Lecture 6

Question 1

ISI definition

Answer 1

o Substituting previously imported manufactured goods with domestically produced goods
o As opposed to focusing on producing goods that can be exported to int. markets (export oriented industrialization)

Question 2

Easy ISI

Answer 2

 Easy ISI – domestic manufacturing of relatively simple consumer goods (beer, apples and soda) for home market
* Low skilled labour, easily acquired technology and machines from abroad
 Once you have exhausted ISI, two options
* Start exporting these easy ISI stuff (Asian model)
* Or secondary ISI

Question 3

Policies promoting secondary ISI

Answer 3

 Trade barriers
 Investment activities private sector wouldn’t produce
 State-owned enterprises
 Tax policies

Question 4

Neoliberal criticism of ISI

Answer 4

 States are bad planners
 Gov had to cover industry losses
* Created budget deficits, funded through borrowing
 Persistent trade imbalance (current account)
* More import than export

Question 5

Economic ideas behind ISI -structuralism

Answer 5

 Dominant in development economics; industrialization -> development
 Prebisch-Singer hypothesis; free trade doesn’t benefit developing countries
* Developing countries terms of trade will diminish over time, because demand in primary commodities is less elastic than demand in manufactured goods
 Belief that industrialization wouldn’t happen by itself, required big push by governments
* Coordination problems, infant industry arguments and need for government provided infrastructure

Question 6

Who held political power

Answer 6

 Pre WW1
* Land owners had political control
 The depression and WW11 led to price shocks and closed markets
* State had to produce own goods
* Land owners lost income because of tough times
* Capital and labour grew as political forces
 After WW11
* Capital had political control and imposed protectionist (ISI) measures to maintain incomes

Question 7

Latin American ISI

Answer 7

 How did they pay for ISI?
* Sovereign borrowing and marketing boards
 Debt crisis
* Starting in 1982
* States lost access to global credit market when unable to repay loans
* Had dramatic consequences on their ability to manage economy
* No longer able to fund or subsidize unprofitable industries
 IMF intervenes and forces reform
* Bails out countries with debts, but forces them to abandon ISI and adopt Washington consensus

Question 8

East Asian model

Answer 8

 They adopt easy ISI after WW11
 Late 50s early 60s, shift emphasis to exports
* Forced manufacturers to worry about international competitiveness
* Invested in successful domestic industries that were profitable in world markets
* Path; labour intensive -> capital intensive -> technology and skill intensive
 Relied on protectionism for domestic markets
 Allowed selective liberalization to lower costs for critical inputs
 Benefited from stable macroeconomic environment
* Low inflation, fairly valued exchange rate and conservative fiscal policies

Question 9

Why did Asian tigers reform and not Latin American states

Answer 9

 One explanation is interests and institutions
* Losers from globalization gain power with great depression/WWs worldwide
* WW11 decimated political power of existing interest groups in Asia, so they start from a clean slate
* In Latin America, interest groups remain intact, so losers from globalization remain in power

Question 10

Why didnt states move away from ISI quicker?

Answer 10

 Politics
* Primary motivation of leaders to remain in power
* Good politics is not equal to good policies
 Leaders who tried to adopt policies against interest of political supporters were removed from office (or threatened)
* Ghana example p. 136
 ISI persisted not because it was good policy, but because those in political power would lose from liberalization
* Workers grew dependent on manufacturing industries and subsidies
* Farmers who lost powers couldn’t support politicians that would adopt export oriented approaches
* ISI became entrenched

Question 11

How did states move away from ISI?

Answer 11

 Trade imbalances and debts couldn’t last forever.
 Eventually, creditors stopped financing loans and politicians couldn’t provide the goodies that individuals had grown accustomed to.
 In danger of losing power, they sought aid from the IMF and World Bank
 IMF and WB made loans conditional on adopting neo liberal policies (Washington consensus)

Question 12

Economic coercion

Answer 12

o Refers to use of a state’s economic power, rather than military power, as a tool of foreign policy
o Goal is to force another state to change policies or behaviour

Question 13

Five forms of economic coercion

Answer 13

 Trade sanctions
* Most common
* Export or import sanctions
 Aid – more on this later
* Positive or negative
 Finance
* Lending and investment restrictions
* Positive or negative
 Currency (monetary)
* Destabilize the value of country’s currency
 Asset targeting
* Seizure of a country’s assets

Question 14

Further distinction economic coercion

Answer 14

• Unilateral, one state imposes sanctions
• Multilateral, many states impose sanctions – the more the better as there are few alternative markets

Question 15

Sanctions require interdependence

Answer 15

 Existing ties or dependence on another country is often necessary for sanctions to be useful
 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

Question 16

Domestic economy cost

Answer 16

 With interdependence comes mutual costs
 Sanctions hurt the target state but also hurt the sending state
 Lost trade and investment
 These winners and losers are sometimes politically important constituents
 Sanctions can be costly signals if they impose a significant cost on the sender

Question 17

Sanctions dont work

Answer 17

 Many in the policy community believe that sanctions are often ineffective
 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 at achieving goals
 Pape (1997) Why Economic Sanctions do not Work
* But wait. Most economic sanctions compliment military threats/actions
* When we consider only economic sanctions, only 4% are effective

Question 18

Imposition is the failure of a threat

Answer 18

 Drezner (2003) and Lacy & Niou (2004)
 We have a selection bias problem in observing only imposition effectiveness
 If sanctions get states to change behaviour, simply the threat of a sanction should do so
 States should be capable of determining, before imposition, if the cost of sanctions -> the cost of policy change
 Successful sanction events should end at the threat stage

Question 19

Why do we see impositions?

Answer 19

 Miscalculation by target
 Miscalculation by sender
* Resolute target
* Sender has alternative goals
* There is no reason that policy change be the only, or most important, goal or reason to impose sanctions
* Appease domestic audience, making an example, demonstrate meaningful threat, punishment or deprivation of important military equipment

Question 20

Cost of sanctions for the target

Answer 20

 Costs of sanction usually fall on average citizen
* Often intentional
* UN sanctions on Iraq 1990s
 Elites can benefit from sanctions
* Monopoly on essential products and can control black markets
* Corruption in UN food for oil program (Iraq)

Question 21

Comprehensive vs targeted sanctions

Answer 21

 Comprehensive sanctions target an entire economy – and thus impose widespread costs
 Policymakers have started to favour targeted sanctions that impose direct costs on policymakers or key supporters of the government

Question 22

Do targeted sanctions work better?

Answer 22

 Hard to tell, recent phenomenon of post 9-11 world
 More humane, less effective – Drezner 2011
 Anecdotal evidence that in a few cases it might have mattered
 Comprehensive sanctions probably work better on democracies

Question 23

Limits of economic coercion

Answer 23

 Weaponized interdependence may lead to states seeking to avoid interdependence with those that abuse economic relationships, Farrel & Newman (2019)
 Some problems are so fundamental to a regimes survival that economic power is not sufficient
* North Korea nuclear weapons
* Russia backing down from Ukraine War
 Human rights sanctions can make repression worse when leaders see them as threats to their political survival

Question 24

Secondary ISI

Answer 24

Secondary ISI, start manufacturing less simple goods for home market (Latin American model)