Download TRADE STRATEGIES FOR ECONOMIC GROWTH

TRADE STRATEGIES FOR ECONOMIC
GROWTH & ECONOMIC DEVELOPMENT
EXPORT LED GROWTH VERSUS
IMPORT SUBSTITUTION
BLINK & DORTON (2011), Economics a Course Companion, p371 to p375
Growth & Development Strategies
•Export Led Growth
vs..
•Import Substitution
Industrialization
GROWTH STRATEGIES
Export-led Growth OR
Export Oriented Industrialization
• Export led growth is an outward-oriented growth
strategy, based on openness and international trade.
• Growth is achieved by concentrating on increasing
exports, and export revenue, as a leading factor in the
aggregate demand of the country.
• Increasing exports should lead to increasing GDP, and
this in turn should lead to higher income and,
eventually, growth in domestic markets as well as
exporting ones.
• The country concentrates on producing and exporting
products in which it has a comparative advantage of
production.
GROWTH STRATEGIES
Export Led Growth
In order to achieve export led growth, it is
assumed the country will need to adopt certain
policies. These include:
• Liberalized Trade: Open up domestic markets to
foreign competition order to gain access to foreign
markets.
• Liberalized Capital Flows: Reduce restrictions on FDI.
• A Floating Exchange Rate:
• Infrastructure: Investment in the provision of
infrastructure to enable trade to take place.
• Deregulation & Minimal Government Intervention.
GROWTH STRATEGIES
Export Led Growth
• The previous list illustrates the theoretical
“package” of policies associated with exportled growth.
• In reality, countries that adopt an outwardoriented strategy do not necessarily adopt all
of these policies.
GROWTH STRATEGIES
Export Led Growth: Primary Products
• The overall trend in primary products has
been downward for many years, with the
exception of oil and some metals.
• This is due to increasing supply and relatively
insignificant increases in demand.
• This combined with increasing protectionism
by developed countries, means that export led
growth based solely on the export of primary
products is unlikely to be achieved.
Export Led Growth:
Manufacturing Exports
• The focus on export-led growth is usually on
increasing manufacturing exports.
Asian Tigers
• The success of countries such as South Korea,
Hong Kong, Singapore and Taiwan (known
previously as the Asian Tigers) is usually used to
illustrate the effectiveness of such a strategy.
• These countries exported products in which they
had a comparative advantage, previously based
upon low cost labor and were extremely
successful in doing so.
Export Led Growth:
Manufacturing Exports
Asian Tigers
• Over time the type of product being exported by
the majority of these countries has also tended to
change from products that were produced using
labour intensive production methods, to more
sophisticated products, using capital intensive
production methods and more highly skilled
workers.
• Improvements in education systems were
essential for this.
Problems with Export Led Growth
Rising Protectionism in Developed Countries
• The success of the Asian tigers since around 1965
has led to increased protectionism in developed
countries against manufactured products from
developing countries.
• Trade Union and workers in developed countries
argued that they could not compete against the
imports from low-wage developing countries that
this was unfair.
• The lobbied their governments to put tariffs and
quotas on the lower-priced goods.
Problems with Export Led Growth
Rising Protectionism in Developed Countries
• Price increases as a result of tariffs effectively
removed the comparative advantage of the
exporting countries.
• Tariff escalation also reduced the ability of the
developing countries to export processed
goods and assembled products, forcing many
to export primary products and low-skilled
manufactured goods instead.
Government Policy &
Export Led Growth
The Role of Government
• Certain assumptions are made about the
necessary conditions for export led growth.
• If we examine the successful countries these
conditions were not necessarily met.
• Many economists would argue that the role of
the state in successful export-led growth is
vital & minimizing government intervention is
not the way forward.
The Role of Government in
Export Led Growth
The Asian Tigers
• In the Asian tiger countries, governments played
an important role by providing infrastructure,
subsidizing output through low credit terms via
central banks and promoting savings and
improvements in technology.
• In addition, governments adopted policies where
they protected domestic industries, that were not
yet able to compete with foreign firms (infant
industry argument for protection)
• They also promoted the industries that were
ready for competition in export markets.
The Role of Government in
Export Led Growth
• This topic is one of great debate among
development economists, and many argue
that invention is vital.
• Others argue that the state intervention in
these economies actually slow growth rates.
Problems with Export Led Growth
MNCs become too powerful!
• If countries attempt to kick start their exportled growth by attracting MNCs, there is always
the fear that the MNCs may become too
powerful within the country and this may lead
to problems.
Problems with Export Led Growth
Increased Income Inequality
• It is argued by some economists that freemarket export-led growth may increase
income inequality in the country.
• If this is the case, then the economic growth
may be achieved at the expense of economic
development.
IMPORT SUBSTITUTION
INDUSTRIALISATION (ISI)
• It may also be referred to an inward-oriented
strategy.
• This states, that a developing country should,
wherever possible, produce goods domestically
rather than import them.
• This should mean that industries producing the
goods domestically will be able to grow, as will
the economy, and will then be able to be
competitive on world markets in the future as
they gain from economies of scale.
IMPORT SUBSTITUTION
INDUSTRIALISATION
• It is the opposite of export-led growth.
• It is not supported by economists who believe
in the advantages of free trade based on
comparative advantage.
IMPORT SUBSTITUTION
INDUSTRIALISATION
Necessary conditions for strategy to work:
• Governments need to adopt a policy of
organizing the selection of goods to produce
domestically.
• Historically this has been labour-intensive, low
skilled manufactured goods such as clothing or
shoes.
• Subsidies are made available to encourage
domestic industries.
• The government needs to implement a
protectionist system with tariff barriers to keep
out foreign imports.
Advantages of ISI
• ISI protects jobs in the domestic market, since
foreign firms are preventing from competing
so domestic firms dominate.
• ISI protects local culture and social habits by
practically isolating the economy from foreign
influence.
• ISI protects the economy from power, and
possibly the negative influence of MNCs.
Disadvantage of ISI
• ISI may only protect jobs in the short run.
• In the long run economic growth may be lower in
the economy and the lack of growth may lead to
a lack of job creation.
• ISI means that the country does not enjoy the
benefits to be gained from comparative
advantage and specialization. Therefore products
are produced relatively inefficiently when they
could be imported from efficient foreign
producers.
Disadvantages of ISI
• ISI may lead to inefficiency in domestic
industries because competition is not there to
act as a spur to be efficient or to conduct R&D.
• ISI may lead to high rates of inflation due to
domestic aggregate supply constraints.
• ISI may cause other countries to take
retaliatory protectionist measures.
Countries adopting ISI
• The main countries which attempted ISI were in Latin
America, including Argentina & Chile. Both has since
changed their policies.
• As former colonies gained their independence many
also adopted inward oriented strategies.
• These included India, Nigeria and Kenya.
• These policies showed some success in the 1960s and
1970s but the policies started to fail in the early 1980s.
• Government over-spending and the debt crisis lead to
the inability of governments to repay the loans they
had take. In the 1980s many of the countries were
forced to go to the IMF for help.
THE WASHINGTON CONSENSUS
Reforms needed for Economic Growth
• In 1989, the American economist John
Williamson identified 10 common reforms
that were necessary for economic growth.
• The World Bank, the IMF and the US Treasury
department agreed with the list and as a
result Latin American economies seeking help
were encouraged (or forced) to adopt such
reforms to illegible for assistance.
THE WASHINGTON CONSENSUS
Reforms needed for Economic Growth
• Fiscal Discipline, that is, balanced budget
• Redirection of spending from indiscriminate subsidies
to basic health and education.
• Lowering of Marginal Tax Rates and broadening of the
tax base.
• Interest Rate Liberalization
• A competitive Exchange Rate
• Trade Liberalization
• Liberalization of FDI inflows
• Privatization
• Deregulation
• Securing of Property Rights
THE WASHINGTON CONSENSUS
Reforms needed for Economic Growth
CRITICISM OF THE WASHINGTON CONSENSUS
• By the end of the 20th century, the Washington
Consensus was increasingly criticized by
economists who were not supporters of such
policies.
• This claims that reforms such as the Washington
Consensus are just a way of to ensure that MNCs
have access to cheap labor markets in developing
countries.
• In this way the MNCs can produce inexpensive
products, which are them sold for higher prices in
developed countries.
THE WASHINGTON CONSENSUS
Reforms needed for Economic Growth
CRITICISM OF THE WASHINGTON CONSENSUS
• The MNCs make high profits and the workers in
developing countries gain little.
• According to this view, the Washington consensus
has not led to high economic growth in Latin
America.
• Instead there has been economic crises and
increased debt.
• Such policies have led to increased income
inequality and exploitative working conditions,
thus working against the goal of economic
development.
THE WASHINGTON CONSENSUS
Reforms needed for Economic Growth
A MOVE TO THE LEFT IN LATIN AMERICA
• There has been a movement to the left in a
number of Latin American countries such as
Venezuela, Ecuador, Bolivia and to a lesser
extent Brazil.
• These countries along with Cuba have been
very vocal in their condemnation of the
Washington consensus.