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Trade and Development I: Import Substitution Industrialization

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Title: Trade and Development I: Import Substitution Industrialization


1
Trade and Development I Import Substitution
Industrialization
  • READING ASSIGNMENT
  • Oatley Chapter 6

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

3
Part 1 Interests Institutions explanation for
ISI
4
  • 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

5
  • 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-

6
Recall Rogowskis model
7
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 ?
8
Smoot-Hawley, Great Depression
Developing
9
Part 2 Intellectual justification for ISI
10
Intellectual justificationStructuralist argument
  • The shift of resources from agriculture to
    manufacturing would not occur unless the state
    adopted appropriate industrial policy

11
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

12
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

13
(No Transcript)
14
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

15
Part 3 What is ISI?
16
Import Substitution Industrialization
  • Industrialize by substituting domestically
    produced goods for manufactured items previously
    imported
  • Typically called ISI
  • 2 stages
  • Easy ISI
  • Secondary ISI

17
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.

18
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

19
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

20
(No Transcript)
21
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
22
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

23
  • Marketing boards
  • Disincentivized agricultural production
  • Subsidized industrialization
  • Tariffs
  • Incentivized local consumers to buy locally
    manufactured industrial products

24
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

25
Oatley 2011 pages pg. 126-127
26
http//www.youtube.com/watch?vcbOdUqf-mUI
27
Argentinas Bicentennial Celebration
http//www.boston.com/bigpicture/2010/05/argentin
as_bicentennial.html
28
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

29
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

30
Thank youWE ARE GLOBAL GEORGETOWN!
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