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Trade and Development II: Economic Reform

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Title: Trade and Development II: Economic Reform


1
Trade and Development II Economic Reform
  • READING ASSIGNMENT
  • Oatley Chapter 7

2
Plan
  • Culture vs. Interests Institutions
  • Why did Asia beat Latin America?
  • Politics of shifting from ISI to neoliberalism
  • Cases of from Africa
  • Foreign aid, loans, conditionality, reform
  • The role of the IMF
  • The East Asian Miracle
  • Export-oriented industrialization

3
PART 1 Culture vs. Interests Institutions
  • http//www.youtube.com/watch?vCwq-XdPfpeA
    https//www.youtube.com/watch?v49AfuuRbgGo
  • http//www9.georgetown.edu/faculty/jrv24/friends.h
    tml
  • Studies
  • Teaching
  • Research
  • Presentations

4
(No Transcript)
5
Why did Japan, Korea, Taiwan, Singapore, and Hong
Kong beat Argentina, Brazil, Mexico, Chile, and
Colombia?
  • Was it culture? Religion?
  • Are Asians just better economists?
  • Interests and institutions
  • Losers from globalization gain power world-wide
    with Great Depression
  • World War II decimated the political power of
    interest groups throughout Asia
  • Clean slate
  • Latin American interest groups remained in tact
  • Losers from globalization remained in power

6
Shift from ISI to neoliberalism
export-oriented industrialization
  • Why the shift?
  • ISI generated economic imbalances (current
    account deficits)
  • Group of East Asian countries outperformed rest
    of the world
  • Neoliberal?
  • Export-Oriented
  • Geo-politically strategic Cold War allies?
  • Latin American Debt Crisis led to Structural
    Adjustment programs of the IMF

7
ISI problems the current account
  • Current account
  • Registers a countrys imports exports of both
    goods and services
  • Deficit means importsgtexports
  • How did ISI lead to deficits?
  • Manufactured goods were not globally competitive
    only sold domestically
  • Marketing Boards weakened agriculture
  • Governments preferred overvalued exchange rates
    (this, sadly, contributed to making exports less
    competitive)

8
Why was it hard to break free of ISI?
Pro-trade ?
URBAN-RURAL CONFLICT
Anti-trade ?
9
Part 2 The politics of shifting from ISI to
neoliberalism
10
Ghana 1971
  • Oatley p136, http//rulers.org/rulg1.htmlghana
  • Ghanaian prime minister devalued the exchange
    rate
  • Oatley 1971 p136
  • www.Rulers.org 1972
  • Edward Akufo-Addo, 31 Aug 1970 - 13 Jan 1972
  • DEPOSED IN A COUP days after the devaluation!
  • Urban residents contributed in the coup effort
  • concerned that prices for imported goods would
    rise
  • The new regime restored the overvalued XR
  • IMF arrangements 66, 67, 69, 1979

11
Example Nigeria 1983
  • President Shagari, facing an economic crisis,
    turned to the IMF hoping to initiate some
    reforms.
  • He faced opposition in the legislature
    elections on the horizon.
  • The presidents officials admitted,
  • the whole idea of bringing in the IMF is to get
    the alibis to persuade the politicians of what we
    need to do.
  • But the demands of the IMF were too harsh,
    considering the presidents political
    constraints.
  • No agreement was concluded.
  • Side note
  • Democracy soon collapsed the new dictator
    pushed through reforms without the IMF.
  • When the dictatorship finally requested an IMF
    loan in 87, it was granted.

12
  • Mid-1980s The IMF was willing to grant an
    agreement to General Babangida, who had already
    pushed through economic reform without IMF
    political support,
  • But the IMF had not been willing to grant an
    agreement to President Shagari, who sought
    political support to push through limited reform.

13
Part 3 Foreign aid, loans, conditionality,
reform
  • The role of the IMF

14
How did governments keep the system going until
the 1980s?
  • Foreign loans
  • Bilateral aid
  • IMF loans (without serious policy conditionality)
  • Were politically important countries hurt in
    the long-run?
  • Perverse impact of foreign aid

15
The Empire Strikes Back
Structural Adjustment or
  • Governments needed to take a smaller role in
    policy areas where markets work reasonably well
  • Stable macroeconomic environment
  • transform budget deficits into surpluses raise
    interest rates devalue the exchange rate
  • ?cut demand change current account deficits into
    surpluses
  • Liberalize trade
  • Privatize State-Owned Enterprises
  • Neocolonialism? (Dependency theory?)

16
Role of domestic politics
  • Losers attempted to block reforms
  • Winners attempted to promote reforms
  • Governments mediated between winners losers
  • Brought in the IMF to help push through reforms?

17
How does bringing in the IMF help push through
economic reform?
Suppose you have a president representing the
winners but a legislature representing
losers
Figure 1 The logic of bringing in the IMF
Payoff to veto player
-1 (change policy)
Accept
Veto player
Without the IMF
Reject
0 (maintain the status quo)
Executive
With the IMF
-1 (change policy) loan
Accept
Veto player
Reject
-r (reject the IMF)
18
  • Reform involved an intense distributive struggle
  • ? reforms were implemented unevenly
  • PARTIAL REFORM!
  • Vreeland 2003 By bringing in the IMF,
    governments gain political leverage - via
    conditionality - to push through unpopular
    policies. For certain constituencies, these
    policies dampen the effects of bad economic
    performance by redistributing income. But IMF
    programs doubly hurt others who are less well
    off They lower growth and exacerbate income
    inequality.
  • But see Oatley p149, figure 7.2

19
Reform index from IADB 1997Growth rates from
World Bank
20
Part 4 The East Asian Miracle Export-Oriented
Strategy
21
The East Asian Model
  • Export-oriented strategy
  • Scholars disagree on the role of the state
  • Neoliberal interpretation East Asian success due
    to market friendly development strategies
  • State-oriented interpretation East Asian success
    due to state-led industrial polices
  • Immediately after WWII easy ISI
  • Late-1950s / Early-1960s shift emphasis to
    exports
  • Forced manufacturers to worry about international
    competitiveness
  • Invested resources in domestic industries that
    were profitable in world markets (Latin American
    African countries did not)
  • Relied on protectionism for their domestic
    markets
  • BUT allowed selective liberalization to lower
    costs for critical inputs
  • (so did Latin America, no?)
  • Stable macroeconomic environment
  • Low inflation
  • Helps encourage savings
  • Appropriately valued exchange rates
  • Helps promote exports
  • Conservative fiscal policies (borrowed little)

22
3 Stages of the East Asian Model of Development
  • Industrial policy promotes labor-intensive light
    industry (easy ISI e.g., textiles)
  • Target heavy industries (e.g., steel,
    shipbuilding, petrochemicals)
  • Target high skill plus RD-intensive industries
    (e.g., computers)
  • (How is this different from Latin America?)

23
Using monetary policy to promote EXPORTS
  • Exporting firms paid interest rates of 6-12
  • Other borrowers paid 20-22
  • Short-term loans unlimited for confirmed export
    orders
  • Credit also made available to exporters input
    suppliers (and the suppliers suppliers)

24
Was success due to markets or states?
  • Centralized or Decentralized mechanisms of
    allocation?
  • Mix?
  • Used industrial policy to shift resources to the
    export industry
  • Used world markets to get prices right for
    export industry
  • Emphasized exports rather than the domestic
    markets

25
Economic reform in China
  • Late 1970s The Household Responsibility System
  • Encourage farmers to lease land from their
    agricultural commune
  • Part of the crop sold to state (at reformed
    prices), part at market prices ( keep the
    profits)
  • Increased agricultural productivity and led to
    rural-urban migration
  • 1984 The Enterprise Responsibility System
  • Enterprises encouraged to acquire inputs and sell
    outputs on world markets
  • Reduced government subsidies
  • Open Door Policy
  • Liberalizing foreign direct investment
  • Does this crowd out domestic investment?
  • Per capita income doubled from 1979 to 1990 and
    then doubled again in the 1990s!
  • Was success due to centralized mechanisms,
    decentralized mechanisms, or a mix?
  • Orthodox vs. heterodox reforms
  • Did political institutions play a role in
    mediating between winners and losers?

26
Take homes
  • Winners, losers economic reform
  • Neo-liberalism Export-oriented
    industrialization
  • Perverse impact of foreign aid
  • Role of the IMF
  • Conservative macroeconomic policies
  • Low inflation
  • Appropriately valued exchange rates
  • Conservative fiscal policies (low spending,
    adequate taxation)
  • Partial reform

27
Thank youWE ARE GLOBAL GEORGETOWN!
28
Trade liberalization the WTO or
Return of the Jedi!
  • Doha Round
  • Agriculture for Non-Agricultural Market Access
    (NAMA)
  • G20 vs. G7
  • Perhaps the G20 believes that the lowering of
    agricultural tariffs will not bring enough
    benefits given the costs of lowering NAMA
    barriers
  • ? No deal
  • But perhaps this is a story of private
    information and reputation
  • They seek to extract more concessions want to
    establish a tough negotiation reputation
  • Games of private information signaling of
    type
  • http//www.youtube.com/watch?v3EkBuKQEkiofeature
    PlayListp81BDB99A37EE7D5Cplaynext1playnext_f
    romPLindex7
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