Colonialism, Trade and Development Benjamin Graham Lecture 10: Trade and Development Benjamin Graham

Lecture 10: Trade and Development Benjamin Graham Today’s Plan Reading quiz Trade and Development Lecture 10: Trade and Development Benjamin Graham

Lecture 6: Barriers to Trade Benjamin Graham Reading Quiz (1) What kinds of trade problems do developing nations face in seeking to reap the gains from trade?  A. Problems related to having their exports concentrated in only one or a few primary products.   B. Agricultural export subsidies of advanced nations.  C. Tariffs on agricultural products and textiles D. A and C E All of the above Lecture 6: Barriers to Trade Benjamin Graham

IR 213: Introduction Benjamin Graham Quiz (2) Which of the following is not considered a primary product? Raw materials Fuels T-shirts Agricultural goods  IR 213: Introduction Benjamin Graham

Lecture 6: Barriers to Trade Benjamin Graham Reading Quiz (3) If advanced nation’s wages are forced down by competition from countries with lower labor costs and abusive labor conditions, this is called A. Elasticity of Labor B. Cost and Demand Differences C. Social dumping D. Labor subsidization E. Labor darwinism Lecture 6: Barriers to Trade Benjamin Graham

Lecture 7: Domestic Politics of Trade Benjamin Graham Some big think In groups, please write down at least one benefit and at least one cost of each of the following strategies. In each case, identify who is harmed (for the cost) and who is benefitted (for the benefit) Total trade openness (i.e. removal of all tariffs, quotas, and subsidies) Subsidizing/protecting key industries Big government safety net (i.e. unemployment insurance, job retraining, welfare, social security, government healthcare, etc.) Lecture 7: Domestic Politics of Trade Benjamin Graham

Lecture 7: Domestic Politics of Trade Benjamin Graham Colonial Legacies Many of todays poor countries are former colonies But not all former colonies are poor It matters who you were colonized by and how you were colonized Economic institutions Political institutions Infrastructure Human capital Lecture 7: Domestic Politics of Trade Benjamin Graham

The Colonial Archetype Colonial government: Low investment in infrastructure or human capital Produce raw materials (mining, agriculture) Trade exclusively with colonial metropole on unfavorable terms (mercantilism) Lecture 7: Domestic Politics of Trade Benjamin Graham

Legacies of Colonialism Colonies were governed better where the colonists actually resided themselves Less malaria -> less colonists dying -> more colonists staying US, Canada, Australia (genocide) and South Africa (Apartheid) Colonists continued to rule after colonial ties ended. Lecture 7: Domestic Politics of Trade Benjamin Graham

If nothing else, hope that you were colonized by the Brits The Brits hired locals into their civil service Developed local capacity & human capital When they left, this civil service persisted India is a prominent example: Hundreds of languages, 30 of which have at least 1 million speakers, several major religions, huge regional economic imbalances Picture ruling all the Americas as a single country -- only harder Also, the common-law system and English Lecture 7: Domestic Politics of Trade Benjamin Graham

Better or worse colonizers The core questions: Was there investment investment in education and infrastructure? Were there efficient courts, rule of law, etc? Did the protection of these courts extend to locals, or just colonizers? Did these institutions survive when the colonizers exited? Lecture 7: Domestic Politics of Trade Benjamin Graham

Development after Decolonization Developing countries export raw materials, import manufactured goods “Terms of trade” favor rich countries: at the time, raw materials (commodities) were becoming cheaper relative to manufactured goods. Powerful MNCs often struck deals with poor-country governments that were not good for the developing country. Decolonization was an economic disappointment Lecture 7: Domestic Politics of Trade Benjamin Graham

Development after Decolonization Neocolonialism Dependency Theory: “Core” wealthy states enrich themselves at the expense of “peripheral” states International division of labor with unskilled labor at the periphery and skilled labor at the core Peripheral states cannot develop due to their place in the “World System” System is static and peripheral states cannot join the core Poverty at the periphery is necessary to sustain wealth at the core Recommendation: Poor states should withdraw from the global economy Import-substituting industrialization (ISI) Lecture 7: Domestic Politics of Trade 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 Some big think In groups, please write down at least one benefit and at least one cost of each of the following strategies. In each case, identify who is harmed (for the cost) and who is benefitted (for the benefit) Total trade openness Subsidizing/protecting key industries Big government safety net 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