1. Trade strategies for growth & development

2. Inward vs outward-oriented International trade strategies in LDCs have formed the basis of growth & development strategies, so one can hardly consider one without considering the other. To start industrialization, LDCs have two options: 1.Discourage IMPORTS whilst developing substitutes → import substitution / inward oriented strategies. 2.Encourage EXPORTS to pay for needed imports → export-led growth / outward oriented strategies.

3. Four periods 1950-60s: Import substitution with strong government intervention 1950-60s: Import substitution with strong government intervention 1960s-1970s: Export-led with strong government intervention 1960s-1970s: Export-led with strong government intervention 1980s-1990s: Export-led with market liberalization (Washington consensus) 1980s-1990s: Export-led with market liberalization (Washington consensus) Late 1990s-2000: Export-led with selective government intervention (New Development consensus) Late 1990s-2000: Export-led with selective government intervention (New Development consensus)

4. Import substitution (1950s-1960s) Also known as import-substituting industrialisation Also known as import-substituting industrialisation Definition: growth and trade strategy where a country begins to manufacture simple consumer goods oriented towards the domestic market in order to promote the domestic industry. It depends on protective measures that will prevent entry of imports that compete with domestic producers. Definition: growth and trade strategy where a country begins to manufacture simple consumer goods oriented towards the domestic market in order to promote the domestic industry. It depends on protective measures that will prevent entry of imports that compete with domestic producers.

5. Rationale 1. Independence (from colonizers) seen as opportunity to modernize. Instead of continuing to export commodities to and import manufactures from DCs: shut out manufactured imports from DCs and start producing those goods domestically. 2. Historical experience of DCs, which used import subs strategies in their initial phases of development.

6. 3. Export pessimism in the 50s-60s caused by ↓ Px and deterioration in balance of payments plus expectation of long term deterioration of ToT. 4. Avoiding BoP problems through curtailment of imports. 5. Infant industry argument.

7. Import-substitution policies and consequences 1. High protection of dom firms, inefficiency and resource misallocation. Lack of competition → high costs + inefficiencies + high prices paid by consumers. 2. Overvalued exchange rates, making imports of capital goods cheaper and X more expensive.

8. Negative effects: Capital-intensive methods → urban UE + growth of informal sectorCapital-intensive methods → urban UE + growth of informal sector X in agricultural sector more difficult → worsen rural povertyX in agricultural sector more difficult → worsen rural poverty 3. Excessive gov intervention, leading to misallocation of resources and inefficiencies in production.

9. 4. Neglect of agriculture → ↑ need for food imports 5. Deterioration of BoP and debt position due to: a) ↑ need for M of cap equipment and intermediate goods b) ↑ need for food imports c)Outward flow of financial capital caused by repatriation of profits by MNCs and wealthy elites seeking safety for their financial investments

10. 6. Encouragement of cap-intensive production methods, but no effort to ↑ access to credit or support users of labour-intensive technologies. 7. Negative impacts on employment and income distribution.

11. 8. Limited possiblities for growth over the longer term on the basis of import-subs, due to inefficiencies of production and misallocation of resources. For example, many firms enjoying protection never became efficient. 9. More room for corruption favoured by strong government intervention (payments of bribes to gov officials in order to secure particular policies).

12. Problems with import-substitution became apparent in the 60s: Problems with import-substitution became apparent in the 60s: –India, Egypt reacted by ↑ protection for cap goods imports and other intermediate goods in order to allevaite BoP problems. –Others (Brazil, Israel, Mexico, Singapore, South korea, Taiwan, Southern European countries) moved towards export promotion.

13. Export promotion (1960s-1970s) Export-led growth strategy: a growth and trade strategy where a country attempts to achieve economic growth by expanding its exports. Based on strong government intervention. Export-led growth strategy: a growth and trade strategy where a country attempts to achieve economic growth by expanding its exports. Based on strong government intervention. It is an outward-oriented strategy since it looks outward towards foreign markets and provides stronger links between the domestic and global economies. It is an outward-oriented strategy since it looks outward towards foreign markets and provides stronger links between the domestic and global economies.

14. Strong gov intervention necessary to help countries develop a strong manuf sector oriented towards exports. Strong gov intervention necessary to help countries develop a strong manuf sector oriented towards exports. Most LDCs that turned to export promotion had began their industrialization with import-substitution. The stronger export industries were in many cases the ones that had received protection. Most LDCs that turned to export promotion had began their industrialization with import-substitution. The stronger export industries were in many cases the ones that had received protection.

15. China, Hong Kong (more market- oriented), Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan, Thailand = Newly Industrializing Economies (NIEs) or Asian Tigers. All of them pursued export promotion of manufactured goods strongly supported by gov intervention and industrial policies. China, Hong Kong (more market- oriented), Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan, Thailand = Newly Industrializing Economies (NIEs) or Asian Tigers. All of them pursued export promotion of manufactured goods strongly supported by gov intervention and industrial policies.

16. Interventionist policies 1. State ownership and control of financial institutions, in order to provide subsidized credit to the industries being promoted. 2. Targeting of industries for export. 3. Industrial policies to support export industries: investment grants, production subsidies to export industries, tax exemptions, export subsidies...

17. 4. Some (selective) protection of domestic industries. 5. Requirements on MNCs in order to maximize benefits of FDI: promotion of R&D, transfer of targeted technologies into the domestic economy, training of dom workers, use of local inputs. 6. Large public investments in key areas: education and skills, R&D, transport and communications infrastructure.

18. 7. Incentives for R&D by private sector for high tech products. To encourage development of domestic skill levels and technology appropriate to local conditions. These policies resulted in successful export performance and the achievement of very high economic growth rates. Since the 1950s, NIESs have been the fastest growing economies in the developing world.

19. The Success of the Asian Tigers 1. Expansion into foreign markets. 2. Benefits of diversification. 3. Major investments in human capital. 4. Appropriate technologies. 5. Increased employment (from the use of labour-intensive technologies). 6. Export earnings avoided balnce of payments problems.

20. 1980s-1990s: Export-led with Market Liberalization: Washington Consensus Early 80s: Early 80s: 1.Poor econ and export performance in many LDCs and high indebtedness 2.Shift in thinking about econ growth and development inspired by neoclassical model, which stressed importance of limiting gov intervention and allowing private sector to operate in a competitive free-market environment. Outward orientation based on free-trade.

21. Main policies recommended: Main policies recommended: 1.Trade liberalisation 2.No restrictions to new FDI by MNCs 3.Sound fiscal policy (no excessive borrowing) 4.Tax reform 5.Changing priorities of gov spending towards health, education, infrastructure 6.Interest rate liberalization 7.Market-determined exchange rates 8.Privatization 9.Deregulation 10.Securing property rights

22. Rationale: reliance on market forces and free trade maximizes efficiency, domestic and global allocation of resources and economic growth. Rationale: reliance on market forces and free trade maximizes efficiency, domestic and global allocation of resources and economic growth. LDCs that have adopted these policies include Argentina, Brazil, China, Chile, India, Kenya, Sri Lanka, Tanzania, Turkey. They began a process of ↓ gov intervention in the market. LDCs that have adopted these policies include Argentina, Brazil, China, Chile, India, Kenya, Sri Lanka, Tanzania, Turkey. They began a process of ↓ gov intervention in the market.

23. Strong influence of the World Bank and the IMF, which lent these countries funds on the condition of reorienting their economies towards freer trade and freer market. Strong influence of the World Bank and the IMF, which lent these countries funds on the condition of reorienting their economies towards freer trade and freer market.

24. Impacts of economic and trade liberalization 1. Limited benefits for export growth and diversification: Countries lost export shares in world markets, especially in AfricaCountries lost export shares in world markets, especially in Africa LDCs did not succeed in diversifying their production into manufacturing. Countries that performed best were those that had already developed significant export sectors.LDCs did not succeed in diversifying their production into manufacturing. Countries that performed best were those that had already developed significant export sectors.

25. Causes of these negative impacts: a.Protectionist policies by DCs b.Growing reliance on free market policies 2. Limited impacts on economic growth No hard evidence suggesting that a greater outward orientation based on freer trade during 80s, 90s has been responsible for more rapid econ growth. No hard evidence suggesting that a greater outward orientation based on freer trade during 80s, 90s has been responsible for more rapid econ growth.

26. Great variability in performance. Great variability in performance. Some economists see no link between econ growth and trade liberalization. Some economists see no link between econ growth and trade liberalization. Some countries better able to benefit from freer trade. Low income countries perform the worst → ↑ inequalities between rich and poor. Some countries better able to benefit from freer trade. Low income countries perform the worst → ↑ inequalities between rich and poor.

27. 3. Increasing income inequalities and poverty within LDCs. World Bank study reveals that the correlation between trade liberalization and income growth is –Negative among the 40% poorest of the population –Positive among the higher income groups So it helps the rich get richer and the poor get poorer. Reason: econ and trade liberalization give rise to winners and losers.

28. WINNERS  Workers in exporting industries  Workers in growing formal sectors  Higher skilled, educated people, with more chances in the competitive environment LOSERS  Less educated people  Poor people with no collateral (unable to obtain credit)  People in remote areas with no transport links to markets  People in agriculture  People affected by lower levels of social protection  People forced from the formal to the informal sector...

29. According to int’al trade theory, free trade originates overall gains that are likely to be greater than the overall losses. However, in the real world this rarely occurs, with the result that some people are worse off due to freer trade and freer markets. According to int’al trade theory, free trade originates overall gains that are likely to be greater than the overall losses. However, in the real world this rarely occurs, with the result that some people are worse off due to freer trade and freer markets. Late 1990s: the Washington consensus was called into question even by the Chief economist of the World bank, Joseph Stiglitz. Late 1990s: the Washington consensus was called into question even by the Chief economist of the World bank, Joseph Stiglitz.

30. Late 1990s-2000s: Export-led growth strategies with selective gov intervention: The New Development Consensus Gov.’s role in LDCs should be complemented (not substituted) by markets. Gov.’s role in LDCs should be complemented (not substituted) by markets. Governments must support education, health and infrastructure development, as well as R&D for both industry and agriculture. Governments must support education, health and infrastructure development, as well as R&D for both industry and agriculture.

31. Gov should pursue policies that promote income equality and poverty alleviation. Gov should pursue policies that promote income equality and poverty alleviation. Gov must provide regulatory framework for markets to work efficiently: regulation of financial system and regulatory framework for competition (to avoid development of private monopolies. Gov must provide regulatory framework for markets to work efficiently: regulation of financial system and regulatory framework for competition (to avoid development of private monopolies. Market-supporting institutions (tax systems, property rights, banking & credit...) should be promotes. Market-supporting institutions (tax systems, property rights, banking & credit...) should be promotes.

32. DCs must assist econ development by ↑ foreign aid and providing increased access to their markets by LDCs. DCs must assist econ development by ↑ foreign aid and providing increased access to their markets by LDCs. Due to their special circumstances, LDCs should receive special treatment by int’al trade agreements regarding removal of their protectionist measures. Due to their special circumstances, LDCs should receive special treatment by int’al trade agreements regarding removal of their protectionist measures.

33. Remark: Unlike the strongly interventionist supply- side policies pursued by the Asian tigers, that focused on direct support and protection against competition, the New Dev Consensus favours the establishment of institutions and conditions that assist firms to do well in a competitive market environment. Unlike the strongly interventionist supply- side policies pursued by the Asian tigers, that focused on direct support and protection against competition, the New Dev Consensus favours the establishment of institutions and conditions that assist firms to do well in a competitive market environment.

34. Support for: –R&D in targeted areas –Vocational training and education –Small firms –Development of infrastructure

35. Justification for industrial policies: numerous kinds of market failures that may prevent countries/markets from: Justification for industrial policies: numerous kinds of market failures that may prevent countries/markets from: –Setting up the needed private firms –Undertaking the necessary R&D –Innovating –Importing appropriate technologies

36. Evaluation of Inward and 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

37. Obstacles Obstacles a) If countries specialize in production & export of primary commodities: –Unstable export revenues due to price volatility. –Deteriorating ToT for exporters of primary commodities over long periods of time (due to low YED for these exports, among other) –Rich country protection of their farmers may limit access to rich country markets and cause price ↓ of protected commodities.

38. b) If countries specialize in production and X of manufactured goods: 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)

39. 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

40. 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.

41. 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.

42. Role of the WTO

43. Bilateral and regional preferential trade agreements (FTAs)

44. Diversification

45. Capital liberalisation