ECON-313 INTERNATIONAL ECONOMICS Trade Policy in Developing Economies Bulent Temel

Learning points. How did developing economies develop in the 20th Century?. How should they develop in the 21st?. What is import-substitution policy, infant industry argument, export-orientation, free trade?

How did developing econs develop? M-substitution X-orientation Free trade

Import substitution = Protecting domestic manufacturing sector against foreign competitors until they become internationally competitive (Infant industry argument)

How to protect?. Increasing tariffs. Import quotas. Regulations on imports. Subsidies to manufacturers. Exchange rate controls

Tariffs = Taxes on imports Impact: More expensive import products More chances for cheaper products

Import quotas = Restricting the volume that can be sold in the domestic market Impact: Larger unsatisfied local demand for domestic producers Larger market share

Regulations on imports = Environmental, economic and health related rules and laws imposed on import products Impact: Fewer foreign products qualify Larger market for domestic producers

Subsidies to manufacturers = Providing capital or reducing tax rates for domestic manufacturers Impact: Domestic manufacturers can cut their prices and become more competitive against foreign competitors

Exchange rate controls = Fixing the value of local currency at a low level Impact: Foreign (domestic) products remain expensive (cheaper) for domestic (foreign) consumers Smaller imports, larger exports

The role of ¥/$ exchange rate in China-US economic relations

An example of change rate controls to boost trade China. (Yuan/$ rate was pegged for decades) Impact: Chinese products that remained very cheap for American consumers dominated the US econ.

Why protect? 1) In dvlping econs, capital markets may be imperfect (they dont provide venture capital) 2) Appropriatibility problem (First investment requires high costs like infrastructure that followers will not pay for)

Problems with import substitution 1) Investing in a capital-intensive industry may be premature in a labor-intensive econ High opportunity cost 2) Wrong industries can be protected National resources are wasted on industries that did not need help

Problems with import substitution 3) Protection Competitive manuf sector Competitiveness: f(Entrepreneurship, skilled labor, mgmt competence,...) 4) Protection Motivation to improve efficiency Higher domestic prices than import prices

Problems with import substitution 5) In dvlpng econs, dom markets may be too small to allow scale econ or profitable competition ( Expensive and low quality dom products) Q: Restricting imports = Restricting exports?

1965+: Export-based manuf. = Restrict imports, and manufacture to export to developed econs. By: tariffs, quotas, X subsidies.

1965+: Export-based manuf. Ex: HPAEs (High Performance Asian Econs) = 60s+: HK, Taiw, Singap, S Korea; 70s+: Malay, Thai, Indon; 80s+ China. Avg growth: 8-9% betw In HK & Sing: Exports > GDP

South Korean GDP ( )

1980s+ Neoliberalism = protection, regulations Impact: int trade, dvlpngs exported more manuf goods and less agric/mining prs. Outcome: Some grew faster, some slower. Income inequality and corruption in all.

Free trade vs. protectionism debate

Conclusion Recipe for growth in dvlping econs in a globalized word today:. Save. Invest in educ.. Buy domestic. Maximize X. Minimize M (cheap, locally unavailable inputs only)

Why? Savings $ in fin system Lower cost of borrowing Investments, growth, employment

Why? Investments in education (Cost of doing so < Returns from it in terms of efficiency and effectiveness)

Why? Buying domestic $ stays in dom econ Effective demand Inv, growth, employment

Example: If your consumption decision allows $0.25 to stay in domestic econ, and everyone spends 80% of their income to domestic goods and services... Then, your decision leads to creation of $1.14 in effective demand.

Why? Maximal exports 1) Maximal markets (TR pop: 70 Million, World: 7 Billion) 2) Access to faster growing economies (Polands growth rate: 4%, but Chinas: 10%)

Why? Imports = National resources shifting abroad Justifiable only if it is for cheaper, locally unattainable inputs Should be minimized when it is for consumption (final goods)

Controlled trade argument: 5/9/8/7/ /cagdas_kalkinma.pdf 5/9/8/7/ /cagdas_kalkinma.pdf Uncontrolled (free) trade argument: ation_id=annotation_726592&feature= iv&src_vid=6qqG6OurHaM&v=J5magu X5x8c ation_id=annotation_726592&feature= iv&src_vid=6qqG6OurHaM&v=J5magu X5x8c Further thinking