trade, government and growth

Question 1

what is the argument of infant industries?

Answer 1

it is a case for protectionist barriers.
The argument is for short term protection of an infant industry, given that:
* economies of scale take time to achieve, and
* learning-by-doing needs industry to be ‘doing’

Question 2

what are the two main factors for the government picking and protection future winners will be successful?

Answer 2

1. local capital markets are missing, distorted or underdeveloped,
2. where government administrators are efficient, accountable, and decision-making is transparent

Question 3

what are the requirements for an efficient financial market and why is this important??

Answer 3

perfect information, competition and free movement of capital
Such markets can convert uncertain business ventures into measurable risk, and thus put a value on the prospects of one investment compared to another.

Question 4

what is the relationship between infant industries and efficient financial market?

Answer 4

where markets are efficient, infant industry protection is not needed.
this is because the financial markets will be able to look into the future at the potential profitability of infant industries and raise the capital required if the prospects are bright. this is show by start ups in industries such as bio-tech and dot.com which had no difficulty raising billions on US financial markets

Question 5

what is a case study which shows how efficient financial markets might be missing?

Answer 5

the socialist government in Chile was overthrown and the free market system of general augusto pinochet took over. import tariffs and a variety of protectionist measures were removed, state industry was privatised and the financial sector was liberalised , interest rates were freed and many flexible credit instruments were created to cater for increasing customer demand
freed from government intervention, productivity of private chilean investment should theoretically rise. however much of the finance being created by local banks was required to fund privatisation, and privatising in a country with a small business elite meant concentrating ownership into an oligopolistic industrial structure that is not efficient. thus no new capital was constructed but it merely passed ownership. paper assets multiplied however the real capital remained no more productive. the country became indebted and the chilean crisis of 1981 occurred due to under developed financial markets

Question 6

when is short termism inevitable?

Answer 6

when the property rights are insecure, the political and economic climate is uncertain and the returns on speculation (not investment) are high

Question 7

what is the effect of short terminsim on infant industries?

Answer 7

if investors are not trusting enough to tie up their capital for years into the future or profits are not guaranteed to pay back investment in one or two years, then infant industries wishing to exploit economies of scale sometime in the future will not get started as no capital will be forthcoming.

Question 8

how can the effects of short termism be prevented for infant industries?

Answer 8

it can be prevented by government backing. governments administrations will need to be democratic, open and transparent so bad economic decisions can be reversed and better investments be made. this will provide the chance for infant industries to be identified and supported through its initial growth phase until they are large enough to face competition in an open international market place

Question 9

what is crony capitalism?

Answer 9

If governments make decisions behind closed doors, where political leaders can confer benefits on parties that pledge valuable support, then investment decisions will not reward economic efficiency and enterprise, just political expediency.

Question 10

what is rent seeking?

Answer 10

where businesses realise that it is better to invest in good relations with the government than take the risk to invest in some entrepreneurial start-up. Best of all is to secure govt contracts and sole licences that effectively create local monopolies for the politically well-connected business elite

Question 11

what is the effect of crony capitalism on infant industries?

Answer 11

infant industries may get started under crony capitalism however there is no guarantee that they will become efficient in the face of world competition. they may never grow up and demands for government subsidies or tariff protection may never go away. in order to keep these protection, they may devote some of their monopoly profits directly into the hands of the key ministers

Question 12

what are the economic arguments for import substitution industrialisation?

Answer 12

• Where there are significant externalities on the supply side (supporting industries) and on the demand side (employees become consumers)
• Where efficient financial markets are missing
• Where there are fractured, unconnected markets for labour, capital, land and enterprise
• Where open borders risk capital flight and a ‘brain drain’
• Where there is astute, incorruptible government…

Question 13

what is the flying geese paradigm?

Answer 13

there is an internal policy framework of import, import substitution production and then export. this leads to a product life cycle pattern of internal industrialisation as low value added business are gradually replaced by high value added buissnesses. the low value added businesses are then taken up abroad by other countries in a follow my leader fashion which become reverse imports of the lead country
this results in regional integration and increasing economic development

Question 14

what does the flying geese paradigm look like on a comparative advantage against time graph for a particular country?

Answer 14

it is multiple inverted U curves which shows how a certain industry gains a comparative advantage in a country and then a new comparative advantage rises. it begins with simple manufacturing such as textiles then it goes to a more difficult such as chemicals and so on

Question 15

what does the flying geese paradigm look like on a comparative advantage against time graph for a particular industry such as textiles?

Answer 15

there is multiple overlapping inverted U curves which shows how originally one country develops a comparative advantage in an industry then as it begins to develop a higher added value business, other countries will develop the lower value added business and the process repeats in a follow my leader fashion

Question 16

what are the critisms of the flying geese paradigm?

Answer 16

1. No theory of technology transfer and growth(more a description of a historical process)
2. Limited ‘reverse imports’ for lead countries(e.g Japan does not import from regional partners the goods it used to produce)
3. Import…production…export transition not always followed(the alleged sequence of follow-my-leader development was not followed by Singapore and Hong Kong)
4. Dependence on extra-regional, not intra-regional markets(dependence on selling to the US and European markets, and also importing technology, means this is not a regionally integrated, self-sustaining growth paradigm)
5. Leap-frogging (‘follow-my-leader’ does not explain the leap into prominence of China)
6. Too simplistic analysis of the way international trade has developed(the most important development in post-war international trade has been the rise in importance of intra-firm, MNC trade)

Question 17

what are external economies of scale?

Answer 17

There are economies of scale that apply as an industry, and not a firm,increases in size. as an industry grows, the firms experiences lower average costs.

Question 18

what are the advantages that the industry benefits from when the number of firms increases in a certain area>

Answer 18

• Ancillary or service firms come to support the industry
• Specialised skills build up
• Transport and communications networks may be upgraded by the local government.
• Knowledge spill-overs occur
• Increasing returns can lead to endogenous growth
• Income multipliers expand the market

Question 19

what are the effects of growth poles or cluster economies?

Answer 19

geographical concentrations in centers of excellence mean the incoming firm has lower average costs of production than a similar firm in another area. a virtous circle sets IP as firms move in to the locality, the more the industry expands, the more it attracts supportive resources, so the greater the productivity and lower the average costs of the participating firms.

Question 20

what might be the issue with economies of scale?

Answer 20

economies of scale might block out competition in areas where they are potentially more efficient at producing the good. for example imagine two countries. one country has more expensive resources but its industry is already operating on a large scale so its average cost curve is benefitting from economies of scale. now country 2 may have cheaper resources then country 1 and so potentially more efficient at producing this output. however it cannot get started because country 1 is already below the threshold costs of country 2

Question 21

what is the effect on the average cost curve from economies of scale?

Answer 21

the average costs curve is shifted downwards. output increases as AC decreases, making it even more difficult for other countries or regions to compete

Question 22

does overcrowding constrain growth?

Answer 22

growth poles such as london pull in new enterprise leading to rising property prices, traffic congestion, increased labour and transaction costs, overcrowded schools hospitals and public services. however one thing that is not limited in growth poles is enterprise. human creativity and ingenuity improves with competition and physical proximity. high prices signal the potential for high profits and induce more innovation to increase supply. necessity is the mother of invention, more problems mean more effort is expended to solve them