Chapter 10 Trade Policy in Developing Countries
Chapter 10 ▪ Trade Policy in Developing Countries
Chapter organization Introduction Import-Substituting Industrialization Problems of the Dual Economy Export-Oriented Industrialization: The East Asian Miracle Summary Copyright C 2003 Pearson Education, Inc Slide 10-2
Copyright © 2003 Pearson Education, Inc. Slide 10-2 Chapter Organization ▪ Introduction ▪ Import-Substituting Industrialization ▪ Problems of the Dual Economy ▪ Export-Oriented Industrialization: The East Asian Miracle ▪ Summary
Introduction There is a great diversity among the developing countries in terms of their income per capita Why are some countries so much poorer than others? For about 30 years after World War II trade policies in many developing countries were strongly influenced by the belief that the key to economic development was creation of a strong manufacturing sector The best way to create a strong manufacturing sector was by protecting domestic manufacturers from international competition Copyright C 2003 Pearson Education, Inc Slide 10-3
Copyright © 2003 Pearson Education, Inc. Slide 10-3 ▪ There is a great diversity among the developing countries in terms of their income per capita. ▪ Why are some countries so much poorer than others? • For about 30 years after World War II trade policies in many developing countries were strongly influenced by the belief that the key to economic development was creation of a strong manufacturing sector. – The best way to create a strong manufacturing sector was by protecting domestic manufacturers from international competition. Introduction
Introduction Table 10-1: Gross Domestic Product Per Capita, 1999(dollars United States 33900 Japan 23.400 Germany 22.700 Singapore 27,800 South Korea 13,300 Mexico 8.500 China 3.800 India 1.800 Source: CIA. World Factbook. 2000 Copyright C 2003 Pearson Education, Inc Slide 10-4
Copyright © 2003 Pearson Education, Inc. Slide 10-4 Introduction Table 10-1: Gross Domestic Product Per Capita, 1999 (dollars)
Import-Substituting Industrialization E From World War II until the 1970s many developing countries attempted to accelerate their development by limiting imports of manufactured goods to foster a manufacturing sector serving the domestic market a The most important economic argument for protecting manufacturing industries is the infant industry argument Copyright C 2003 Pearson Education, Inc Slide 10-5
Copyright © 2003 Pearson Education, Inc. Slide 10-5 ▪ From World War II until the 1970s many developing countries attempted to accelerate their development by limiting imports of manufactured goods to foster a manufacturing sector serving the domestic market. ▪ The most important economic argument for protecting manufacturing industries is the infant industry argument. Import-Substituting Industrialization
Import-Substituting Industrialization he Infant Industry Ar gument It states that developing countries have a potential comparative advantage in manufacturing and they can realize that potential through an initial period of protection It implies that it is a good idea to use tariffs or import quotas as temporary measures to get industrialization started Example: The U.S. and Germany had high tariff rates on manufacturing in the 1gth century, while Japan had extensive import controls until the 1970s Copyright C 2003 Pearson Education, Inc Slide 10-6
Copyright © 2003 Pearson Education, Inc. Slide 10-6 Import-Substituting Industrialization ▪ The Infant Industry Argument • It states that developing countries have a potential comparative advantage in manufacturing and they can realize that potential through an initial period of protection. • It implies that it is a good idea to use tariffs or import quotas as temporary measures to get industrialization started. – Example: The U.S. and Germany had high tariff rates on manufacturing in the 19th century, while Japan had extensive import controls until the 1970s
Import-Substituting Industrialization Problems with the Infant Industry Argument It is not always good to try to move today into the industries that will have a comparative advantage in the future Example: In the 1980s South Korea became an exporter of automobiles, whereas in the 1960s its capital and skilled labor were still very scarce Protecting manufacturing does no good unless the protection itself helps make industry competitive Example: Pakistan and India have protected their heav manufacturing sectors for decades and have recently begun to develop significant exports of light manufactures like textiles Copyright C 2003 Pearson Education, Inc Slide 10-7
Copyright © 2003 Pearson Education, Inc. Slide 10-7 Import-Substituting Industrialization ▪ Problems with the Infant Industry Argument • It is not always good to try to move today into the industries that will have a comparative advantage in the future. – Example: In the 1980s South Korea became an exporter of automobiles, whereas in the 1960s its capital and skilled labor were still very scarce. • Protecting manufacturing does no good unless the protection itself helps make industry competitive. – Example: Pakistan and India have protected their heavy manufacturing sectors for decades and have recently begun to develop significant exports of light manufactures like textiles
Import-Substituting Industrialization Market Failure Justifications for Infant Industry Protection Two market failures are identified as reasons why infant industry protection may be a good idea Imperfect capital markets justification If a developing country does not have a set of financial institutions that would allow savings from traditional sectors (such as agriculture) to be used to finance investment in new sectors(such as manufacturing), then growth of new industries will be restricted Appropriability argument Firms in a new industry generate social benefits for which they are not compensated(e.g. start-up costs of adapting technology) Copyright C 2003 Pearson Education, Inc Slide 10-8
Copyright © 2003 Pearson Education, Inc. Slide 10-8 ▪ Market Failure Justifications for Infant Industry Protection • Two market failures are identified as reasons why infant industry protection may be a good idea: – Imperfect capital markets justification – If a developing country does not have a set of financial institutions that would allow savings from traditional sectors (such as agriculture) to be used to finance investment in new sectors (such as manufacturing), then growth of new industries will be restricted. – Appropriability argument – Firms in a new industry generate social benefits for which they are not compensated (e.g. start-up costs of adapting technology). Import-Substituting Industrialization
Import-Substituting Industrialization Promoting Manufacturing Through Protection Import-substituting industrialization The strategy of encouraging domestic industry by limiting imports of manufactured goods Many less-developed countries have pursue d this strategy Has import-substituting industrialization promoted economic development? Many economists are now harshly critical of the results of import substitution, arguing that it has fostered high cost, inefficient production Copyright C 2003 Pearson Education, Inc Slide 10-9
Copyright © 2003 Pearson Education, Inc. Slide 10-9 ▪ Promoting Manufacturing Through Protection • Import-substituting industrialization – The strategy of encouraging domestic industry by limiting imports of manufactured goods – Many less-developed countries have pursued this strategy. • Has import-substituting industrialization promoted economic development? – Many economists are now harshly critical of the results of import substitution, arguing that it has fostered highcost, inefficient production. Import-Substituting Industrialization
Import-Substituting Industrialization Why not encourage both import substitution and exports? A tariff that reduces imports also necessarily reduces exports Until the 1970s many developing countries were skeptical about the possibility of exporting manufactured goods In many cases, import-substituting industrialization policies dovetailed naturally with existing political biases Copyright C 2003 Pearson Education, Inc Slide 10-10
Copyright © 2003 Pearson Education, Inc. Slide 10-10 • Why not encourage both import substitution and exports? – A tariff that reduces imports also necessarily reduces exports. – Until the 1970s many developing countries were skeptical about the possibility of exporting manufactured goods. – In many cases, import-substituting industrialization policies dovetailed naturally with existing political biases. Import-Substituting Industrialization
