1. VII.D Trade Policies for Development
Import Substitution.
Export Promotion
The “Industrialization Strategy” Approach
Regional Economic Integration
See text, Chapter 12,
Sections 12.5, 12.6 and 12.7, pp
ECON December 2, 2015

4. I. Import Substituting Industrialization (ISI)
1. Basic Character of the Approach:
Definition
Objectives:
Industrialization and structural Change;
Employment creation in the "modern sector"
Balance of payments considerations: reduce imports
"Economic Independence"

5. 2. Method, or "policy tools:“
Analyze import pattern;
“Protect” and subsidize new industries replacing most significant imports via
Tariffs
Non-Tariff Barriers (NTBs)
Low interest lending
Subsidies of various sorts to the "ISI" activities
Tax advantages of various sorts
Provision of infrastructure

6. 3. Origins of the approach:
Development theorizing, ;
Experience of the higher income countries earlier in their histories: (USA, Canada, Germany, etc.)
The Soviet economic model in some cases;
The Latin American development experience: 1930s and WW II eras;
Classical Economics: the Infant Industry argument changed to an "infant economy" argument.

7. 4. Strengths of the Approach
initial potentiality of substituting for some major import products;
ISI as a "natural process"
The larger the country, the greater the potential of ISI due to the existence of a larger market.
[e.g. compare Brazil with Nicaragua]

8. 5. Results:
Initially, from 1945 to around reasonably good especially for larger countries;
Rapid growth and significant industrialization plus structural change in many countries;
Later, around the late 1960s into the 1980s, the approach was "running out of steam”
Growth slowed down; inefficiencies with the approach became overpowering in many cases.

9. 6. Problems with the approach:
Indiscriminate and extreme implementation in many cases;
Thwarting of various types of economies of scale
"Miniature replica effect"
promotion of oligopoly and monopoly power through protection against imports;

10. discrimination against all non-protected sectors (usually agriculture and resource based activities)
blockage of intra-industry specialization;
impacts on income distribution
Balance of Payments impacts often adverse (due to high demand for imported capital goods, and inputs;
and to the impact on the exchange rate
tendency to exhaust itself

11. (“Deadweight loss” to society = - b – c)
Technical Note: Partial Equilibrium Analysis of a Tariff.
Given Sdom and Ddom and Sworld for a product
Free trade situation: Sw and DD at Q1 prevail, with 0Q2 domestically
produced and Q2Q1 imported.
Suppose that a tariff is imposed, with the Tariff is “t0”.
Relevant Supply curve is now Sw+to at Pd
and relevant price is Pd = Pworld = to
Who wins and who loses as a result of the higher tariff??
Consumers: lose areas: a + b + c + d
Producers: gain area: a
Government: gains area: “c” as tax revenue
Net loss to society: -a –b –c –d +a + d = -b -c
(“Deadweight loss” to society = - b – c)

13. Technical Note: Nominal and Effective Rates of Protection
Nominal Rate of Protection: the rate of protection when a tariff levied on
imports of a product, usually as a percentage of the value of the product.
i.e. the rate of protection then is simply the % rate applied
Effective Rate of Protection: the rate of protection on the Value Added
domestically of the product on which the tariff is levied.
Example:
A country imposes a 100% tariff on cars.
Suppose an imported car costs $20,000 plus the 100% tariff (of 20,000.) or $40,000.
The domestic price of similar locally made cars can then rise to the level of $40,000.
Suppose the domestic value added of the car is the final price, less the costs of the imported inputs, which are 50% of the world price or $10,000.
Then the 100% nominal tariff (of $20,000.) is applied to the domestic value added which is 10,000. The effective protection is then 20,000 on the domestic value added of 10,000 or 200%.
i.e. the effective rate of protection exceeds the nominal rate considerably when the domestic value added is less than 100%, that is when inputs are imported at lower world prices.

14. II. Export-Oriented Development Strategies
1. Basic Character of the Approach
Definition
Relationship with other aspects of External-Orientation;
Objectives:
Achieve accelerated and economically sustainable growth and development;
Accelerate high-productivity employment creation
Improve income levels
Relieve balance of payments constraints on development

15. 2. Policy Tools or Methods:
lower tariffs and non tariff barriers (NTBs)
cut other types of subsidization for old ISI firms;
provide transitional support for export activities or the "clusters" of economic activities around major export activities'
let the exchange rate float, i.e. let the exchange rate realities prevail by permitting a market determined rate;

16. 3. Range of Approaches: Complete "Apertura"
Generalized multilateral trade liberalization;
Regional trade liberalization;
Restricted liberalization in some sectors only;
Some bilateral liberalization
"Export Processing Zones"
various combinations of the above.

17. Origins of the Approach:
the earlier experience of some major cases, e.g. Japan, the G-4 (or Asian Tigers)
economic theory and argumentation
problems with ISI;
regional integration experiences, esp. European Common Market;
Now, the experience also of China, Chile, Mexico and other countries that have used the approach successfully

18. Actual Historical Experiences:
5. Strengths:
Actual Historical Experiences:
Highly successful: Asian Tigers; China; India; Malasia, HK, Taiwan, S. Korea, Chile
Positive but debatable: Mexico, much of Latin America;
Vis-a –vis Disaster ISI cases: e.g. N. Korea
Reduction of Economic Waste (improved efficiencies; rising productivity)
improved economies of scale;
intra-industry specialization becomes possible;
Reduced discrimination against non-protected sectors;
Intensified dynamic effects of "learning through competition;"
Reduced monopoly-oligopoly power for domestic firms;
Reduced rent-seeking activities? Maybe.

19. Positive and more sustainable effect on balance of payments;
Increased foreign exchange earnings permit increased importation of capital goods and thence increased technological transfer;
Higher productivity employment permits rising real wages and incomes, and thence improved family well-being and human development;
Improved growth permits increased taxation and social expenditures and thence improved human development;

20. Vested interests may block implementation;
6. Problems with the Approach:
Disadvantages of being a “latecomer”: China and a few other big countries have seized many of the opportunities already.
Some countries may not be in a position to benefit quickly if human resources, institutions and other policies are weak.
Short-term transitional costs of restructuring may make the approach unsustainable at first;
Vested interests may block implementation;
Major gains in employment and wages may be slow in coming;
May accelerate "resource stripping" if environmental policies are weak and inappropriate;

21. Export Orientation: Industrialization Strategy Approach
Supportive government policy is needed to support new industrial export activities; laissez faire is not enough.
Patterned after experiences of South Korea, Taiwan and Singapore, perhaps Brazil, as well.

22. VIII.E REGIONAL ECONOMIC INTEGRATION Among Developing Countries ECON November 2, 2015 See textbook, pp

23. How does REGIONAL ECONOMIC INTEGRATION Work? Advantages
Potential Disadvantages
Forces promoting economic integration
Types of Integration Scheme
Experience with Economic Integration
Some Specific Integration Schemes: Africa, Latin America and Asia

24. The Historical Record:
Some comments on:
The US common market after 1776;
Germany after 1870 unification
The European Common Market: from 6 members to 23 or so.
LAFTA; NAFTA; CAFTA
Hugo Chavez “Bolivarian Alternative (?)
Asian, African and other integration attempts

25. Italy, 1843 and Germany to 1866

27. 1. How does REGIONAL ECONOMIC INTEGRATION Work?
It makes possible productivity improvements,
i.e. it permits more output to be squeezed out of given quantities of human, natural and capital resources.
It thus can contribute to
increasing real incomes in a country, thereby permitting
improved human development by individuals and families for themselves, and
by governments through increased taxation and social expenditures (health, education, social security, infrastructure etc.)

28. It can also promote economic development through
strengthening the tax base of governments so that
more can be invested in public goods or other purposes directed more specifically at economic development.
The economic expansion facilitated by economic integration may make possible public investment in safeguarding the environment? Maybe
Does Economic Integration promote stability and peace among countries?
Evidence and argumentation pro:
Evidence contra:

29. How does Regional Economic Integration promote productivity improvements?
1. Permits Implementation of Economies of Scale and Consequent Resource Saving (human, natural and capital resources):
Larger plant size
Larger enterprise size
Increased length of “production runs”
Increased intra-industry specialization
Increased vertical specialization
Increased agglomerative economies.
These are some of the “dynamic benefits” of improved rationalization of economic structure.

30. 2. Static Benefits: gains from comparative advantage from trade creation
3. Impacts of Increased Competition within the Integration Area:
Stimulates domestic product quality improvement;
Stimulates improvements i.e. reductions, in production costs.
4. Expanded Market Size can Promote Increased (and more efficient) Investment.

31. 5. Strengthened Ability for the Region to develop successful “clusters” of economic activities and thus to integrate and compete in the international economy
6. Strengthened Ability for the Region to Face External Competition for its own domestic markets. .
These gains can be greatest for small country partners

32. 2. POTENTIAL DISADVANTAGES OF REGIONAL INTEGRATION
Costs of Transition to Larger Markets:
Some industries or types of economic activity may not be able to compete with imports.
The result is then labour displacement, economic dislocation, and unemployment.
Are these “costs” of economic integration borne by the workers and enterprises themselves, or does society share in their burden?
enterprise and industry restructuring costs;

33. 2. Possible Longer Term Negative Impacts:
“agglomerative dis-economies” for some regions or countries
consequent loss of economic activity and employment; (e.g. the Maritime provinces in Canada?)
3. Trade diversion may harm some partners
What is “Trade Diversion?

34. 3. Forces behind the attempts to form larger economic communities:
Economic theory and argumentation
Problems with ISI;
Other regional integration experiences,
esp. the European Common Market, but
Also the USA and Asian and L. American
Demonstration effects
Political arguments:
peace and stability and
regional bargaining power

35. 4. Types of Integration Scheme
Specific Functional Cooperation
Agreement to cooperate for specific purposes
(watershed management; transport, energy….)
Free Trade Area (FTA);
Lowering and elimination of trade barriers between two or more countries; separate tariff structures for the rest of the world
2. Customs Union (CU)
CU = FTA + Common External Tariff
3. Common Market (CM):
Common Market = CU + Factor Mobility (capital & labour)
4. Economic and Monetary Union (EMU):
EMU = CM + Single Currency (monetary &Exchange rate policy)
5. Political Union (PU)
Political Union = EMU + Common foreign & security policy

36. Obstacles to Successful Integration
Achieving effective economic integration is complex and politically difficult. Why?
Vested interests of enterprise may object due to fear of competition from neighbors; workers may object given the probability of some job loss as well as job gain.
Political or philosophical differences among neighboring countries
e.g. East African Community with Idi Amin, Nyrere and Kenyatta

37. 3. Trade Diversion may damage some partners and induce them to leave
4. Distributional Issues: fear that some countries gain disproportionately while others lose
5. Weaknesses in the supranational institutions
6. Infrastructural weaknesses prevent meaningful economic interaction

39. Developing Country Experiences with Economic Integration: Africa
Early ambitious “Pan-Africanists” and modest gradualists;
Moderates unwilling to sacrifice national independence so soon after achieving it. A gradualist approach for some time, but with high aspirations
Major difficulties have hindered progress Antagonisms among countries
Logistic Obstacles: Infrastructure Gaps (see map)
Physical Magnitude of Integration Task (see map)

42. African Economic Integration Schemes
Southern African Development Community (SADC)
East African Community (EAC)
Economic Community of West African States (ECOWAS)
Economic Community of Central African States (ECCAS)
Common Market for Eastern and Southern Africa (COMESA)
Arab Maghreb Union (UMA)
Southern Africa's Common Monetary Area (CMA)
African Economic Community, (AEC)

43. African Economic Community,
including

44. H. African Economic Community
(The Community of Common Markets)
Founded in 1991;
The Sub-Saharan Integration Scheme, including all others except Mahgreb
Ambitious objectives:
Promote ec., soc., &cultural development and integration
Establish a framework for the mobilization af all resources
Promote cooperation in al fields of human endeavour
Harmonize policies of all existing and future economic communities
“Fund for community solidarity and compensation”
Envisages rather complete union ultimately.
Common currency; common Central Bank, Pan-African parliament

46. African Intra-Bloc Exports as a Per Cent of Total Exports
Integration Scheme
1970
1980
1990
2000
2007
COMESA
9.1
6.1
6.6
6.0
4.7
EAC
16.9
8.9
13.3
17.6
20.4
ECCAS
2.2
1.4
1.0
0.6
ECOWAS
2.9
10.1
7.8
10.8
9.4
SADC
0.3
2.8
12.2
15.2
Source: Text, p. 490 and World Bank, World Development Indicators, p. 349

47. Latin American Experience with Economic Integration
Early Beginnings; Limited Early Achievements Current Schemes Prospects

48. Asociación Latinoamericana de Integración

49. ALBA Alianza Bolivariana para los Pueblos de Nuestra América

50. Central American Common Market

51. Grupo Andino

52. Caribbean Associations

53. Mercosur

54. ASEAN

57. Conclusion: Numerous attempted integration schemes; Mixed results;
Some schemes excessively ambitious, falter in implementation;
Difficulties in establishing effective integration movements are immense;
Success re integration is vital for Asia’s, Africa’s and Latin America’s Future.