SESSION_11_-_TRADE_POLICY_IN_DEVELOPING_COUNTRIES

TRADE POLICY IN DEVELOPING COUNTRIES

Overview of Trade Policy and Development

  • Trade policy plays a critical role in the economic growth of developing countries.

  • Understanding the dynamics of trade policy helps explain why some nations achieve rapid development while others do not.

  • Key themes include:

    • Industrialization

    • Trade liberalization since 1985

    • Economic growth in Asia

Introduction to Import-Substitution Industrialization (ISI)

  • Rationale of ISI:

    • Reduce reliance on imports.

    • Establish a robust manufacturing base to achieve economic independence.

  • Timeline:

    • Widely adopted post-WWII, prevalent until the 1970s.

  • Examples:

    • India adopted ISI focusing on domestic production under protectionism.

    • Latin American countries implemented similar ISI strategies.

  • Definition:

    • ISI is a strategy aimed at limiting imports and fostering domestic production.

The Infant Industry Argument

  • Concept:

    • Emerging industries require temporary protection to become competitive in the global market.

  • Challenges:

    • Imperfect Capital Markets: Developing countries often lack effective financial systems.

    • Appropriability Issues: Early innovators incur costs that benefit later entrants without compensation.

  • Historical Examples:

    • U.S: High tariffs in the 19th century supported industrial growth.

    • Japan: Post-war import controls fueled substantial industrialization.

Criticisms of Import-Substitution Industrialization

  • Inefficiencies: Protectionism protects uncompetitive industries.

  • Scale Limitations: Small domestic markets hinder production efficiency leading to higher costs.

  • Misallocation of Resources: Industries without comparative advantages receive undue focus.

  • Case Example: In Pakistan (1963), high protection resulted in tariff rates of 271%, conserving inefficient industries.

Outcomes of Import-Substitution Industrialization

  • Positive Results:

    • Expansion of sectors such as steel, textiles, and automobiles.

  • Negative Results:

    • Long-term competitiveness remained unfirm.

    • Limited GDP growth in comparison to advanced nations.

  • Indian Example (1970s): Although imports accounted for only 3% of GDP, local products lagged in quality.

Achievements and Challenges of ISI

  • Achievements:

    • Mexico developed manufacturing capacity by heavily shielding its sectors until the 1980s.

    • Growth in critical sectors such as automobiles and steel, with increased domestic production.

  • Challenges:

    • Complex regulations created inefficiencies.

    • Small market limitations hampered achieving economies of scale.

    • In Pakistan (1963), misallocation led to costs exceeding global benchmarks by 300%.

Transition from ISI to Trade Liberalization

  • Motivation for Change:

    • Inefficiencies present in ISI prompted countries to adopt open trade policies.

  • Case Study: Mexico:

    • Liberalized trade leading to significant export growth.

    • Joined NAFTA in 1994 to enhance North American economic integration.

Overview of Trade Liberalization

  • Trend:

    • Average tariffs in developing countries dropped from 30% (1980s) to approximately 10% by 2000.

  • Brazil's Example: Reduced tariffs from 50% to below 10% following liberalization.

Effects of Trade Liberalization

  • Significant increase in trade as a percentage of GDP in developing nations.

  • Notable shift from agricultural to manufacturing exports.

  • India’s Example: Export volumes significantly surged post-1990s liberalization.

Mixed Outcomes of Liberalization

  • Success Stories:

    • India showcased economic acceleration through liberalization.

  • Challenges:

    • Latin America faced reduced GDP growth despite reforms.

    • Mexico’s Experience: Despite export growth, general economic growth remained modest.

Introduction to the Asian Miracle

  • Export-oriented industrialization significantly contributed to GDP growth and poverty reduction in East Asian countries.

  • Key Nations: South Korea, Taiwan, and Singapore experienced rapid economic growth since the 1960s.

Economic Convergence

  • Trends Noted:

    • South Korea’s per capita GDP rose from 2% to 35% of U.S. levels between 1960 and 2010.

    • Parallel growth patterns observed in China and India after implementing economic reforms.

Role of Trade in Growth

  • China’s Transformation:

    • Post-1978 reforms positioned China as the leading global exporter.

    • Emphasis on export-oriented policies and openness to foreign investments.

Controversies Surrounding the Asian Miracle

  • Debate: The significance of trade liberalization compared to broader economic reforms impacting growth rates.

  • Observations of slower economic growth in Latin America highlight the potential importance of additional factors.

Lithuania’s Economic Transition

  • Strategy: Focused on export-oriented growth and integrating into the EU market post-1990s.

  • Outcomes: GDP and exports experienced significant growth with key advancements in manufacturing and technology sectors.

Key Takeaways from Session 11

  • ISI aimed to reduce foreign dependence by limiting imports for domestic production growth.

  • Encountered challenges led to a shift from ISI to open trade policies.

  • Trade liberalization yielded export growth but created varied economic outcomes across different regions.