Trade Policies for Development: I.Import Substitution. II.Export Promotion III.Regional Economic Integration See text, Chapter 12, Sections 12.5, 12.6.

Trade Policies for Development:

I. Import Substitution. II. Export PromotionIII. Regional Economic Integration

See text, Chapter 12, Sections 12.5, 12.6 and 12.7, pp. 593-620

ECON 3508 June 13 and 15, 2011

I. Import Substituting Industrialization (ISI)

1. Basic Character of the Approach:• Definition• Objectives:

– Industrialization and structural Change;– Employment creation in the "modern

sector"– Balance of payments considerations:

reduce imports– "Economic Independence"

2. Method, and "policy tools:“– Analyze import pattern;– Stimulate new industries replacing most

significant imports via“Protection” and Subsidization:

– Instruments: • Tariffs• Non-Tariff Barriers (NTBs)• Low interest lending to favoured enterprises ISI

sectors• Subsidies of various sorts to the "ISI" activities• Tax advantages of various sorts• Provision of infrastructure

3. Origins of the approach:

•Development theorizing, 1943-1960;• Experience of the higher income countries earlier in their histories: (USA, Canada, Germany, etc.)• The Soviet economic model in some cases;• The Latin American development experience: 1930s and WW II eras;• Classical Economics: the Infant Industry argument changed to an "infant economy" argument.

4. Strengths of the Approach

– initial potentiality of substituting for some major import products;

– ISI as a "natural process" – The larger the country, the greater the

potential of ISI due to the existence of a larger market.

[e.g. compare Brazil with Nicaragua]

5. Results:

– Initially, from 1945 to around 1970. reasonably good especially for larger countries, esp. in Latin America;

• Rapid growth and significant industrialization plus structural change in many countries;

– Later, around the late 1960s into the 1980s, the approach was "running out of steam”

• Growth slowed down; inefficiencies with the approach became overpowering in many cases.

6. Problems with the approach:

– Indiscriminate and extreme implementation in many cases;

– Thwarting of various types of economies of scale;

• “Effective market size” was small for many countries

– "Miniature replica effect"– Promotion of oligopoly and monopoly power

through protection against imports;

– Discrimination against all non-protected sectors (usually agriculture and resource based activities)

– Blockage of intra-industry specialization;– Impacts on income distribution– Balance of Payments impacts often adverse

(due to high demand for imported capital goods, and inputs; • and to the impact on the exchange rate

– Tendency to exhaust itself, early in small countries, later in large countries

II. Export-Oriented Development Strategies

1. Basic Character of the Approach– Definition– Relationship with other aspects of External-

Orientation;– Objectives:

• Achieve accelerated and economically sustainable growth and development;

• Accelerate high-productivity employment creation

• Improve income levels

• Relieve balance of payments constraints on development

2. Policy Tools or Methods:

– lower tariffs and non tariff barriers (NTBs) – cut other types of subsidization for old ISI

firms;– provide transitional support for export

activities or the "clusters" of economic activities around major export activities'

– let the exchange rate float, i.e. let the exchange rate realities prevail by permitting a market determined rate;

3. Range of Approaches:– Complete "Apertura" – Generalized multilateral trade liberalization;– Regional trade liberalization;– Restricted liberalization in some sectors

only;– Some bilateral liberalization– "Export Processing Zones" – various combinations of the above.

4. Origins of the Approach:

– regional integration experiences, esp. European Common Market;

– the experience of some major successful cases by the 1970s e.g. Japan, the Asian Tigers

– economic theory and argumentation– problems with ISI;

5. Strengths:• Actual Historical Experiences:

– Highly successful: Asian Tigers; China; India; Malasia, HK, Taiwan, S. Korea, Chile

– Positive but debatable: Mexico, much of Latin America;• Vis-a –vis Disaster ISI cases: e.g. N. Korea

• Reduction of Economic Waste (improved efficiencies; rising productivity)

– improved economies of scale;– intra-industry specialization becomes possible;

• reduced discrimination against non-protected sectors;

• intensified dynamic effects of "learning through competition;"

• reduced monopoly-oligopoly power for domestic firms;

• reduced rent-seeking activities.

• Positive and more sustainable effect on balance of payments;

• Increased foreign exchange earnings permit increased importation of capital goods and thence increased technological transfer;

• Higher productivity employment permits rising real wages and incomes, and thence improved family well-being and human development;

• Improved growth permits increased taxation and social expenditures and thence improved human development;

6. Problems with the Approach:

• Short-term transitional costs of restructuring may make the approach unsustainable at first;

• Vested interests may block implementation;• Major gains in employment and wages may be

slow in coming;• May accelerate "resource stripping" if

environmental policies are weak and inappropriate;

• Some countries may not be in a position to benefit quickly if human resources, institutions and other policies are weak.

The Industrialization Strategy Approach to Export-Oriented Strategic Approach

– Focus on government interventions to encourage exports, especially those with higher skill and technology content (industrial policy)

– Problem: without proper attention to incentives, industrial policies may be counterproductive too

– WTO rules and industrial policies – gray areas remain

– Problem: level of competence and political authority of governments to carry out policies effectively

III. REGIONAL ECONOMIC INTEGRATION Among Developing

Countries

ECON 3508 June 15, 2011

Agenda

1. How does REGIONAL ECONOMIC INTEGRATION Work? Advantages

2. Potential Disadvantages

3. Forces promoting economic integration

4. Types of Integration Scheme

5. Experience with Economic Integration

6. Some Specific Integration Schemes

The Historical Record:

Some comments on:1. The US common market after 1776;

Germany after 1870 unification

2. The European Common Market: from 6 members to 23 or so.

3. LAFTA; NAFTA; CAFTA

4. Chavez “Bolivarian Alternativ”e (?)

5. Asian, African and other integration attempts

1. How does REGIONAL ECONOMIC INTEGRATION Work?

It makes possible productivity improvements,– i.e. it permits more output to be squeezed out of

given quantities of human, natural and capital resources. [HOW? See below]

It thus can contribute to – increasing real incomes in a country, thereby

permitting – improved human development by individuals and

families for themselves, and – by governments through increased taxation and social

expenditures (health, education, social security, infrastructure etc.)

It can also promote economic development through– strengthening the tax base of governments so that– more can be invested in public goods or other

purposes directed more specifically at economic development.

 The economic expansion facilitated by economic

integration may make possible public investment in safeguarding the environment.

Does Economic Integration promote stability and peace among countries?

Evidence and argumentation pro:Evidence contra:

How does Regional Economic Integration promote productivity improvements?

1. Permits Implementation of Economies of Scale and Consequent Resource Saving (human, natural and capital resources):– Larger plant size

– Larger enterprise size

– Increased length of “production runs”

– Increased intra-industry specialization

– Increased vertical specialization

– Increased agglomerative economies.

These are some of the “dynamic benefits” of improved rationalization of economic structure.

2. Static Benefits: gains from comparative advantage from trade creation

3. Impacts of Increased Competition within the Integration Area:

– Stimulates domestic product quality improvement;

– Stimulates improvements in product quality and reductions in production costs.

4. Expanded Market Size can Promote Increased (and more efficient) Investment.

These gains can be greatest for small country partners

5. Strengthened Ability for the Region to develop successful “clusters” of economic activities and thus to integrate and compete in the international economy

6. Strengthened Ability for the Region to Face External Competition for its own domestic markets.

7. Reversing the historic fragmentation of Asia Africa and L. Am.:Especially Africa: 55 countries, with small effective

market sizes; major logistic difficulties and historic divisions

2. POTENTIAL DISADVANTAGES OF REGIONAL INTEGRATION

1. Costs of Transition to Larger Markets:Some industries or types of economic activity may

not be able to compete with imports.

The result is then labour displacement, economic dislocation, and unemployment.

Are these “costs” of economic integration borne by the workers and enterprises themselves, or does society share in their burden?

– enterprise and industry restructuring costs;

2. Possible Longer Term Negative Impacts:– Loss of effective “clusters” of economic

activities for some regions or countries– consequent loss of economic activity and

employment; (e.g. the Maritime provinces in Canada?)

3. Trade diversion may harm some partners

What is “Trade Diversion?

3. Forces behind the attempts to form larger economic communities:

Economic theory and argumentation Problems with ISI;

Other regional integration experiences, esp. the European Common Market “Demonstration

Effects”

Political arguments: • peace and stability and

• regional bargaining power

4. Stages of Integration1. Specific Functional Cooperation

Agreement to cooperate for specific purposes

(watershed management; transport, energy….)

2. Free Trade Area (FTA);Lowering and elimination of trade barriers between two or more

countries; separate tariff structures for the rest of the world

2. Customs Union (CU)CU = FTA + Common External Tariff

3. Common Market (CM):Common Market = CU + Commonpolicy re Factor Mobility

(capital & labour) and other areas

4. Economic and Monetary Union (EMU):EMU = CM + Single Currency (Monetary & Exchange rate policy)

5. Political Union (PU)Political Union = EMU + Common foreign and security policy;

Common Central Government

Obstacles to Successful Integration

Achieving effective economic integration is complex and politically difficult. Why?

1. Vested interests of enterprise may object due to fear of competition from neighbors

2. Political or philosophical differences among neighboring countries

e.g. East African Community with Idi Amin, Nyrere and Kenyatta

3. Trade Diversion may damage some partners and induce them to leave

4. Distributional Issues: fear that some countries gain disproportionately while others lose

5. Weaknesses in the supranational institutions

6. Infrastructural weaknesses prevent meaningful economic interaction

Some Experiences with Economic Integration: Africa

1. Early ambitious “Pan-Africanists” and modest gradualists;

2. Moderates unwilling to sacrifice national independence so soon after achieving it. A gradualist approach for some time, but with high aspirations

3. Major difficulties have hindered progress Antagonisms among countries

4. Logistic Obstacles: Infrastructure Gaps (see map)

5. Physical Magnitude of Integration Task (see map)

African Economic Integration Schemes

1. Southern African Development Community (SADC)

2. East African Community (EAC)

3. Economic Community of West African States (ECOWAS)

4. Economic Community of Central African States (ECCAS)

5. Common Market for Eastern and Southern Africa (COMESA)

6. Arab Maghreb Union (UMA)

7. Southern Africa's Common Monetary Area (CMA)

8. African Economic Community, (AEC)

African Intra-Bloc Exports as a Per Cent of Total Exports

Integration Scheme

1970 1980 1990 2000 2007

COMESA 9.1 6.1 6.6 6.0 4.7

EAC 16.9 8.9 13.3 17.6 20.4

ECCAS 2.2 1.4 1.4 1.0 0.6

ECOWAS 2.9 10.1 7.8 10.8 9.4

SADC 1.4 0.3 2.8 12.2 15.2

Source: World Bank, World Development Indicators, 2009. p. 349

6. Some African Integration Schemes

o Originally SADCC; Founded 1980; o Defensive economic organization vs. aparteid S.

Africao Re-founded in 1992 with S. African presenceo Objective: a full common marketo 200 million people; GDP +/- 200 milliono Dominated by S. Africao Successful expansion of intra-regional trade

A. Southern African Development Community (SADC)

Latin American Experience with Economic Integration

Early Beginnings;

Limited Early Achievements

Current Schemes

Prospects

Asociación Latinoamericana de

Integración

ALBA

Central American Common Market

Grupo Andino

Caribbean Associations

Mercosur

ASEAN

Conclusion:Numerous attempted integration

schemes;Mixed resultsSome schemes excessively ambitious,

falter in implementationDifficulties in establishing effective

integration movements are immenseSuccess re integration is vital for Africa’s

and Latin America’s Future