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.