Trade and Development I: Import Substitution Industrialization

1. Trade and Development I: Import Substitution Industrialization READING ASSIGNMENT: Oatley – Chapter 6

2. Plan • Interests & Institutions explanation for ISI • Economic justification for ISI • What is ISI? • The effect

3. Part 1: Interests & Institutions explanation for ISI

4. Up through WWI, developing countries had liberal trade policies • (um… colonialism?) • After independence, who were the winners from globalization? • Did they have political power? • By late 1950s, turned protectionist • Trade politics in developing countries dominated by urban-rural cleavage

5. 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-

6. Recall Rogowski’s model • Capital is a highly “specific factor” • Land is a highly “specific factor” • (In his model, labor is a mobile factor)

7. Pro-trade  Pro-trade  CLASS CONFLICT URBAN-RURAL CONFLICT Examples: Peron in Argentina, Vargas in Brazil Anti-trade  Anti-trade  Pro-trade  Pro-trade  URBAN-RURAL CONFLICT CLASS CONFLICT Anti-trade  Anti-trade 

8. Smoot-Hawley, Great Depression Developing

9. Part 2: Economic justification for ISI

10. Intellectual justification:Structuralist argument • The shift of resources from agriculture to manufacturing would not occur unless the state adopted appropriate industrial policy

11. International Anti-trade stance • Haberler Report: • Von Haberler – Harvard economist (Austrian origin) • GATT 1957 report: • 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

12. A G77 advance • Pushed for the Generalized System of Preferences (GSP) – manufactured exports from developing countries gained preferential access to advanced industrialized countries’ markets

13. A G77 failure • New International Economic Order – • Attempt to create an international trade system whose operation was subordinate to development needs of the world’s poor countries • Inspired by the Organization of Petroleum Exporting Countries (OPEC) – used their control of oil to improve their terms of trade in the early 1970s • OPEC’s rate of success has been mixed • With other commodities, collective action problems have proven too severe

14. Part 3: What is ISI?

15. Import Substitution Industrialization • Industrialize by substituting domestically produced goods for manufactured items they previously imported • Typically called “ISI”

16. 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? • Large domestic demand preexisting • Requires “Low-Tech” machines • 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

21. Government policies to promote ISI • Trade barriers • 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 • 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. 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…

23. Oatley 2011: pages pg. 126-127

24. http://www.youtube.com/watch?v=cbOdUqf-mUI

25. Argentina’s Bicentennial Celebration: http://www.boston.com/bigpicture/2010/05/argentinas_bicentennial.html

26. 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

27. KOREA after WWII • Japan defeated  Power of foreign colonizer  local groups • Initially land-owners dominate (1950s), then land-reform (still 1950s… why?) •  Increases the relative power of emerging urban-industrial sector • So back in the 1950s, land-owners would have been pro-free trade • Why did Korea use to have a relative abundance of land & a comparative advantage in agriculture (land-owners pro-trade)… • … but today has a relative abundance of capital & a comparative advantage in manufactures (capital-owners pro-trade)… • Remember – “relative” abundance – relative to what? • The other factor • 1950: The opportunity cost of manufactured goods was higher in terms of agricultural goods inside of Korea than it was on the outside world. So Land-owners could get their manufactured goods cheaper through trade. (So could owners of capital… but they would also lose their livelihood!) • NOW: The opportunity cost of agricultural goods is higher in terms of manufactured goods inside of Korea than it is on the outside world. So capital-owners can get their agricultural goods cheaper through trade. (So can land-owners… but they will also lose their livelihood!)

29. Non-traded goods sector? • Goods that do not enter into international trade • Costly/impossible to transport (houses) • Must be performed locally (haircuts, auto repair, public utilities, face-to-face services) • (THE INTERNET IS CHANGING SERVICE-SECTOR) • Civil servants, teachers, military personnel • Do not face competition from foreign trade • Benefit when the price of traded goods decline • But what if your customers lose from trade?? • How mobile are customers? • If you are in urban-services (rural-services), you may be tied to the fate of the owners of capital (land)…

30. Consumers always benefit from trade…? • What if they face a time-consistency preference problem? • Eat cheap unhealthy food today, pay the health price in 20 years • Me, I shop at Whole Foods! • But is the effect on healthcare? • Others eat unhealthy food today, I pay the health price in 20 years • Negative healthcare-cost externalities from cheap food • An externality is an effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account • Multinational corporations moving into China are simultaneously investing in Pepsi, Coca-cola, Junk food, and medical technologies that millions of people will need in the future from eating this food (diabetes medicine, coronary artery disease medicine/surgery, …) • Do we need market solutions? Domestic political solutions? International political solutions? Is protectionism going to save us?

31. http://www.foodincmovie.com/ • http://www.thedailyshow.com/video/index.jhtml?videoId=232260&title=robert-kenner

32. 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

33. Thank youWE ARE GLOBAL GEORGETOWN!