Trade and Development (2): Import substitution vs. Export-oriented Benjamin Graham Lecture 10: Trade and Development Benjamin Graham

Lecture 10: Trade and Development Benjamin Graham Housekeeping Any questions about the exam? Midterm is on FRIDAY. No reading quiz today or tomorrow Lecture 10: Trade and Development Benjamin Graham

Lecture 7: Domestic Politics of Trade Benjamin Graham Review Why were you better off being colonized by the British? A. Have you seen King Leopold’s Ghost? The Belgians were horrific. B. The brits trained locals to serve in the civil service (i.e. the bureaucracy) C. The common law system has historically better for business because it adapts better over time. D. English is a convenient second language in the global economy E. All of the above Lecture 7: Domestic Politics of Trade Benjamin Graham

Lecture 7: Domestic Politics of Trade Benjamin Graham Review Economic development following decolonization was, generally speaking: A. A disaster – way below expectations B. A welcome respite after colonial oppression C. A runaway success Lecture 7: Domestic Politics of Trade Benjamin Graham

Dependency Theory over Time Dependency theory is Marxist in origin Like Marxism more generally, it provided a compelling explanation for a set of facts at one time But made bad predictions going forward Empirical problems for dependency theory Peripheral states can grow wealthy (and have) The poor countries that have developed most successfully have been primarily trade-dependent Import-substituting industrialization failed (by most measures) Lecture 7: Domestic Politics of Trade Benjamin Graham

Import-Substituting Industrialization Core prescriptions: Tax agriculture and subsidize key industries Protect those industries with high tariffs Aim for economic self-sufficiency (i.e. autarky) Rapid industrialization: By 1970s many developing countries are self-sufficient in manufacturing Costs: These industries are inefficient, produce low quality goods Temporary subsidies become permanent No gains from trade!!!! Lecture 7: Domestic Politics of Trade Benjamin Graham

Export-Oriented Industrialization Similar in many ways to ISI: Tax agriculture (also keep wages low), subsidize key industries But subsidize exports in particular “National Champions” model South Korea is the archetypical case Cheap labor provides the key competitive advantage Government investment helps develop higher value-added industries. But government intervention has its risks... Lecture 7: Domestic Politics of Trade Benjamin Graham

Checking Understanding In import substituting industrialization and export oriented industrialization, who gets taxed to fund government subsidies of selected industries? A. Other industries B. Farmers C. Banks D. Industrial workers via an income tax E. Sales tax on consumer goods Lecture 7: Domestic Politics of Trade Benjamin Graham

Checking Understanding What is the core advantage of export-oriented industrialization over import substituting industrialization A. ISI involves the government picking winners, leading to corruption. In EOI the government doesn’t pick winners. B. In ISI subsidies intended to be temporary can become permanent. This can’t happen in EOI C. In ISI, states give up most of the gains from trade. EOI is all about maximizing the gains from trade. Lecture 7: Domestic Politics of Trade Benjamin Graham

Lecture 7: Domestic Politics of Trade Benjamin Graham ISI didn’t die easily Theories don’t die just because the facts become inconvenient Entrenched domestic political interests The 1980s debt crisis sealed the deal The IMF essentially forced countries off of ISI Conditional loans: We’ll bail you out, but only if you adopt the policies we prescribe Lecture 7: Domestic Politics of Trade Benjamin Graham

The Washington Consensus Neoliberal economic policy Liberalize trade Privatize state-owned assets Fiscal austerity to fix current account deficits Open up to foreign capital and foreign investment Turns out, this hurts a lot Taking away the government safety-net in poor countries has high human costs “bitter medicine” that may not even work Economic pain = political instability Lecture 7: Domestic Politics of Trade Benjamin Graham

Lecture 7: Domestic Politics of Trade Benjamin Graham Group Questions There is a strong empirical finding that people with a college education, and especially people with a graduate degree, are more likely to support free trade. Why do you think this is? Lecture 7: Domestic Politics of Trade Benjamin Graham