The four periods
1950s-1960s: Import substitution
with strong government
intervention
• Import substitution: growth and trade
strategy where a country begins to
manufacture simple consumer goods
oriented towards the domestic market in
order to promote the domestic industry. It
presupposes the imposition of protective
measures that will prevent entry of
imports that compete with domestic
producers.
Rationale
1. Independence (from colonizers) seen as
opportunity to modernize. Instead of
continuing to export commodities to and
import manufactures from DCs: shut out
manufactured imports from DCs and start
producing those googs domestically.
2. Historical experience of DCs, which used
import subs strategies in their initial
phases of development.
3. Export pessimism in the 50s-60s caused
by ↓Px and deterioration in balance of
payments plus expectation of long term
deterioration of ToT.
4. Avoiding BoP problems through
curtailment of imports.
5. Infant industry argument.
Import-subs policies and
consequences
1. High protection of dom firms, inefficiency
and resource misallocation. Lack of
competition→ high costs + inefficiencies
+ high prices paid by consumers.
2. Overvalued exchange rates, making
imports of capital goods cheaper and X
more expensive.
Negative effects:
• Capital-intensive methods→ urban UE +
growth of informal sector
• X in agricultural sector more difficult
→worsen rural poverty
3. Excessive gov intervention, leading to
misallocation of resources and
inefficiencies in production.
4. Neglect of agriculture → ↑need for food
imports
5. Deterioration of BoP and debt position
due to:
a) ↑need for M of cap equipment and
intermediate goods
b) ↑need for food imports
c) Outward flow of financial capital caused by
repatriation of profits by MNCs and wealthy
elites seeking safety for their financial
investments
6. Encouragement of cap-intensive
production methods, but no effort to ↑
access to credit or support users of
labour-intensive technologies.
7. Negative impacts on employment and
income distribution.
8. Limited possiblities for growth over the
longer term on the basis of import-subs,
due to inefficiencies of production and
misallocation of resources. For example,
many firms enjoying protection never
became efficient.
9. More room for corruption favoured by
strong government intervention
(payments of bribes to gov officials in
order to secure particular policies).
• Problems with import-subsitution became
apparent in the 60s:
– India, Egypt reacted by ↑protection for cap
goods imports and other intermediate goods
in order to allevaite BoP problems.
– Others (Brazil, Israel, Mexico, Singapore,
South korea, Taiwan, Southern European
countries) moved towards export promotion.
1960s-1970s: Outward orientation
with strong gov intervention
• Export-led growth strategy: a growth and
trade strategy where a country attempts
to achieve economic growth by expanding
its exports.
• It is an outward-oriented strategy since it
looks outward towards foreign markets
and provides stronger links between the
domestic and global economies.
• Strong gov intervention necessary to help
countries develop a strong manuf sector
oriented towards exports.
• Most LDCs that turned to export
promotion had began their
industrialization with import-substitution.
The stronger export industries were in
many cases the ones that had received
protection.
• China, Hong Kong (more market-
oriented), Indonesia, japan, Malaysia,
Singapore, South Korea, Taiwan, Thailand
= Newly Industrializing Economies (NIEs)
or Asian Tigers.
Interventionist policies
• State ownership and control of financial
institutions, in order to provide subsidized
credit to the industries being promoted.
• Targeting of industries for export.
• Industrial policies to support export
industries: investment grants, production
subsidies to export industries, tax
exemptions, export subsidies...
• Some (selective) protection of domestic
industries.
• Requirements on MNCs in order to
maximize benefits of FDI: promotion of
R&D, transfer of targeted technologies
into the domestic economy, training of
dom workers, use of local inputs.
• Large public investments in key areas:
education and skills, R&D, transport and
communications infrastructure.
• Incentives for R&D by private sector for
high tech products.
1980s-1990s: Export-led with
Market Liberalization: Washington
Consensus
• Early 80s:
1. Poor econ and export performance in many
LDCs and high indebtedness
2. Shift in thinking about econ growth and
development inspired by neoclassical model,
which stressed importance of limiting gov
intervention and allowing private sector to
operate in a competitive free-market
environment. Outward orientation based on
free-trade.
• Based on ten economic policy items:
1.
2.
3.
4.
5.
Trade liberalization
No restrictions to new FDI by MNCs
Sound fiscal policy (no excessive borrowing)
Tax reform
Changing priorities of gov spending towards
health, education, infrastructure
6. Interest rate liberalization
7. Market-determined exchange rates
8. Privatization
9. Deregulation
10.Securing property rights
• Rationale: reliance on market forces and
free trade maximizes efficiency, domestic
and global allocation of resources and
economic growth.
• LDCs that have adopted these policies
include Argentina, Brazil, China, Chile,
India, Kenia, Sri Lanka, Tanzania, Turkey.
They began a process of ↓gov intervention
in the market.
• Strong influence of the World Bank and
the IMF, which lent these countries funds
on the condition of reorienting their
economies towards freer trade and freer
market.
Impacts of economic and trade
liberalization
1. Limited benefits for export growth and
diversification:
• Countries lost export shares in world
markets, especially in Africa
• LDCs did not succeed in diversifying their
production into manufacturing. Countries
that performed best were those that had
already developed significant export sectors.
Causes of these negative impacts:
a. Protectionist policies by DCs
b. Growing reliance on free market policies
2. Limited impacts on economic growth
• No hard evidence suggesting that a
greater outward orientation based on
freer trade during 80s, 90s has been
responsible for more rapid econ growth.
• Great variability in performance.
• Some economists see no link between
econ growth and trade liberalization.
• Some countries better able to benefit
from freer trade. Low income countries
perform the worst→ ↑inequalities
between rich and poor.
3. Increasing income inequalities and
poverty within LDCs. World Bank study
reveals that the correlation between
trade liberalization and income growth is
– Negative among the 40% poorest of the
population
– Positive among the higher income groups
So it helps the rich get richer and the poor
get poorer.
Reason: econ and trade liberalization give
rise to winners and losers.
WINNERS
Workers in exporting
industries
Workers in growing
formal sectors
Higher skilled,
educated people, with
more chances in the
competitive
environment
LOSERS
Less educated people
Poor people with no
collateral (unable to
obtain credit)
People in remote
areas with no
transport links to
markets
People in agriculture
People affected by
lower levels of social
protection
People forced from
the formal to the
informal sector ...
• According to int’al trade theory, free trade
originates overall gains that are likely to
be greater than the overall losses.
However, in the real world this rarely
occurs, with the result that some people
are worse off due to freer trade and freer
markets.
• Late 1990s: the Washington consensus
was called into question even by the Chief
economist of the World bank, Joseph
Stiglitz.
Late 1990s-2000s: Export-led
growth strategies with selective gov
intervention: The New
Development Consensus
• Gov.’s role in LDCs should be
complemented (not substituted) by
markets.
• Cuts in gov spending should not affect
spending on education, health and
infrastructure.
• Gov must support education, health and
infrastructure and R&D for both industry
and agriculture.
• Gov should pursue policies that promote
income equality and poverty alleviation.
• Gov must provide regulatory framework
for markets to work efficiently: regulation
of financial system and regulatory
framework for competition (to avoid
development of private monopolies.
• DCs must assist econ development by
↑foreign aid and providing increased
access to their markets by LDCs.
• Due to their special circumstances, LDCs
should receive special treatment by int’al
trade agreements regarding removal of
their protectionist measures.
Remarks:
• Unlike the strongly interventionist supplyside policies pursued by the Asian tigers,
that focused on direct support and
protection against competition, the New
Dev Consensus favours the establishment
of institutions and conditions that assist
firms to do well in a competitive market
environment.
Support for:
– R&D in targeted areas
– Vocational training and education
– Small firms
– Development of infrastructure
• Justification for industrial policies:
numerous kinds of market failures that
may prevent countries/markets from:
– Setting up the needed private firms
– Undertaking the necessary R&D
– Innovating
– Importing appropriate technologies