1. The Golden Age and the Origins of Protectionism Lecture # 6 Week 3

2. Structure of this class Export – led growth revisited Economic performance as of 1914 Ideology The origins of protectionism Conclusion

3. Recall from last class: the stellar performance of Latin America during third quarter of 19 th C

4. And let’s ask the question again: In what way this export-led growth period differs from the current globalization trend? At least four differences: World markets more integrated now (trade and finance) The US and then China as major trading partners The emergence of trading blocks (NAFTA, MERCOSUR, CAFTA..) WTO

5. However, export performance continues to be viewed as an important determinant of economic performance Export – growth highly correlated with GDP Growth And, as argued in the last class that during that period - last quarter 19 th C - Latin America grew as fast as the US (“Golden Age”) Export – led growth continued during up until early 20 th C Catching – up with the US did not take place as Latin America had lost two centuries of sustained growth

6. Performance as of 1914 Then…. Commodity markets became more unstable   VOLATILITY Transfer of British economic hegemony in Latin America to the US Export growth continued after the World War I but volatility persisted Industrial growth started under “weakly” protective environment (lacked coherent industrial policy) Great Depression in the 1930s: Trade and economic activity slowed down considerably overall, with some countries more vulnerable than others, deflation, defaults on sovereign debt, government spending increased overall, currency devaluations → political unrest, and emergence of radical parties

7. Six arguments for protection (Cardoso – Helwege (1992)) Volatility of primary commodity prices Declining terms of trade (Prebisch – Singer dependencia School in the 1950s) Infant industry Low wages due to FDI into labor – intensive export sector No demand spillovers

8. Ideology “Infant Industry” arguments (Furtado on World War I) Prebish – Singer “Dependencia School” in the 1950s Center and periphery The role of multinational corporations viewed as detrimental in that: a)Contribute to the declining terms of trade b)Offers little stimulation to the rest of the economy Moreover: ↓ domestic savings, ↓foreign exchange reserves, ↓government revenues, ↑income inequalities→ bourgeois elite and landed aristocracy versus blue collars and peasants Government intervention as stimulus to lack of domestic demand (J. M. Keynes) → How to finance government spending?→ most likely will lead to fiscal deficits

9. The origins of protectionism High and positive correlation between protectionism (tariffs) and high growth in 19 th C North America Irwin would however argue that there is no causality Non-traded sector in North America played an exceedingly important role as a determinant of rapid growth in the 19 th C The emergence of a service sector (not a manufacturing sector) played a major role for US to catch up with UK While protectionist policies in the US together with the emergence of a strong service sector were mutually reinforcing and triggered high and sustained growth……

10. Protectionism in Latin America according to Coatsworth – Williamson (2002) started much earlier In particular, their empirical investigation: Data for a sample of eight Latin American countries (pre- 1914 export growth) shows that tariffs in the region were higher than anywhere else The countries in their sample include: Argentina, Brazil, Chile, Mexico, Uruguay, Colombia, an Peru

11. OLS panel 1870 – 1950 time fixed effects (TS) cross-section fixed effects (CS) fixed effects for both (FE)

12. And their empirical investigation suggests 3 main motives for protection: Government revenue – via specific import duties – to finance wars Protection of nascent manufacturing in the interior in the advent of lower transport costs – railways connecting ports with the interior Protection of urban capitalists by oligarchic governments

13. Were the motives for protection the same after 1913? 4 findings: Revenue motives for protection became more powerful after 1913 “Strategic” trade policies became relevant starting in 1913 The size of the domestic market became more important as of 1913 Transport costs to the interior were less important after 1913

14. LEGACY Example 1: Taxes on incomes and profits < 5% in 2001 compared to 12.5% in high-income economies (Artana, Lopez Murphy, and Navajas(2003) Example 2: Very high administrative costs relative to industrialized countries (IMF data for 1998) Example 3: Volatile government revenues due to swings in income associated with the production of primary commodities Example 4: Small increase in revenues for financing public expenditures (IMF data for 1994 and 2001)

15. In conclusion While in North America, protectionism for rapid industrialization was reinforced by the rapid development of a service sector -  high growth rates I.e., The US became net creditor in the 20 th C Protectionism in Latin America did not seem to have the same effect because of lack of domestic demand, underdeveloped service sectors, among others… Reliance on export sector persisted…