Trade & Development, Sanctions Flashcards
What is ISI?
- 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)
The stages of ISI/EOI
Everyone starts with easy ISI:
- Domestic manufacturing of relatively simple consumer goods for the home market
– Technology and machines easily acquired from abroad
– Relies on low-skilled labor
What are the options available once easy ISI is exhausted?
- Start exporting easy ISI products to the world (East Asian Model) = Export Oriented Industrialization
- Secondary ISI: manufacture less simple goods for the home market (eg. cars) (Latin American Model)
Government policies to promote (secondary) ISI
- Trade barriers
- Investment in activities the private sector would not produce:
– Roads, transportation networks, electricity, telecommunications
– Large-scale operations - steel plants, auto plants - State-owned enterprises (and mixed-owned)
– Chemical, telecommunications, electricity, railways, metal fabrication - Tax policies
– “Taxed” agricultural exports through “Market Boards”
– Marketing Board: purchased crops from farmers at below-world market prices, then sell them on the world market at world market prices
“Neo-liberal” criticism of ISI
- States are bad planners
– They can’t foresee which industries will be competitive and which will be successful
– States are poor at distributing resources efficiently - Government had to cover industry losses
– Created budget deficits
—> 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 economic ideas behind ISI: Structuralism
- Dominant in Development Economics:
– Industrialization -> Development - Prebish-Singer Hypothesis: Free trade does not benefit developing countries
– 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 goods
– Most research disputes this claim, but governments believed it (initially) - Belief that industrialization wouldn’t happen by itself, required “Big Push” by governments
– Coordination problems
– Infant Industry Arguments
– Need for government provided infrastructure
Who benefits/loses from ISI?
Generally developing countries are abundantly endowed in land and poorly endowed with capital
- Agriculture is the land-abundant sector (export-oriented)
- Manufacturing is the capital-abundant sector (import-competing)
- So land-owners should be pro-free-trade
- Owners of capital should be anti-free-trade
Who held political power pre-during-post WW2?
Pre WW2:
- Land-owners (abundant factor) had political control (through less than democratic means)
The depression and WW2: led to price shocks and closed markets:
- State had to produce their own goods
- Land owners lost income because of tough times
- Capital ad labor grew as political forces
– Because 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
ISI in Latin America
How did they pay for ISI?
- Through marketing boards, but also sovereign borrowing
- Did they pay it back? Not all of it
Latin American debt crisis
- Starting in 1982 (the lost decade)
- States lost access to global credit markets when they couldn’t repay their loands
- Had dramatic consequences on their ability to manage the economy
- No longer can they fund or subsidize unprofitable industries
IMF intervene and forces reform
- Bails out countries with burdensome debts
- Forces them to abandon ISI and adopt the “Washington Consensus”
Export Oriented Industrialization (East Asian Model)
- After WW2 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 and Africa didn’t)
—> Path to development: labor intensive -> capital intensive -> technology and skill intensive - Relied on protectionism for their domestic markets
- BUT allowed selective liberalization to lower costs for “critical inputs” (just like LA)
- 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)
Why did the Asian “Tigers” reform and not the states of Latin America?
Interests and institutions (one explanation):
- “Losers” from globalization gain power with Great Depression/World Wars worldwide
- WW2 decimated the political power of existing interest groups in Asia
– In Asia, they start from a clean slate
- In Latin America, interest groups remain in tact
– “Losers” of globalization remain in power
Why didn’t states move away from ISI quicker?
Politics:
- The primary motivation of leaders is to remain in power
- Good politics =/= good policies
- Leaders that tried to adopt policies against the interests of their political supporters were removed (or threatened with removal) from office
- ISI persisted not because it was good policy but because 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 because WW2 provided a clean slate
How did states move away from ISI?
- 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
- The IMF and World Bank made loans conditional on adopting neo-liberal policies
– Known as “the Washington Consensus”
What is economic coercion?
- Refers to the use of a state’s economic power, rather than military power, as a tool of foreign policy
- Goal: force another state to change policies or behavior
Five forms of economic sanctions
Trade sanctions (most common)
- Export sanctions or import sanctions
Aid
- 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 (or individual’s) cases
Further distinction on economic sanctions
Unilateral
- One state imposes sanctions
Multilateral
- Many states impose sanction - the more the better as there are few alternative markets
How sanctions usually require (inter)dependence
- Existing ties are 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 of sanctions
- 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
– The more it hurts the more resolved the sender is
Arguments that sanction do not work
- Many in the policy community believe sanctions of ineffective
– Are they right or do they have bad quantitative reasoning skills - Haubauer, Schott, and 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
– Most economic sanctions complement military threats/actions
– When we consider only economic sanctions, only 4% are effective
Imposition is the failure of a threat (sanctions)
Drezner (2003), Lacy and Niou (2004)
- We have a selection bias problem in observing only imposition effectiveness
- If sanctions get states to change behavior, simply the threat of a sanction should do so
- States should be capable of determining, before imposition, if the costs of sanctions > the cost of policy change
- Successful sanction events should end at the threat stage
How come we still see imposition if it’s simply the failure of threat? (sanctions)
- Miscalculation by the target
– Target through costs of sanctions for target < the cost of policy change
– Imposed sanctions can eventually work if the cost > cost of policy change
—> Hovi et al (2007) “When do Imposed Economic Sanctions Work” World Politics - Miscalculation by sender
– Sender thought: costs of sanctions for target > the cost of policy change - Resolute target
- Sender has alternative goals, Baldwin (1985
Other possible goals of sanctions that is not policy change
There is no reason that policy change should be the only, or most important, goal or reason to impose sanctions
- “Making an example” (a wider audience)
- Demonstrate meaningful threat
- Appease domestic audience
- Punishment
- Deprivation of important military equipment
The costs of sanctions (for target state)
- The costs of sanction often fall on average citizens
– This is often intentional as senders hope the people will overthrow or put pressure on the regime
– UN sanctions on Iraq 1990s
—> Food prices increases 25 times over 5 years
—> 100k-227k deaths (many young children) 1991-1998 - Elites can benefit from sanctions
– They have a monopoly on essential products and can control black markets
– Corruption in UN Food for Oil Program (Iraq)
Comprehensive vs Targeted Sanctions
- Comprehensive sanctions target an entire economy - and thus impose widespread costs
- Policymakers have started to favor targeted sanctions that impose direct costs on policymakers or key supporters of the government
