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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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