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
s: 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
High protection of dom firms, inefficiency and resource misallocation. Lack of competition→ high costs + inefficiencies + high prices paid by consumers.
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
State ownership and control of financial institutions, in order to provide subsidized credit to the industries being promoted.
Targeting of industries for export.
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 R&D, 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, R&D, transport and communications infrastructure.

18. Incentives for R&D by private sector for high tech products
Incentives for R&D 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
Expansion into foreign markets.
Benefits of diversification.
Major investments in human capital.
Appropriate technologies.
Increased employment (from the use of labour-intensive technologies).
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. Limited impacts on economic growth
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. So it helps the rich get richer and the poor get poorer.
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 int’al 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 R&D 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 int’al 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:
R&D 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 R&D
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 g+s
Allows countries to acquire needed resources
Flow of new ideas and technology
Increased X + more efficiency = Larger growth rates

37. If countries specialize in production & export of primary commodities:
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. 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 int’al trade in the context of market-based policies could not rely on government support for their export industries.

41. Concluding remarks
An outward oriented trade strategy is superior to an inward-oriented one.
Significant advantages in an outward-oriented strategy based on diversification of Xs into manufacturing and higher VA activities.
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, R&D 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. LDCs are better off pursuing regional trade agreements (UNCTAD)
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. Development of technological capabilities and skills
Development of technological capabilities and skills. Diversification provides incentives to acquire new technologies and higher training, education and skill levels (success of Asian Tigers).
Reduced vulnerability to short-term price volatility and long-term price declines.
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 Int’al trade should be conducted in the context of competitive mkts.

55. Non-convertibility for financial account (FA) transactions
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’.