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

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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