Trade strategies for growth

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Trade strategies for growth development
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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.

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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)

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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.

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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.

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• 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.

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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.

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• 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.

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• 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

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• 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.

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• 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).

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• 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.

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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.

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• 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.

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• 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.

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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...

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• 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.

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• 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.

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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.

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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.

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• 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

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• 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.

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• 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.

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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.

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• 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.

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• 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.

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• 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.

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• 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 ...

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• 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.

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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.

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• 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.

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• 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.

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• 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.

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

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• 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

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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

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• 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.

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• 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)

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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

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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.

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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.

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Role of the WTO
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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.

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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

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• 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).

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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.

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• 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.

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• 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)

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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)

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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).

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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.

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

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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.

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• 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.

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• 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.

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• 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.

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• 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.

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

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• 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.

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• 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.