage-based labor

Secondary ISI was promoted through government planning, investment policy, and trade barriers. Governments employed 5-year plans

marketing boards = taxing farmers in order to subsidize industrial projects

neoliberalism = skeptical of state ability to allocate resources efficiently + trusts in market mechanisms: advocates for state’s withdrawal, reduction of trade barriers + reliance on markets to foster globally competitive industries

• ! contemporary development consensus = underscores the necessity of robust political and economic institutions to support development.

ISI created opportunities for rent-seeking, with government-controlled import licenses generating profits for those who could obtain them -> gov officials and private actors engaged in rent-seeking resisted efforts to dismantle ISI

Scholars debate whether East Asia’s achievements stemmed more from market-friendly policies (neoliberalism) or state-led industrial strategies

• neoliberalism -> stable eco environments, low inflation, stable exchange rates, conservative fiscal policies, high savings and investment rates
• state-led appraoch -> phased/staged industrialization strategy = advancing to heavier industries with gov intervention, protectionism and incentives to foster competitiveness

Question 31

(reading but not in lecture: contemporary development consensus)

Answer 31

= underscores the necessity of robust political and economic institutions to support development.

1980s = neoliberalism supplanted structuralism as the guiding economic development philosophy, with contemporary consensus: a renewed emphasis on the role of good political and economic institutions

Question 32

reading: shift from structuralism -> neoliberalism in the 80s propelled by:

Answer 32

1. 1970s ISI began causing eco imbalances -> need for reform
   - gov budget imbalance: ISI reliance on gov intervention -> budget deficits -> creation State Owned Enterprises also running deficits + sustained with state money (also gov deficits bc it subsidized essentials to get support urban residents)
   - current account deficits: more import (machinery and parts) than export (inefficiency + non-competitive)
2. 1970s East Asian economies (with neoliberal strategies) surpassed development rates of other countries
3. eco crisis early 1980s compelled gov to undertake reforms (IMF and WB pushing for neoliberal models)
   - crisis bc developing countries were relying on foreign loans, lenders began to doubt they could pay it back

(many governments maintained overvalued exchange rates, which made imported goods cheaper domestically and discouraged exports by raising domestic prices in foreign markets. This pricing imbalance encouraged imports over domestic production and created obstacles for domestic producers in international markets, leading to rising imports without a matching export base.)