Development strategies

Inward vs outward-oriented In order to import all the manufactures needed for industrialization, LDCs have two options: 1.Encourage EXPORTS to pay for needed imports 2.Discourage IMPORTS whilst developing substitute domestic products

Export Promotion Encourage: Encourage: –Free trade in goods –Free movement of capital and labour MNCs are encouraged MNCs are encouraged Manufactures are promoted Manufactures are promoted Justified by: Justified by: –Increased output and growth arising from free trade: comparative advantage, economies of scale, increased competition, modern technology. –Success of Asian Tigers

Problem with this strategy: protectionism of DCs, very strong in those labour- intensive industries where LDCs have comparative advantage. Problem with this strategy: protectionism of DCs, very strong in those labour- intensive industries where LDCs have comparative advantage.

Import Substitution Encourages self-reliance in the production of manufactures Encourages self-reliance in the production of manufactures Tariff barriers against Imports, to protect home market Tariff barriers against Imports, to protect home market Factor movements of K and L are restricted Factor movements of K and L are restricted MNCs are restricted MNCs are restricted

Theoretical justification based on a critique of free-trade theory, whose assumptions do not account for UE, changing comparative costs, inappropriate technology and risks of over specialization. Theoretical justification based on a critique of free-trade theory, whose assumptions do not account for UE, changing comparative costs, inappropriate technology and risks of over specialization. Infant industry argument to justify protectionism. Infant industry argument to justify protectionism. Improvement of balance of trade with restriction of imports. Improvement of balance of trade with restriction of imports.

Evaluation of Outward-oriented strategies Benefits: those of international free trade Benefits: those of international free trade –Increased dom. production and consumtion due to specialization –Economies of scale –Greater variety and quality of g+s –Allows countries to acquire needed resources –Flow of new ideas and technology –Increased X + more efficiency = Larger growth rates

Greater growth → more resources to achieve economic development objectives Greater growth → more resources to achieve economic development objectivesObstacles If countries specialize in production and X of primary commodities: 1.Unstable X revenues due to price volatility (PED, PES <1) 2.Deterioration of ToT due to low YED for X. 3.Protection of farmers in rich countries may limit access of poor country farmers to rich markets.

If countries specialize in production and X of manufactured goods: 4.Protectionist policies imposed by DCs: – Prevent access to the large and rich markets – Discourage diversification of LDC into manufacturing and higher VA activities (tariff escalation, admin and technical barriers)

Can LDCs imitate the trade and growth strategies of the Asian Tigers? 1. The Asian Tigers faced lower trade barriers on their X of manufactures to DCs. Some trade barriers were increased during the 1980s, after the entry of East Asian exports into DCs markets. This was in order to protect domestic producers against low cost competing goods anddomestic producers against low cost competing goods and their workers against losing their jobs due to entry of low cost importstheir workers against losing their jobs due to entry of low cost imports

2. The Asian Tigers’ outward orientation was export promotion with strong gov intervention, whereas countries in the 80s opened to international trade on the basis of market- based policies. Interventionist supply-side policies played a key role in the development of manufacturing and higher VA production. LDCs that opened up to int’al trade in the context of market-based policies could not rely on government support for their export industries.

Concluding remarks 1. An outward oriented trade strategy is superior to an inward-oriented one. 2. Significant advantages in an outward- oriented strategy based on diversification of Xs into manufacturing and higher VA activities. 3. DC protectionism is a major obstacle.

4. Possible way out for LDCs: formation of regional trading blocs (avoids obstacles created by rich country protectionism). 5. Outward orientation likely to be more successful when accompanied by industrial policies.

Evaluation of market-led and interventionist strategies 1. Very strong gov intervention in the market discredited as strategy for int’al trade and growth. Agreement since the 2000s: market forces should play a significant role, with varying degrees of some gov intervention.

2. A market-led strategy with no gov intervention (Washington consensus) does not take into account the particular situation of LDCs. Such a strategy may lead to increased UE, persisting or increasing poverty, income inequalities, insufficient investments in education and health and infrastructure, use of inappropriate technologies...

3. Areas where gov intervention is necessary: Poverty alleviationPoverty alleviation ↓ Income inequalities ↓ Income inequalities Investments in health, education, infrastructure, tech transfer, establishment of R&D capabilityInvestments in health, education, infrastructure, tech transfer, establishment of R&D capability Some support for the private sectorSome support for the private sector Protection of the environmentProtection of the environment Sustainable developmentSustainable development Some protection of dom industries in initial phasesSome protection of dom industries in initial phases

3. Uniqueness of each country → strategies tailored to particular needs and conditions, in consultation with aid and development agencies 5. In earlier stages of development countries can benefit from more strongly interventionist strategies as they may lack the necessary institutions and legal framework required for the good functioning of markets.