Development Development strategiesstrategies

Inward vs outward-orientedInward vs outward-oriented

In order to import all the manufactures In order to import all the manufactures needed for industrialization, LDCs needed for industrialization, LDCs have two options:have two options:

1.1. Encourage EXPORTS to pay for needed Encourage EXPORTS to pay for needed importsimports

2.2. Discourage IMPORTS whilst developing Discourage IMPORTS whilst developing substitute domestic productssubstitute domestic products

Export PromotionExport Promotion• Encourage:Encourage:

– Free trade in goodsFree trade in goods– Free movement of capital and labourFree movement of capital and labour

• MNCs are encouragedMNCs are encouraged

• Manufactures are promoted Manufactures are promoted

• Justified by:Justified by:– Increased output and growth arising from free Increased output and growth arising from free

trade: comparative advantage, economies of trade: comparative advantage, economies of scale, increased competition, modern scale, increased competition, modern technology.technology.

– Success of Asian TigersSuccess of Asian Tigers

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

Import SubstitutionImport Substitution

• Encourages self-reliance in the Encourages self-reliance in the production of manufacturesproduction of manufactures

• Tariff barriers against Imports, to Tariff barriers against Imports, to protect home marketprotect home market

• Factor movements of K and L are Factor movements of K and L are restrictedrestricted

• MNCs are restrictedMNCs are restricted

• Theoretical justificationTheoretical justification based on based on a critique of free-trade theory, whose a critique of free-trade theory, whose assumptions do not account for UE, assumptions do not account for UE, changing comparative costs, changing comparative costs, inappropriate technology and risks of inappropriate technology and risks of over specialization.over specialization.

• Infant industryInfant industry argument to justify argument to justify protectionism.protectionism.

• Improvement of balance of trade Improvement of balance of trade with restriction of imports.with restriction of imports.

Evaluation of Outward-Evaluation of Outward-oriented strategiesoriented strategies• BenefitsBenefits: those of international free trade: those of international free trade

– Increased dom. production and consumtion Increased dom. production and consumtion due to specializationdue to specialization

– Economies of scaleEconomies of scale– Greater variety and quality of g+sGreater variety and quality of g+s– Allows countries to acquire needed resourcesAllows countries to acquire needed resources– Flow of new ideas and technologyFlow of new ideas and technology– Increased X + more efficiency = Larger Increased X + more efficiency = Larger

growth ratesgrowth rates

• Greater growth → more resources to Greater growth → more resources to achieve economic development objectivesachieve economic development objectives

ObstaclesObstacles

If countries specialize in production and If countries specialize in production and X of X of primary commoditiesprimary commodities::1.1. Unstable X revenues due to price volatility (PED, Unstable X revenues due to price volatility (PED,

PES <1)PES <1)

2.2. Deterioration of ToT due to low YED for X.Deterioration of ToT due to low YED for X.

3.3. Protection of farmers in rich countries may limit Protection of farmers in rich countries may limit access of poor country farmers to rich markets.access of poor country farmers to rich markets.

If countries specialize in production If countries specialize in production and X of and X of manufactured goodsmanufactured goods::

4.4. Protectionist policies imposed by DCs:Protectionist policies imposed by DCs:– Prevent access to the large and rich Prevent access to the large and rich

marketsmarkets

– Discourage diversification of LDC into Discourage diversification of LDC into manufacturing and higher VA activities manufacturing and higher VA activities (tariff escalation, admin and technical (tariff escalation, admin and technical barriers)barriers)

Can LDCs imitate the trade and Can LDCs imitate the trade and growth strategies of the Asian growth strategies of the Asian Tigers?Tigers?

1.1. The Asian Tigers faced The Asian Tigers faced lower trade lower trade barriersbarriers on their X of manufactures to DCs. on their X of manufactures to DCs. Some trade barriers were increased during Some trade barriers were increased during the 1980s, after the entry of East Asian the 1980s, after the entry of East Asian exports into DCs markets. This was in order exports into DCs markets. This was in order to protectto protect• domestic producers against low cost domestic producers against low cost

competing goods and competing goods and • their workers against losing their jobs due their workers against losing their jobs due

to entry of low cost importsto entry of low cost imports

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

Concluding remarksConcluding remarks

1.1. An outward oriented trade strategy is An outward oriented trade strategy is superior to an inward-oriented one.superior to an inward-oriented one.

2.2. Significant advantages in an outward-Significant advantages in an outward-oriented strategy based on oriented strategy based on diversification of Xs into manufacturing diversification of Xs into manufacturing and higher VA activities.and higher VA activities.

3.3. DC protectionism is a major obstacle.DC protectionism is a major obstacle.

4.4. Possible way out for LDCs: Possible way out for LDCs: formation of regional trading blocs formation of regional trading blocs (avoids obstacles created by rich (avoids obstacles created by rich country protectionism).country protectionism).

5.5. Outward orientation likely to be Outward orientation likely to be more successful when accompanied more successful when accompanied by industrial policies.by industrial policies.

Evaluation of market-led Evaluation of market-led and interventionist and interventionist strategiesstrategies1.1. Very strong gov intervention in the Very strong gov intervention in the

market discredited as strategy for market discredited as strategy for int’al trade and growth. Agreement int’al trade and growth. Agreement since the 2000s: market forces since the 2000s: market forces should play a significant role, with should play a significant role, with varying degrees of some gov varying degrees of some gov intervention.intervention.

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

3.3. Areas where gov intervention is Areas where gov intervention is necessary:necessary:

• Poverty alleviationPoverty alleviation• ↓ ↓ Income inequalitiesIncome inequalities• Investments in health, education, Investments in health, education,

infrastructure, tech transfer, infrastructure, tech transfer, establishment of R&D capabilityestablishment 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 Some protection of dom industries in

initial phasesinitial phases

3.3. Uniqueness of each country → Uniqueness of each country → strategies tailored to particular needs strategies tailored to particular needs and conditions, in consultation with and conditions, in consultation with aid and development agenciesaid and development agencies

5.5. In earlier stages of development In earlier stages of development countries can benefit from more countries can benefit from more strongly interventionist strategies as strongly interventionist strategies as they may lack the necessary they may lack the necessary institutions and legal framework institutions and legal framework required for the good functioning of required for the good functioning of markets.markets.