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ECON-313 INTERNATIONAL ECONOMICS
Trade Policy in Developing EconomiesBulent Temel www.bulenttemel.com
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Learning points
. How did developing economies develop in the 20th Century?
. How should they develop in the 21st?
. What is import-substitution policy, infant industry argument, export-orientation, free trade?
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How did developing econs develop?
M-substitution X-orientation Free trade
------------------------------------------------
1945 1965 1980 2012
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Import substitution
= Protecting domestic manufacturing sector against foreign competitors until they become internationally competitive (Infant industry argument)
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How to protect?
. Increasing tariffs
. Import quotas
. Regulations on imports
. Subsidies to manufacturers
. Exchange rate controls
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Tariffs
= Taxes on imports
Impact: More expensive importproducts → More chances for cheaper products
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Import quotas
= Restricting the volume that can be sold in the domestic market
Impact: Larger unsatisfied local demand for domestic producers → Larger market share
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Regulations on imports
= Environmental, economic and health related rules and laws imposed on import products
Impact: Fewer foreign products qualify → Larger market for domestic producers
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Subsidies to manufacturers= Providing capital or reducing
tax rates for domestic manufacturers
Impact: Domestic manufacturers can cut their prices and become more competitive against foreign competitors
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Exchange rate controls
= Fixing the value of local currency at a low level
Impact: Foreign (domestic) products remain expensive (cheaper) for domestic (foreign) consumers → Smaller imports, larger exports
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The role of ¥/$ exchange rate in China-US economic relations
http://www.youtube.com/watch?v=XnAT7FZpmg0
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An example of change rate controls to boost trade
China. (Yuan/$ rate was pegged fordecades)
Impact: Chinese products that remained very cheap for American consumers dominatedthe US econ.
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Why protect?1) In dvlping econs, capital
markets may be imperfect (they don’t provide venture capital)
2) Appropriatibility problem (First investment requires high costs like infrastructure that followers will not pay for)
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Problems with import substitution1) Investing in a capital-intensive
industry may be premature in a labor-intensive econ → High opportunity cost
2) Wrong industries can be protected → National resources are wasted on industries that did not need help
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Problems with import substitution3) Protection ↛ Competitive manuf
sector Competitiveness: f(Entrepreneurship, skilled labor, mgmt competence, ...)
4) Protection ↛ ↘ Motivation to improve efficiency → Higher domestic prices than import prices
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Problems with import substitution5) In dvlpng econs, dom markets
may be too small to allow scale econ or profitable competition (→ Expensive and low quality dom products)
Q: Restricting imports = Restricting exports?
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1965+: Export-based manuf.
= Restrict imports, and manufacture to export to developed econs.
By: ↗ tariffs, ↗ quotas, ↗ X subsidies.
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1965+: Export-based manuf.
Ex: HPAEs (High Performance Asian Econs) = 60s+: HK, Taiw, Singap, S Korea; 70s+: Malay, Thai, Indon; 80s+ China.
Avg growth: 8-9% betw 1965-1997
In HK & Sing: Exports > GDP
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South Korean GDP (1910-2010)
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1980s+ Neoliberalism
= ↘ protection, ↘ regulations
Impact: ↗ int trade, dvlpngs exported more manuf goods and less agric/mining prs.
Outcome: Some grew faster, some slower. Income inequality and corruption ↗ in all.
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Free trade vs. protectionism debate http://
www.youtube.com/watch?v=6qqG6OurHaM
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Conclusion
Recipe for growth in dvlping econs in a globalized word today:
. Save
. Invest in educ.
. Buy domestic
. Maximize X
. Minimize M(cheap, locally unavailable inputs
only)
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Why?
Savings → ↗ $ in fin system →↘ Lower cost of borrowing → ↗ Investments, growth,employment
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Why?
Investments in education → (Cost of doing so < Returns from it in terms of efficiency and effectiveness)
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Why?
Buying domestic → ↗ $ stays in dom
econ → ↗ Effective demand → ↗ Inv,
growth, employment
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Example:
If your consumption decision allows $0.25
to stay in domestic econ, and everyonespends 80% of their income to domesticgoods and services...
Then, your decisionleads to creation of $1.14 in effective demand.
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Why?
Maximal exports→ 1) Maximal markets (TR pop:
70 Million, World: 7 Billion)2) Access to faster growing
economies (Poland’s growth rate: 4%, but China’s: 10%)
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Why?
Imports = National resources shifting abroad
Justifiable only if it is for cheaper, locally unattainable inputs
Should be minimized when it is for consumption (final goods)
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Controlled trade argument: http://
www.bulenttemel.com/uploads/5/9/8/7/5987355/cagdas_kalkinma.pdf
Uncontrolled (free) trade argument: http://
www.youtube.com/watch?annotation_id=annotation_726592&feature=iv&src_vid=6qqG6OurHaM&v=J5maguX5x8c
Further thinking