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Trade strategies for growth

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Title: Trade strategies for growth


1
Trade strategies for growth development
2
Inward vs outward-oriented
  • International trade strategies in LDCs have
    formed the basis of growth development
    strategies, so one can hardly consider one
    without considering the other.
  • To start industrialization, LDCs have two
    options
  • Discourage IMPORTS whilst developing substitutes
    ? import substitution / inward oriented
    strategies.
  • Encourage EXPORTS to pay for needed imports ?
    export-led growth / outward oriented strategies.

3
Four periods
  • 1950-60s Import substitution with strong
    government intervention
  • 1960s-1970s Export-led with strong government
    intervention
  • 1980s-1990s Export-led with market
    liberalization (Washington consensus)
  • Late 1990s-2000 Export-led with selective
    government intervention (New Development
    consensus)

4
Import substitution (1950s-1960s)
  • Also known as import-substituting
    industrialisation
  • Definition growth and trade strategy where a
    country begins to manufacture simple consumer
    goods oriented towards the domestic market in
    order to promote the domestic industry. It
    depends on protective measures that will prevent
    entry of imports that compete with domestic
    producers.

5
Rationale
  • Independence (from colonizers) seen as
    opportunity to modernize. Instead of continuing
    to export commodities to and import manufactures
    from DCs shut out manufactured imports from DCs
    and start producing those goods domestically.
  • Historical experience of DCs, which used import
    subs strategies in their initial phases of
    development.

6
  • Export pessimism in the 50s-60s caused by ?Px and
    deterioration in balance of payments plus
    expectation of long term deterioration of ToT.
  • Avoiding BoP problems through curtailment of
    imports.
  • Infant industry argument.

7
Import-substitution policies and consequences
  1. High protection of dom firms, inefficiency and
    resource misallocation. Lack of competition? high
    costs inefficiencies high prices paid by
    consumers.
  2. Overvalued exchange rates, making imports of
    capital goods cheaper and X more expensive.

8
  • Negative effects
  • Capital-intensive methods? urban UE growth of
    informal sector
  • X in agricultural sector more difficult ?worsen
    rural poverty
  • Excessive gov intervention, leading to
    misallocation of resources and inefficiencies in
    production.

9
  • Neglect of agriculture ? ?need for food imports
  • Deterioration of BoP and debt position due to
  • ?need for M of cap equipment and intermediate
    goods
  • ?need for food imports
  • Outward flow of financial capital caused by
    repatriation of profits by MNCs and wealthy
    elites seeking safety for their financial
    investments

10
  • Encouragement of cap-intensive production
    methods, but no effort to ? access to credit or
    support users of labour-intensive technologies.
  • Negative impacts on employment and income
    distribution.

11
  • Limited possiblities for growth over the longer
    term on the basis of import-subs, due to
    inefficiencies of production and misallocation of
    resources. For example, many firms enjoying
    protection never became efficient.
  • More room for corruption favoured by strong
    government intervention (payments of bribes to
    gov officials in order to secure particular
    policies).

12
  • Problems with import-substitution became apparent
    in the 60s
  • India, Egypt reacted by ?protection for cap goods
    imports and other intermediate goods in order to
    allevaite BoP problems.
  • Others (Brazil, Israel, Mexico, Singapore, South
    korea, Taiwan, Southern European countries) moved
    towards export promotion.

13
Export promotion (1960s-1970s)
  • Export-led growth strategy a growth and trade
    strategy where a country attempts to achieve
    economic growth by expanding its exports. Based
    on strong government intervention.
  • It is an outward-oriented strategy since it looks
    outward towards foreign markets and provides
    stronger links between the domestic and global
    economies.

14
  • Strong gov intervention necessary to help
    countries develop a strong manuf sector oriented
    towards exports.
  • Most LDCs that turned to export promotion had
    began their industrialization with
    import-substitution. The stronger export
    industries were in many cases the ones that had
    received protection.

15
  • China, Hong Kong (more market-oriented),
    Indonesia, Japan, Malaysia, Singapore, South
    Korea, Taiwan, Thailand Newly Industrializing
    Economies (NIEs) or Asian Tigers. All of them
    pursued export promotion of manufactured goods
    strongly supported by gov intervention and
    industrial policies.

16
Interventionist policies
  1. State ownership and control of financial
    institutions, in order to provide subsidized
    credit to the industries being promoted.
  2. Targeting of industries for export.
  3. Industrial policies to support export industries
    investment grants, production subsidies to export
    industries, tax exemptions, export subsidies...

17
  • Some (selective) protection of domestic
    industries.
  • Requirements on MNCs in order to maximize
    benefits of FDI promotion of RD, transfer of
    targeted technologies into the domestic economy,
    training of dom workers, use of local inputs.
  • Large public investments in key areas education
    and skills, RD, transport and communications
    infrastructure.

18
  • Incentives for RD by private sector for high
    tech products. To encourage development of
    domestic skill levels and technology appropriate
    to local conditions.
  • These policies resulted in successful export
    performance and the achievement of very high
    economic growth rates. Since the 1950s, NIESs
    have been the fastest growing economies in the
    developing world.

19
The Success of the Asian Tigers
  1. Expansion into foreign markets.
  2. Benefits of diversification.
  3. Major investments in human capital.
  4. Appropriate technologies.
  5. Increased employment (from the use of
    labour-intensive technologies).
  6. Export earnings avoided balance of payments
    problems.

20
1980s-1990s Export-led with Market
Liberalization Washington Consensus
  • Early 80s
  • Poor econ and export performance in many LDCs and
    high indebtedness
  • Shift in thinking about econ growth and
    development inspired by neoclassical model, which
    stressed importance of limiting gov intervention
    and allowing private sector to operate in a
    competitive free-market environment. Outward
    orientation based on free-trade.

21
  • Main policies recommended
  • Trade liberalisation
  • No restrictions to new FDI by MNCs
  • Sound fiscal policy (no excessive borrowing)
  • Tax reform
  • Changing priorities of gov spending towards
    health, education, infrastructure
  • Interest rate liberalization
  • Market-determined exchange rates
  • Privatization
  • Deregulation
  • Securing property rights

22
  • Rationale reliance on market forces and free
    trade maximizes efficiency, domestic and global
    allocation of resources and economic growth.
  • LDCs that have adopted these policies include
    Argentina, Brazil, China, Chile, India, Kenya,
    Sri Lanka, Tanzania, Turkey. They began a process
    of ?gov intervention in the market.

23
  • Strong influence of the World Bank and the IMF,
    which lent these countries funds on the condition
    of reorienting their economies towards freer
    trade and freer market.

24
Impacts of economic and trade liberalization
  • Limited benefits for export growth and
    diversification
  • Countries lost export shares in world markets,
    especially in Africa
  • LDCs did not succeed in diversifying their
    production into manufacturing. Countries that
    performed best were those that had already
    developed significant export sectors.

25
  • Causes of these negative impacts
  • Protectionist policies by DCs
  • Growing reliance on free market policies
  • Limited impacts on economic growth
  • No hard evidence suggesting that a greater
    outward orientation based on freer trade during
    80s, 90s has been responsible for more rapid econ
    growth.

26
  • Great variability in performance.
  • Some economists see no link between econ growth
    and trade liberalization.
  • Some countries better able to benefit from freer
    trade. Low income countries perform the worst?
    ?inequalities between rich and poor.

27
  • Increasing income inequalities and poverty within
    LDCs. World Bank study reveals that the
    correlation between trade liberalization and
    income growth is
  • Negative among the 40 poorest of the population
  • Positive among the higher income groups
  • So it helps the rich get richer and the poor get
    poorer.
  • Reason econ and trade liberalization give rise
    to winners and losers.

28
  • WINNERS
  • Workers in exporting industries
  • Workers in growing formal sectors
  • Higher skilled, educated people, with more
    chances in the competitive environment
  • LOSERS
  • Less educated people
  • Poor people with no collateral (unable to obtain
    credit)
  • People in remote areas with no transport links to
    markets
  • People in agriculture
  • People affected by lower levels of social
    protection
  • People forced from the formal to the informal
    sector ...

29
  • According to intal trade theory, free trade
    originates overall gains that are likely to be
    greater than the overall losses. However, in the
    real world this rarely occurs, with the result
    that some people are worse off due to freer trade
    and freer markets.
  • Late 1990s the Washington consensus was called
    into question even by the Chief economist of the
    World bank, Joseph Stiglitz.

30
Late 1990s-2000s Export-led growth strategies
with selective gov intervention The New
Development Consensus
  • Gov.s role in LDCs should be complemented (not
    substituted) by markets.
  • Governments must support education, health and
    infrastructure development, as well as RD for
    both industry and agriculture.

31
  • Gov should pursue policies that promote income
    equality and poverty alleviation.
  • Gov must provide regulatory framework for markets
    to work efficiently regulation of financial
    system and regulatory framework for competition
    (to avoid development of private monopolies.
  • Market-supporting institutions (tax systems,
    property rights, banking credit...) should be
    promotes.

32
  • DCs must assist econ development by ?foreign aid
    and providing increased access to their markets
    by LDCs.
  • Due to their special circumstances, LDCs should
    receive special treatment by intal trade
    agreements regarding removal of their
    protectionist measures.

33
  • Remark
  • Unlike the strongly interventionist supply-side
    policies pursued by the Asian tigers, that
    focused on direct support and protection against
    competition, the New Dev Consensus favours the
    establishment of institutions and conditions that
    assist firms to do well in a competitive market
    environment.

34
  • Support for
  • RD in targeted areas
  • Vocational training and education
  • Small firms
  • Development of infrastructure

35
  • Justification for industrial policies numerous
    kinds of market failures that may prevent
    countries/markets from
  • Setting up the needed private firms
  • Undertaking the necessary RD
  • Innovating
  • Importing appropriate technologies

36
Evaluation of Inward and Outward-oriented
strategies
  • Benefits those of international free trade
  • Increased dom. production and consumtion due to
    specialization
  • Economies of scale
  • Greater variety and quality of gs
  • Allows countries to acquire needed resources
  • Flow of new ideas and technology
  • Increased X more efficiency Larger growth
    rates

37
  • Obstacles
  • If countries specialize in production export of
    primary commodities
  • Unstable export revenues due to price volatility.
  • Deteriorating ToT for exporters of primary
    commodities over long periods of time (due to low
    YED for these exports, among other)
  • Rich country protection of their farmers may
    limit access to rich country markets and cause
    price ? of protected commodities.

38
  • If countries specialize in production and X of
    manufactured goods
  • Protectionist policies imposed by DCs
  • Prevent access to the large and rich markets
  • Discourage diversification of LDC into
    manufacturing and higher VA activities (tariff
    escalation, admin and technical barriers)

39
Can LDCs imitate the trade and growth strategies
of the Asian Tigers?
  • The Asian Tigers faced lower trade barriers on
    their X of manufactures to DCs. Some trade
    barriers were increased during the 1980s, after
    the entry of East Asian exports into DCs markets.
    This was in order to protect
  • domestic producers against low cost competing
    goods and
  • their workers against losing their jobs due to
    entry of low cost imports

40
  1. The Asian Tigers outward orientation was export
    promotion with strong gov intervention, whereas
    countries in the 80s opened to international
    trade on the basis of market-based policies.
    Interventionist supply-side policies played a key
    role in the development of manufacturing and
    higher VA production. LDCs that opened up to
    intal trade in the context of market-based
    policies could not rely on government support for
    their export industries.

41
Concluding remarks
  1. An outward oriented trade strategy is superior to
    an inward-oriented one.
  2. Significant advantages in an outward-oriented
    strategy based on diversification of Xs into
    manufacturing and higher VA activities.
  3. DC protectionism is a major obstacle.

42
Role of the WTO
43
Bilateral and regional preferential trade
agreements (FTAs)
  • Due to the slow progress made by the WTO, the
    number of bilateral and regional trade agreements
    has increased (159 in 2007, several hundreds in
    2010). LDCs see in trading blocs a way to benefit
    from free trade without the obstacles imposed by
    DCs.
  • Examples EMRCOSUR, ASEAN, COMESA, CEMAC, CAIS,
    etc.

44
Regional FTAs
  • They have the greatest potential to help
    developing countries achieve growth dev when
    they involve
  • Regional agreements
  • Geographical closeness
  • Similar level of dev and technological
    capabilities
  • Similar market sizes
  • Shared commitment to cooperation

45
  • Benefits
  • Expand markets (economies of scale) and diversify
    production and exports.
  • Larger markets increase domestic and foreign
    direct investment.
  • If similar level of development more fair
    competition.
  • If shared commitment to cooperation policies can
    be pursued that increase the benefits of
    integration (investment in infrastructure, RD
    collaboration, cooperation in environmental
    issues).

46
Bilateral FTAs limitations
  • Most bilateral agreements are between developing
    and developed countries that are not usually in
    the same geographical region. US with LDCs, EU
    with LDCs and transition economies, Japan with
    Asia-Pacific region.
  • The prospect of gaining access to the market of
    the DC is the reason for LDCs to enter into such
    agreements.

47
  • There are some risks
  • The LDC must make equal and matching cuts in
    tariff and other barriers. This puts even
    efficient LDC firms at a competitive disadvantage
    as they are forced to compete with lower cost DC
    firms.
  • Problem with many LDCs forming FTAs with the same
    DC in order to gain market access, as they must
    compete with each other for the developed country
    market. They also face competition from lower
    cost producers in the DC.

48
  • Trade deficits, Balance of payments problems and
    foreign debt may be caused by increased imports
    and only slightly increasing exports.
  • In Bilateral negotiations LDCs have less
    bargaining power than when they act as one in
    multilateral negotiations.
  • LDCs must often agree to other requirements, such
    as on IP rights or freer rules on FDI.
  • Bilateral agreements weaken regional trade
    agreements when one of the members makes a
    bilateral agreement with a third country.
  • LDCs are better off pursuing regional trade
    agreements (UNCTAD)

49
Diversification
  • Benefits More varied production, increased
    employment, establishment of more firms, use of
    higher skill and technology levels.
  • It allows countries to achieve the following
    objectives
  • Sustained increases in exports. Can only be
    achieved through diversification into markets for
    which there is a sustained increase in global
    demand (not true for commodity exports)

50
  1. Development of technological capabilities and
    skills. Diversification provides incentives to
    acquire new technologies and higher training,
    education and skill levels (success of Asian
    Tigers).
  2. Reduced vulnerability to short-term price
    volatility and long-term price declines.
  3. Use of domestic primary commodities. These can be
    used as the basis for diversification into
    manufacturing, as the domestic availability of
    the raw materials can work to stimulate industry
    (vertical diversification).

51
Capital liberalisation
  • Definition the free movement of financial
    capital in and out of a country. It occurs
    through the elimination of exchange controls
    (restrictions on the quantity of foreign exchange
    that can be bought by domestic residents of a
    country).
  • Non-convertible currency the domestic currency
    cannot be freely exchanged for foreign
    currencies. It may apply to current account or
    financial account transactions.

52
  • Fully convertible currency can be freely
    exchanged for other foreign currencies.
  • Capital liberalisation involves the elimination
    of exchange controls, making a currency fully
    convertible.

53
Capital flight
  • Definition Large scale transfer of privately
    owned financial capital to another country.
  • It results from high uncertainty and risk of
    holding domestic assets due to
  • Risk of confiscation
  • Sudden ? taxation
  • Political instability
  • Anything leading to loss of value of the domestic
    currency.

54
  • Non-convertibility for current account
    transactions (mainly foreign trade). Conversion
    of currencies is subject to gov restrictions. For
    example , only for specific imports and exports
    consistent with gov objectives.
  • Today most countries have convertible currencies
    for CA transactions.
  • Benefits of currency convertibility based on the
    principle that Intal trade should be conducted
    in the context of competitive mkts.

55
  • Non-convertibility for financial account (FA)
    transactions. Implies gov control over what flows
    are permissible. Exceptions for debt service
    payments, funds to be used in inward FDI, inward
    flows due to borrowing, financial investment by
    foreigners.

56
  • Reasons
  • To avoid Capital flight, as financial capital
    cannot leave the country if the domestic currency
    cannot be converted into foreign currencies.
  • To avoid Currency speculation, which can lead to
    currency instability.
  • Ability to conduct monetary policy independently
    of exchange rate considerations. In case of a
    recession, for example, the interest rate can be
    lowered without risk of a depreciation.

57
  • Benefits of full convertibility for FA
  • Access to foreign capital markets (ability to
    diversify financial investments).
  • Access to more varied and cheaper sources of
    finance.
  • Encourages FDI.
  • Permits inflows of financial capital, as
    foreigners know they can sell their assets if
    they wish.
  • ? competition among financial institutions ? ?
    efficiency ? costs.

58
  • Prevents black market for foreign exchange
  • 1 to 6 contribute to greater economic growth.
  • Facilitates efficient global allocation of
    savings.

59
  • Conditions to be met before full convertibility.
  • Stable political system
  • Sound fiscal and monetary policies that encourage
    confidence in domestic assets and currency.
  • Sound macro policies that work to avoid wide
    exchange rate fluctuations and large BOP
    deficits.
  • Strong financial institutions that operate under
    gov regulation to avoid excessive risks.
  • Mkt orientation, with well-functioning price
    system that facilitates more efficient allocation
    of resources and financial capital.

60
  • Currency convertibility and financial crises.
  • Several East Asian countries experienced a severe
    financial and economic crisis in the late 90s.
    These economies had extended convertibility of
    their currencies to the FA (under pressure from
    the IMF).
  • In 1997, recession declining confidence in the
    economy triggered attacks on their currencies,
    resulting in massive capital flight and downward
    pressures on the value of their currencies.
  • IMF stepped in with loans and imposed tight
    monetary policy in order to curtail capital
    flight and help support the currencies. However,
    confidence was low and downward pressure on curr
    continued. High i created negative growth, higher
    UE and poverty.
  • According to Stiglitz, FA liberalization ...was
    the single most important factor leading to the
    crisis.
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