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
