Trade and Development I: Import Substitution Industrialization

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Trade and Development I Import Substitution
Industrialization

• READING ASSIGNMENT
• Oatley Chapter 6

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Plan

1. Interests Institutions explanation for ISI
2. Economic justification for ISI
3. What is ISI?
4. The effect

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Part 1 Interests Institutions explanation for
ISI
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• Up through WWI, developing countries had liberal
  trade policies
• By late 1950s, developing countries turn
  protectionist
• 2 questions
• Who were the winners from globalization?
• Did they have political power?
• Trade politics in developing countries dominated
  by urban-rural cleavage

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• Generally, developing countries are abundantly
  endowed with land and poorly endowed with
  capital
• Agriculture is the ________-________ sector
• EXPORT ORIENTED SECTOR
• Manufacturing is the ________-________ sector
• IMPORT-COMPETING SECTOR
• So, land-owners should be ___-free-trade
• PRO-
• Owners of capital should be ___-free-trade
• ANTI-

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Recall Rogowskis model
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Pro-trade ?
Pro-trade ?
URBAN-RURAL CONFLICT
CLASS CONFLICT
Examples Peron in Argentina, Vargas in Brazil
Anti-trade ?
Anti-trade ?
Pro-trade ?
Pro-trade ?
URBAN-RURAL CONFLICT
CLASS CONFLICT
Developing
Anti-trade ?
Anti-trade ?
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Smoot-Hawley, Great Depression
Developing
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Part 2 Intellectual justification for ISI
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Intellectual justificationStructuralist argument

• The shift of resources from agriculture to
  manufacturing would not occur unless the state
  adopted appropriate industrial policy

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International Anti-trade stance

• Haberler Report
• Von Haberler Harvard economist (Austrian
  origin)
• Reports a decline in the terms of trade for
  primary producers
• From 1955 commodity prices fell by 5,
  industrial prices rose by 6
• 1964 United Nations Conference on Trade and
  Development (UNCTAD) ? Group of 77
• (Von Haberler did not mean that there was a
  systematic long-term (secular) decline in the
  terms of trade. He left Harvard in 1971 for
  American Enterprise Institute)
• ? SingerPrebisch Theory (Intellectual
  justification for ISI)
• Participation in GATT will make it harder for
  developing countries to industrialize

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Terms of trade

• Relates the price of a countrys exports to the
  price of its imports
• Improvement in the terms of trade
• Price of exports is rising relative to the price
  of imports
• Decline in the terms of trade
• Price of exports is declining relative to the
  price of imports

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Summarizing Why did governments adopt ISI?

• Interests
• Losers from globalization gain power during the
  Great Depression
• (Globalization dries up, so the winners lose
  substantial income)
• Ideas
• Some economists (legitimized by the United
  Nations) argued against free trade

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Part 3 What is ISI?
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Import Substitution Industrialization

• Industrialize by substituting domestically
  produced goods for manufactured items previously
  imported
• Typically called ISI
• 2 stages
• Easy ISI
• Secondary ISI

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Easy ISI

• Develop domestic manufacturing of simple consumer
  goods
• Soda, beer, apparel, shoes, furniture
• What do you mean by easy? Easy how? How is it
  easy?
• Large domestic demand preexisting
• Requires Low-Tech machines
• Requires low-skilled labor
• Ya know easy.

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Asia Latin America

• Both practiced easy ISI
• But then Asian countries switched to an
  EXPORT-ORIENTED STRATEGY
• Producing manufactured goods that can be sold in
  international markets
• EXPORT rather than produce exclusively for the
  domestic market
• Latin America moved to SECONDARY ISI

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SECONDARY ISI

• Production of consumer durable goods,
  intermediate inputs, and the capital goods needed
  to produce consumer durables
• E.g., automobiles (Argentina, Brazil, Chile)
• Begin by importing auto pieces and assembling
  them domestically
• Gradually, increase the of locally produced
  parts

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Argentine Torino http//www.taringa.net/posts/auto
s-motos/4559857/Autos-del-Turismo-Carretera-Chevy-
Falcon-Dodge-Torino.html http//www.taringa.net/p
osts/autos-motos/16261340/Renault-Torino-un-fierra
zo-D.html
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Government policies to promote ISI

• Investment in activities the private sector would
  not produce
• Roads, transportation networks, electricity,
  telecommunications
• Large-scale operations steel plants, auto
  plants
• State-owned Enterprises ( mixed-owned)
• Chemical, telecommunications, electricity,
  railways, metal fabrication
• Trade barriers (tariffs)
• Tax policies
• Taxed agricultural exports through Marketing
  Boards
• Marketing Board purchased crops from farmers at
  below-world market prices, then sell them on the
  world market at world market prices

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• Marketing boards
• Disincentivized agricultural production
• Subsidized industrialization
• Tariffs
• Incentivized local consumers to buy locally
  manufactured industrial products

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Closer look _at_ Brazil

• Labor-abundant, capital scarce
• Late 19th century slave labor
• 1877-78 Grande Seca (Great Drought) in the
  cotton-growing northeast, led to major turmoil,
  starvation, poverty and internal migration
• Slavery abolished 1884
• Still, primary commodities 1 Coffee
  dominate until the Great Depression
• Drop in prices hurt land owners again this time
  a coup
• 1930 Getulio Vargas
• Pursues the easy ISI stage Protectionism
  promotes light manufacturing
• Transition to 2ndary ISI in 1950s

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Oatley 2011 pages pg. 126-127
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http//www.youtube.com/watch?vcbOdUqf-mUI
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Argentinas Bicentennial Celebration
http//www.boston.com/bigpicture/2010/05/argentin
as_bicentennial.html
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Results

• How did they pay for industrialization?
• Borrowed
• How did they pay it back?
• Latin American Debt Crisis (1982)
• The Lost Decade
• IMF to the rescue?
• Washington Consensus
• Dismantle the states presence in the economy

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Take-homes

• Political motivation for ISI
• Losers from trade in Latin America (urban sector)
  gain political power
• Intellectual justification for ISI
• Declining terms of trade for primary products
• Asia LA both practice easy ISI
• LA moves to Secondary ISI

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Thank youWE ARE GLOBAL GEORGETOWN!