Trade Policy In Developing Countries Flashcards
Until 1970s what was economic development thought to heavily depend on
Manufacturing - thus trade policy was to protect domestic manufacturing from international competition (import-substituting industrialisation)
But since 1980s trade liberalisation benefits have been highlighted.
What was East Asia policy
Policy to promote exports in targeted industries (export-oriented industrialisation, EOI)
Import substituting industrialisation (ISI)
How did this come about
Division of labour - less-developed countries largely exported primary products, while importing finished goods from EU and US
Prebisch view
That this would keep poverty in less-developed countries since exploited by rich.
Argued developing countries should break division of labour and promote domestic manufacturing and industrialisation, and limit competing imports
Import-substituting industrialisation relationship with protection
Higher protection - since ISI protects domestic sector from foreign competition
Effective rate of protection
measures how much
protection a tariff(or other trade policies) provides to
domestic producers.
Effective rate of protection
VT-VW )/VW
VW is value added at world price
VT is value added with trade policies.
Essentially difference over original
Reason for ISI
Infant industry argument - cannot initially compete with established competition, so protect allow them to compete internationally
Economic development (not encourage manufacturing) was the ultimate goal of the ISI policy:
Did it work?
No, companies adopting import-substituting industrialisation grew slower than others.
Also aggravated income inequality and unemployment
Why ISI unsuccessful?
Low imports due to protection
Low exports since countries drew resources away from actual or potential export sectors. Substituting for imports also meant discouraging exports
New industries did not become competitive
Complex, time consuming regulations e.g quotas
It set high tariff rates for consumers and firms that needed imported components for their products
Promoted inefficiently small industries. Domestic market wasn’t large enough (to exploit EOS fully)
Why did it not work
Poor countries lacked skilled labour; trade policies did not solve this.
ISI policy e.g quota can allow inefficient sector to survive, but cannot directly improve efficiency
Problems with infant industry argument
Wasteful on resources, and may never grow up or become competitive with protection (complacency traps)
2 arguments for why market failures prevent infant industries from becoming competitive
Imperfect financial asset markets
Problem of appropriability
Imperfect financial asset markets
as a reason for infant industry failure to become competitive
Poor financial laws and markets (lack of property rights in particular), firms cannot save or borrow to invest in production
Problem of appropriability
Firms may not be able to PRIVATELY appropriate benefits of their investments if they are PUBLIC goods and there are a lack of property rights
Not worth it if invest costs to gain knowledge, and people can free-ride and use the knowledge if their ideas aren’t protected by property rights
