trade and development i: import substitution industrialization reading assignment: oatley –...
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Trade and Development I: Import Substitution Industrialization
READING ASSIGNMENT: Oatley – Chapter 6
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Plan
1. Interests & Institutions explanation for ISI
2. Economic justification for ISI
3. What is ISI?
4. The effect
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Part 1: Interests & Institutions
explanation for ISI
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• Up through WWI, developing countries had liberal trade policies
• By late 1950s, developing countries turn protectionist
• 2 questions:
– Who were the winners from globalization?
– Did they have political power?
• Trade politics in developing countries dominated by urban-rural cleavage
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• Generally, developing countries are abundantly endowed with land and poorly endowed with capital…
• Agriculture is the ________-________ sector– EXPORT ORIENTED SECTOR
• Manufacturing is the ________-________ sector– IMPORT-COMPETING SECTOR
• So, land-owners should be ___-free-trade– PRO-
• Owners of capital should be ___-free-trade– ANTI-
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Recall Rogowski’s model
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Pro-trade
Anti-trade
Pro-trade
Anti-trade
Pro-trade
Anti-trade
Pro-trade
Anti-trade
URBAN-RURAL
CONFLICT
URBAN-RURAL
CONFLICT
CLASS CONFLICT
CLASS CONFLICTExamples:
Peron in Argentina,
Vargas in Brazil
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Developing
Smoot-Hawley, Great Depression
Developing
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Part 2: Intellectual justification for ISI
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Intellectual justification:Structuralist argument
• The shift of resources from agriculture to manufacturing would not occur unless the state adopted appropriate industrial policy
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International Anti-trade stance• Haberler Report:
– Von Haberler – Harvard economist (Austrian origin)
– Reports a decline in the “terms of trade” for primary producers
– From 1955: commodity prices fell by 5%, industrial prices rose by 6%
• 1964 United Nations Conference on Trade and Development (UNCTAD) Group of 77
• (Von Haberler did not mean that there was a systematic long-term (secular) decline in the terms of trade. He left Harvard in 1971 for American Enterprise Institute)
Singer–Prebisch Theory (Intellectual justification for ISI):
– Participation in GATT will make it harder for developing countries to industrialize
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Terms of trade
• Relates the price of a country’s exports to the price of its imports
• “Improvement” in the terms of trade:– Price of exports is rising relative to the price of
imports
• “Decline” in the terms of trade:– Price of exports is declining relative to the
price of imports12
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Summarizing: Why did governments adopt ISI?
1. Interests– Losers from globalization gain power during
the Great Depression– (Globalization dries up, so the “winners” lose
substantial income)
2. Ideas– Some economists (legitimized by the United
Nations) argued against free trade
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Part 3: What is ISI?
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Import Substitution Industrialization
• Industrialize by substituting domestically produced goods for manufactured items previously imported
• Typically called “ISI”
• 2 stages:
– “Easy” ISI
– Secondary ISI16
Easy ISI• Develop domestic manufacturing of simple
consumer goods
• Soda, beer, apparel, shoes, furniture
What do you mean by “easy”? Easy how? How is it easy?
1. Large domestic demand preexisting
2. Requires “Low-Tech” machines
3. Requires “low-skilled” labor
Ya know… “easy.”17
Asia & Latin America• Both practiced “easy” ISI
• But then Asian countries switched to an EXPORT-ORIENTED STRATEGY:
– Producing manufactured goods that can be sold in international markets
– EXPORT rather than produce exclusively for the domestic market
• Latin America moved to “SECONDARY ISI”…18
SECONDARY ISI
• Production of consumer durable goods, intermediate inputs, and the capital goods needed to produce consumer durables
• E.g., automobiles (Argentina, Brazil, Chile)
• Begin by importing auto pieces and assembling them domestically
• Gradually, increase the % of locally produced parts
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Argentine Torinohttp://www.taringa.net/posts/autos-motos/4559857/Autos-del-Turismo-Carretera-Chevy-Falcon-Dodge-Torino.html http://www.taringa.net/posts/autos-motos/16261340/Renault-Torino-un-fierrazo-D.html
Government policies to promote ISI• Investment in activities the private sector would
not produce: – Roads, transportation networks, electricity,
telecommunications– Large-scale operations – steel plants, auto plants
• State-owned Enterprises (& mixed-owned)– Chemical, telecommunications, electricity, railways,
metal fabrication
• Trade barriers (tariffs)
• Tax policies:– “Taxed” agricultural exports through “Marketing Boards”– Marketing Board – purchased crops from farmers at
below-world market prices, then sell them on the world market at world market prices 22
Marketing boards
•Disincentivized agricultural production
•Subsidized industrialization
Tariffs
•Incentivized local consumers to buy locally manufactured industrial products
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Closer look @ Brazil• Labor-abundant, capital scarce
• Late 19th century – slave labor
• 1877-78 Grande Seca (Great Drought) in the cotton-growing northeast, led to major turmoil, starvation, poverty and internal migration
• Slavery abolished 1884
• Still, primary commodities – #1: Coffee – dominate until the Great Depression
• Drop in prices hurt land owners again – this time a coup
• 1930 Getulio Vargas
• Pursues the easy ISI stage – Protectionism promotes light manufacturing
• Transition to 2ndary ISI in 1950s… 24
Consumption of capital goods in Brazil
60%
35%
10%
0%
20%
40%
60%
80%
1949 1959 1964
Year
% im
po
rte
d
25Oatley 2011: pages pg. 126-127
Argentina’s Bicentennial Celebration: http://www.boston.com/bigpicture/2010/05/argentinas_bicentennial.html
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Results• How did they pay for industrialization?
– Borrowed
• How did they pay it back?
• Latin American Debt Crisis (1982)– The Lost Decade
• IMF to the rescue?– Washington Consensus– Dismantle the state’s presence in the economy
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Take-homes
• Political motivation for ISI:
– Losers from trade in Latin America (urban sector) gain political power
• Intellectual justification for ISI:
– Declining terms of trade for primary products
• Asia & LA both practice “easy” ISI
• LA moves to Secondary ISI
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Thank youWE ARE GLOBAL GEORGETOWN!
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