Import Substitution Industrialization International Political Economy Prof Tyson Roberts Brief history g lobalization amp development Mercantilism 1500s1700s Globalization through empire ID: 233860
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Slide1
Trade & Development I:Import Substitution Industrialization
International
Political Economy
Prof. Tyson RobertsSlide2
Brief history globalization & development
Mercantilism (1500s-1700s)
Globalization through empire
Imperial goal: amass the most gold
Subsidize exports, tax imports
Classical liberalism (1800s– early 1900s )
Increasing free trade promoted by Britain hegemon
Continued promotion of trade within empiresSlide3
How globalization helps developing countries according to classical liberalism
1
st
Age of Globalization
Free trade: poor countries specialize in comparative advantage (e.g., agriculture) & import other products (e.g., manufactures)
Free flow of labor: workers move from labor-abundant to labor-scarce economies => wages
Free flow of capital: capital flows freely from capital-rich to capital scarce countries => investment, developmentSlide4
Example 1: Argentina in 1800s
Economically backward compared to Britain
Land abundant
Labor scarce
What should we predict regarding policy preferences of each group, and the resulting political coalitions?Slide5
Commerce and Coalitions1st
Age of Globalization (increasing free trade)
Labor scarce
relative to Land
Labor
abundant
relative to Land
Capital rich
(Developed
countries)
Capitalists & Landowners for tradeLabor againstCapital & Labor for trade Landowners againstCapital scarce (LDCs)Landowners for trade Labor & Capitalists againstLabor for tradeLandowners & Capitalists against
5Slide6
Commerce and Coalitions1st
Age of Globalization (increasing free trade)
Labor scarce
relative to Land
Labor
abundant
relative to Land
Capital rich
(Developed
countries)
Capitalists & Landowners for tradeLabor againstCapital & Labor for trade Landowners againstCapital scarce (LDCs)Landowners for trade Labor & Capitalists againstLabor for tradeLandowners & Capitalists against
6
ArgentinaSlide7
In 1800s, Latin America ruled by landowners; much of Asia & Africa ruled by empires
Collective Action Cost
High
Low
Factors Mobile
& Majoritarian
Inst
. (e.g., democracy, not oligarchy)
Rampant free riding
No trade policy coalitions
Exit (?)
Rogowski
Factors
Mobile &
Non-
maj.
Inst
. (e.g., oligarchy)Rampant free ridingTrade policy coalitionsExit (?)Class-based coalitions possible, but not necessary for victoryFactors Specific &Majoritarian Inst.Individual interest groups unable to affect trade policyConsumer groups inactive Universalistic logroll (?)Cross sector coalitions (logrolling) or coalitions with laborConsumer groups activeFactor Specific &Non-maj. Inst.Standard trade policyModel (Pareto,Olson, etc)Lobbying for protectionConsumer groups inactiveCross sector coalitions (logrolling) or coalitions with labor possible, but not necessary for victoryConsumer groups activeSlide8
Brief history globalization & development
Mercantilism (1500s-1700s)
Globalization through empire
Imperial goal: amass the most gold
Subsidize exports, tax imports
Classical liberalism (1800s– early 1900s )
Increasing free trade promoted by Britain hegemon
Continued promotion of trade within empires
World Wars & interwar period (1914-1945)
Breakdown of free trade system, nationalist, fascist & communist movementsSlide9
Crisis: WWI & Great Depression
War => increased demand for labor => increased power of labor in economics (unions) and politics (votes) (esp. in sovereign nations)
British Navy no longer strong enough to enforce free trade policies in developing countries
Rich and poor countries respond to crisis by imposing controls on trade, capital, immigration
Communists & Fascists extremely protectionistSlide10
War => increased demand for labor => increased power of labor in economics and politics (votes)
Collective Action Cost
High
Low
Factors Mobile
& Majoritarian
Inst
. (e.g., democracy, not oligarchy)
Rampant free riding
No trade policy coalitions
Exit (?)
Rogowski
Factors
Mobile &
Non-
maj.
Inst
. (e.g., oligarchy)Rampant free ridingTrade policy coalitionsExit (?)Class-based coalitions possible, but not necessary for victoryFactors Specific &Majoritarian Inst.Individual interest groups unable to affect trade policyConsumer groups inactive Universalistic logroll (?)Cross sector coalitions (logrolling) or coalitions with laborConsumer groups activeFactor Specific &Non-maj. Inst.Standard trade policyModel (Pareto,Olson, etc)Lobbying for protectionConsumer groups inactiveCross sector coalitions (logrolling) or coalitions with labor possible, but not necessary for victoryConsumer groups activeSlide11
Example 2: Argentina in 1930s
Economically backward compared to Britain
Land abundant
Labor scarce
What should we predict regarding policy preferences of each group, and the resulting political coalitions?Slide12
Commerce and CoalitionsDepression of the 1930s (increasing protectionism)
Labor scarce
relative to Land
Labor
abundant
relative to Land
Capital rich
(Developed
countries)
Capitalists
& Landowners for tradeLabor againstCapital & Labor for tradeLandowners againstCapital scarce (LDCs)Landowners for tradeLabor & Capitalists againstLabor for tradeLandowners & Capitalists against
12Slide13
Commerce and CoalitionsDepression of the 1930s (increasing protectionism)
Labor scarce
relative to Land
Labor
abundant
relative to Land
Capital rich
(Developed
countries)
Capitalists
& Landowners for tradeLabor againstCapital & Labor for tradeLandowners againstCapital scarce (LDCs)Landowners for tradeLabor & Capitalists againstLabor for tradeLandowners & Capitalists against
Asian & East
European Fascism
W. European
Fasicism
United States: New Deal
South American Populism
13Slide14
Argentina 1940s-1950s
Juan Peron rises to power with support of labor, industrialists (import competing sectors) and military
Implements import substitution industrialization policiesSlide15
http://www.youtube.com/watch?v=
WxnaZ0SANr8Slide16
Structuralist Critique of Economic Liberalism
Market imperfections in developing countries
Industrialization in modern era requires coordination
Complementary demand: need critical mass of wage workers to buy manufactured products
Pecuniary external demand: need related industries to invest simultaneouslySlide17
Coordination Problem
Electricity
Firm
Invest in Dam
Don’t invest
Manufacturer
Invest in factory
10, 10
-5, 0
Don’t invest
0, -5
0, 0Slide18
Coordination Problem
Electricity
Firm
Invest in Dam
Don’t invest
Manufacturer
Invest in factory
10, 10
-5, 0
Don’t invest
0, -5
0, 0Slide19
Solution to coordination problem: “Big Push” by Government
Volta Dam, Ghana
Major electricity producer
Valco
aluminum smelter
Major electricity userSlide20
Structuralist Critique of Economic Liberalism
Market imperfections in developing countries
Industrialization in modern era requires coordination
Declining terms of trade
Imported manufactures prices rise
Export commodity prices fall
Result: core country real incomes rise, periphery country real incomes fallSlide21
Solution to Declining Terms of Trade Problem: ISI
Easy ISI:
Promote local production of consumer goods
Sufficient local demand to enable economies of scale
Sufficient local labor for labor intensive production
Necessary technology available for import (in part in form of foreign capital: machines, etc.)
Benefits: wage-based employment, human capitalSlide22
Solution to Declining Terms of Trade Problem: ISI
Easy ISI
Second step options
Secondary ISI
Move up to consumer durables (cars, etc.), intermediate inputs (steel, etc.), and capital goods (machines, etc.)
Common in Latin America, South Asia, etc.
Export substitution
Expand consumer good production for export
Common in some East Asian countriesSlide23
ISI Policies
Government planning (5-year plans, etc.)
Government investment
Roads, rail, electricity, telecom, etc.
State-owned & mixed-ownership enterprises
Trade barriers
Tariffs (on manufactured goods)
Import quotas (on manufactured goods)Overvalued and/or multitiered
exchange rates to enable import of capital goodsSlide24
Sources of funds for investment
Foreign aid
Foreign borrowing
Taxes on agricultural exports (marketing boards)
Tariffs on importsSlide25
$2
$1
$1Slide26
Winners & Losers from ISI Policies
Winners
Workers & firms in import-competing industries
H
igher market share & prices for produced goods
Government
Jobs, opportunities for rent-seeking
Urban residentsSubsidized government services
Losers
Export-oriented farmers
Lower producer prices => reduced productionConsumers Higher prices for manufactured goodsManufacturers in export-oriented industries (if any)Overvalued exchange rates increase price of exports, etc.Slide27
Assume the world equilibrium price for cocoa is $2. How much would Ghana cocoa farmers be willing to produce?
Price of cocoa
3
2
1
2
6
4
S
C
D
C
Quantity of Ghanaian CocoaSlide28
Assume the world equilibrium price for cocoa is $2. How much would Ghana cocoa farmers be willing to produce?
Price of cocoa
3
2
1
2
6
4
S
C
D
C
Quantity of Ghanaian CocoaSlide29
How would cocoa farmers respond if the government sets the producer price at $1?
Price of cocoa
3
2
1
2
6
4
S
C
D
C
Quantity of CocoaSlide30
How would cocoa farmers respond if the government sets the producer price at $1?
Price of cocoa
3
2
1
2
6
4
S
C
D
C
Quantity of CocoaSlide31
ISI policies successfully promoted industrialization & GDP growth in 60s & 70s
GDP/capita growth
1960s
& 70s
Latin America
2.3%
Sub-Saharan
Africa
1.4%
Middle East & N. Africa
3.7%East Asia5.2 %South Asia1.2%Southeast Asia3.1%But for most countries (all but East Asia), those growth rates would not prove sustainable…Slide32
Conclusions
International and domestic developments and new belief systems => ISI Policies
World Wars & Depression strengthened relatively scarce factor owners
Political changes strengthened workers, domestic industrialists, urban voters, etc.
Marxism,
Structuralist
critique of economic liberalism, etc. Slide33
Conclusions
ISI policies increased industrialization & GDP growth, but …
Urban workers & industrialists benefitted to detriment of export-oriented farmers
Governments (esp. in “weak states”) took advantage of rent-seeking opportunities to over-extend protection of inefficient manufacturers
Budget & trade deficits left countries exposed to global downturn