Trade and Development II: Economic Reform

READING ASSIGNMENT: Oatley – Chapter 7

1

Plan

1. Culture vs. Interests & Institutions

Why did Asia “beat” Latin America?

2. Politics of shifting from ISI to “neoliberalism”

Cases of from Africa

3. Foreign aid, loans, conditionality, & reform:

The role of the IMF

4. The East Asian Miracle:

Export-oriented industrialization2

PART 1: Culture vs. Interests & Institutionshttp://www.youtube.com/watch?v=Cwq-XdPfpeA https://www.youtube.com/watch?v=49AfuuRbgGo

http://www9.georgetown.edu/faculty/jrv24/friends.html

Studies:

Teaching:

Research:

Presentations:

3

4

Why did Japan, Korea, Taiwan, Singapore, and Hong Kong “beat” Argentina, Brazil, Mexico, Chile, and Colombia?

• Was it culture? Religion?

• Are Asians just better economists?

• Interests and institutions:

– “Losers” from globalization gain power world-wide with Great Depression

– World War II decimated the political power of interest groups throughout Asia:

• Clean slate

– Latin American interest groups remained in tact• Losers from globalization remained in power

5

Shift from ISI to “neoliberalism” & export-oriented industrialization

• Why the shift? – ISI generated economic imbalances (current account

deficits)

– Group of East Asian countries outperformed rest of the world

• Neoliberal?• Export-Oriented• Geo-politically strategic Cold War allies?

– Latin American Debt Crisis led to Structural Adjustment programs of the IMF

6

ISI problems & the current account

• Current account:– Registers a country’s imports & exports of both goods

and services– Deficit means imports>exports

• How did ISI lead to deficits?1. Manufactured goods were not globally competitive –

only sold domestically

2. Marketing Boards weakened agriculture

3. Governments preferred overvalued exchange rates (this, sadly, contributed to making exports less competitive)

7

Pro-trade

Anti-trade

URBAN-RURAL

CONFLICT

Why was it hard to break free of ISI?

8

Part 2: The politics of shifting

from ISI to “neoliberalism”

9

Ghana 1971• Oatley p136, http://rulers.org/rulg1.html#ghana

• Ghanaian prime minister devalued the exchange rate

– Oatley: 1971 p136

– www.Rulers.org – 1972:

Edward Akufo-Addo, 31 Aug 1970 - 13 Jan 1972

– DEPOSED IN A COUP days after the devaluation!

– Urban residents contributed in the coup effort

concerned that prices for imported goods would rise

– The new regime restored the overvalued XR

– IMF arrangements: ’66, ’67, ’69, … 197910

Example: Nigeria 1983• President Shagari, facing an economic crisis, turned to the IMF hoping to

initiate some reforms.

• He faced opposition in the legislature & elections on the horizon.

• The president’s officials admitted,

“the whole idea of bringing in the IMF is to get the alibis to persuade the politicians of what we need to do.”

• But the demands of the IMF were too harsh, considering the president’s political constraints.

• No agreement was concluded.

• Side note:

– Democracy soon collapsed & the new dictator pushed through reforms without the IMF.

– When the dictatorship finally requested an IMF loan in ’87, it was granted. 11

• Mid-1980s: The IMF was willing to grant an agreement to General Babangida, who had already pushed through economic reform without IMF political support,

• But the IMF had not been willing to grant an agreement to President Shagari, who sought political support to push through limited reform.

12

Part 3: Foreign aid, loans, conditionality, & reform

The role of the IMF

13

How did governments keep the system going until the 1980s?

• Foreign loans

• Bilateral aid

• IMF loans (without serious policy conditionality)

• Were politically important countries “hurt” in the long-run?

• Perverse impact of foreign aid14

The Empire Strikes Back

• Governments needed to take a smaller role in policy areas where markets work reasonably well

• Stable macroeconomic environment – – transform budget deficits into surpluses; raise interest

rates; devalue the exchange rate cut demand; change current account deficits into

surpluses

• Liberalize trade

• Privatize State-Owned Enterprises

• Neocolonialism? (Dependency theory?)

Structural Adjustment… or…

15

Role of domestic politics

• “Losers” attempted to block reforms

• “Winners” attempted to promote reforms

• Governments mediated between winners & losers

• Brought in the IMF to help push through reforms?

16

Executive

Without the IMF

With the IMF

Veto player

Accept

Reject

Payoff to veto player

-1 (change policy)

0 (maintain the status quo)

-r (reject the IMF)

Figure 1: The logic of bringing in the IMF

Veto player

Accept

Reject

-1 (change policy) + loan

How does bringing in the IMF help push through economic reform?

17

Suppose you have a president representing the “winners” but a legislature representing “losers”…

• Reform involved an intense distributive struggle reforms were implemented unevenly

• PARTIAL REFORM!

– Vreeland 2003: “By bringing in the IMF, governments gain political leverage - via conditionality - to push through unpopular policies. For certain constituencies, these policies dampen the effects of bad economic performance by redistributing income. But IMF programs doubly hurt others who are less well off: They lower growth and exacerbate income inequality.”

• But see Oatley p149, figure 7.2

18

Reform index from IADB 1997Growth rates from World Bank

19

Part 4: The East Asian Miracle:

Export-Oriented Strategy

20

The East Asian Model• Export-oriented strategy

• Scholars disagree on the role of the state– Neoliberal interpretation: East Asian success due to market friendly

development strategies– State-oriented interpretation: East Asian success due to state-led industrial

polices

• Immediately after WWII: “easy ISI”

• Late-1950s / Early-1960s: shift emphasis to exports– Forced manufacturers to worry about international competitiveness– Invested resources in domestic industries that were profitable in world

markets (Latin American & African countries did not)

• Relied on protectionism for their domestic markets

• BUT allowed selective liberalization to lower costs for “critical inputs”

– (so did Latin America, no?)

• Stable macroeconomic environment:1. Low inflation

– Helps encourage savings2. Appropriately valued exchange rates

– Helps promote exports– Conservative fiscal policies (borrowed little)

21

3 Stages of the East Asian Model of Development

1. Industrial policy promotes labor-intensive light industry (easy ISI – e.g., textiles)

2. Target heavy industries (e.g., steel, shipbuilding, petrochemicals)

3. Target high skill plus R&D-intensive industries (e.g., computers)

• (How is this different from Latin America?)

22

Using monetary policy to promote EXPORTS:

• Exporting firms paid interest rates of 6-12%

• Other borrowers paid 20-22%

• Short-term loans unlimited for confirmed export orders

• Credit also made available to exporters’ input suppliers (and the suppliers’ suppliers)

23

Was success due to markets or states?

• Centralized or Decentralized mechanisms of allocation?

• Mix?

• Used industrial policy to shift resources to the export industry

• Used world markets to “get prices right” for export industry

• Emphasized exports rather than the domestic markets

24

Economic reform in China1. Late 1970s: The Household Responsibility System

• Encourage farmers to lease land from their agricultural commune• Part of the crop sold to state (at reformed prices), part at market prices (&

keep the profits)• Increased agricultural productivity and led to rural-urban migration

2. 1984: The Enterprise Responsibility System• Enterprises encouraged to acquire inputs and sell outputs on world markets • Reduced government subsidies

3. Open Door Policy• Liberalizing foreign direct investment• Does this “crowd out” domestic investment?

• Per capita income doubled from 1979 to 1990 and then doubled again in the 1990s!

• Was success due to centralized mechanisms, decentralized mechanisms, or a mix?

• “Orthodox” vs. “heterodox” reforms

• Did political institutions play a role in mediating between winners and losers?

25

Take homes

• Winners, losers & economic reform

• Neo-liberalism & Export-oriented industrialization

• Perverse impact of foreign aid

• Role of the IMF

• Conservative macroeconomic policies– Low inflation– Appropriately valued exchange rates– Conservative fiscal policies (low spending, adequate taxation)

• Partial reform

26

Thank youWE ARE GLOBAL GEORGETOWN!

27

Trade liberalization & the WTO… or…• Doha Round:

– Agriculture for Non-Agricultural Market Access (NAMA)

• G20 vs. G7

• Perhaps the G20 believes that the lowering of agricultural tariffs will not bring enough benefits given the costs of lowering NAMA barriers No deal

• But perhaps this is a story of private information and reputation

• They seek to extract more concessions & want to establish a “tough” negotiation reputation

• Games of private information & signaling of “type”• http://www.youtube.com/watch?

v=3EkBuKQEkio&feature=PlayList&p=81BDB99A37EE7D5C&playnext=1&playnext_from=PL&index=7

Return of the Jedi!

28