CHAPTER 13
The Trade Policy Debate:
Export Promotion, Import
Substitution and Economic
Integration
OBJECTIVES
◉ Ascertain the conditions under which trade policies
might help or harm developing countries in their
dealings with the industrial worlds with one another.
◉ Summarize the arguments on the ongoing debate
between trade optimists and trade pessimists.
◉ Trade policies of developed countries.
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Trade Strategies for Development:
Export Promotion vs. Import
Substitution
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OUTWARD LOOKING TRADE POLICIES
◉ In the words of Paul Streeten, “encourage not
only free trade but also the free movement of
capital, workers, enterprises and students…,
the multinational enterprise, and an open
system of communications.”
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PAUL STREETEN
◉ Paul Patrick Streeten was an Austrian-
born British economics professor. He
was a professor at Boston University,
US until his retirement. He has been a
distinguished academic working on
development economics since the
1950s
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INWARD LOOKING DEVELOPMENT TRADE POLICIES
◉ Idea stress the need for nations to evolve their own
styles of development and to control their own destiny.
◉ This means setting policies to encourage indigenous
“learning by doing” in manufacturing and developing
technologies appropriate to a country’s resource
endowments.
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INWARD LOOKING DEVELOPMENT TRADE POLICIES
◉ Greater self-reliance can be accomplished, in
Streeten’s words, only if “you restrict trade,
the movement of people, and
communications and if you keep out the
multinational enterprise, with its wrong
products and wrong want stimulation and
hence its wrong technology.”
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INWARD VS. OUTWARD
◉ A lively debate
regarding these two
philosophical
approaches has
been carried on in
the development
literature since the
1950s.
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LETS DIG DEEPER…
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IMPORT SUBSTITUTION
◉ KEY IDEA: “Produce it rather than
import it.”
◉ Inward-oriented strategy
◉ Opposite of export-led growth
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IMPORT SUBSTITUTION
In order for it to work, there need to be some
necessary conditions:
- The government needs to adopt a policy of
organizing the selection of goods to produce
domestically.
- Subsidies are made available to encourage
domestic industries
- Government needs to implement a
protectionist system
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About this
IMPORT template
SUBSTITUTION
ADVANTAGES DISADVANTAGES
1. May only protect jobs in the short-
1. Protects jobs in domestic
run
market
2. Country does not enjoy the benefits
2. Protects local culture and to be gained by comparative
social habits advantage and specialization
3. Protects the economy from 3. May lead to inefficiency in domestic
power and possibly bad firms
influence of MNCs 4. May lead to high rates of inflation
due to domestic aggregate supply
constraints
5. It may cause retaliatory measures
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EXPORT PROMOTION
◉ KEY IDEA: “Increase trade for
growth”
◉ Outward-oriented strategy
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EXPORT PROMOTION
Increase Increased Higher
GROWTH
Exports GDP Incomes
◉ Country focuses on producing and exporting
products in which it has a comparative advantage.
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EXPORT PROMOTION
◉ In order to achieve this, it is assumed that a country
will need to adopt certain policies:
- Liberalized trade
- Liberalized capital flows
- A floating exchange rate
- Investment in the provision of infrastructure to enable
trade to take place
- Deregulation and minimal government intervention
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POSSIBLE PROBLEMS: EXPORT PROMOTION
◉ Lead to increased protectionism in developed
nation against manufactured products from
developing nations 16
POSSIBLE PROBLEMS: EXPORT PROMOTION
◉ Increased arrival of
MNCs
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POSSIBLE PROBLEMS: EXPORT PROMOTION
◉ May increase inequality
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FOURFOLD
CATEGORIZATION
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FOURFOLD CATEGORIZATION
1. Primary outward-looking policies
(encouragement of agricultural and raw-
materials exports)
2. Secondary outward-looking policies
(promotion of manufactured exports)
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FOURFOLD CATEGORIZATION
3. Primary inward-looking policies (mainly agricultural self-
sufficiency)
4. Secondary inward-looking policies (manufactured
commodity self-sufficiency through import substitution)
Then we turn our attention to eclectic strategies,
particularly export-oriented strategic industrialization,
and South-South economic integration.
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Export Promotion:
Looking Outward and
Seeing Trade Barriers
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EXPORT PROMOTION:
primary-commodity export expansion
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On the demand side, there appear to be at least five factors
working against the rapid expansion of primary-product to the
developed nations
1. the income elasticity of demand for agricultural
foodstuffs and raw materials are relatively low compared
with those for fuels, certain minerals, and manufactures.
2. developed-country population growth rates are now at
or near the replacement level, so little expansion can be
expected from this source.
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On the demand side, there appear to be at least five factors
working against the rapid expansion of primary-product to the
developed nations
3. The price elasticity of demand for most primary
commodities is relatively low.
4. The development of synthetic substitutes.
5. The the growth of agricultural protection in the
developed countries
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On the supply side, there appear to be at least five factors working
against the rapid expansion of primary-product to the developed
nations
◉ The most important is the structural rigidity of many
Third World rural production system
◉ rigidities—such as limited resources; poor climate; bad
soils; antiquated rural institutional, social, and economic
structures; and non-productive patterns of land tenure
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CONCLUSION
◉ Successful promotion of primary product
exports in low-income countries and for the
benefit of the poor cannot occur unless there
is a reorganization of rural social and
economic structures along the lines to raise
total agricultural productivity and distribute
the benefits more widely.
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EXPORT PROMOTION:
expanding manufactured good exports
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expanding manufactured good exports
◉ The expansion of manufactured exports has
been encouraged by the spectacular export
performances of countries like South Korea,
Singapore, Hong Kong, Taiwan, and China.
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expanding manufactured good exports
◉ The export successes of recent decades, especially
among the Asian Tigers, have provided impetus for
arguments by market fundamentalists.
that economic growth is best served by allowing market
forces, free enterprise, and open economies to
prevail while minimizing government intervention.
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expanding manufactured good exports
◉ However, evidence from East Asia does not support
this view of how export success was achieved. In
South Korea, Taiwan, and Singapore (as in Japan
earlier
exports was not left to the market but resulted from
planned intervention by the government while
making ample use of the profit incentive.
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IMPORT
SUBSTITUTION:
Looking but Still
Paying Outward
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INFANT INDUSTRY
◉ infant-industry argument — the argument that new
industries had to be protected until they could
establish themselves properly to meet the
competition.
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TARIFFS
◉ A principal mechanism of the import substitution
strategy is the erection of protective tariffs (taxes on
imports) or quotas (limits on the quantity of imports)
behind which IS industries are permitted to operate.
The basic economic rationale for such protection is
the infant-industry argument.
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TARIFFS
◉ Tariff protection against the imported commodity is
needed, so the argument goes, in order to allow the
now higher-priced domestic producers enough time
to learn the business and to achieve the economies
of scale in production and the external economies of
learning by doing that are necessary to lower unit
costs and prices.
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THEORY OF PROTECTION
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THEORY OF PROTECTION
◉ Alternatively, we can say that a tariff redistributes
income from consumers to producers. However, in the
longer run, advocates of IS protection for infant
industries argue that everyone will benefit as domestic
and other manufacturers reap the benefits of economies
of scale and learning by doing so that ultimately the
domestic price falls below P 2 (the world price)..
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Trade Optimists and
Trade Pessimists:
Summarizing the
Traditional Debate
Trade Optimists and Trade Pessimists:
◉ Trade optimists Theorists who believe in the benefits
of free trade, open economies, and outward-looking
development policies.
◉ Trade pessimists Theorists who argue that without
tariff protection or quantitative restrictions on trade,
developing countries gain little or nothing from an
export oriented, open-economy posture.
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TRADE
PESSIMIST
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◉ Trade pessimists tend to focus on four basic themes:
1. the limited growth of world demand for primary
exports
2. the secular deterioration in the terms of trade for
primary producing nations,
3. the rise of “new protectionism” against manufactured
and processed agricultural goods from developing
countries, and
4. the presence of market failures that reduce the
ability of developing countries to move up to export
higher-value products.
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TRADE PESSIMIST-ARGUMENTS
1. The slow growth in demand for their traditional
exports means that export expansion results in lower
export prices and a transfer of income from poor to
rich nations
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TRADE PESSIMIST-ARGUMENTS
2. Without import restrictions, the high elasticity of
developing countries’ demand for imports, combined
with the low elasticity for their exports, means that
developing countries must grow slowly to avoid
chronic balance of payments and foreign-exchange
crises.
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TRADE PESSIMIST-ARGUMENTS
3. Developing nations have their “static” comparative
advantage in primary products, which means that
export-promoting free-trade policies tend to hinder
industrialization, which is in turn the major vehicle for
the accumulation of technical skills and
entrepreneurial talents.
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TRADE PESSIMIST-ARGUMENTS
4. Trade pessimists view trade liberalization under the
WTO as limited in practice, with developing
economies—particularly the least developed
countries—lacking the high-powered lawyers and
other resources needed to pry developed markets
open.
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TRADE
OPTIMIST
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◉ They argue that trade liberalization (including
export promotion, currency devaluation,
removal of trade restrictions, and generally
“getting prices right”) generates rapid export
and economic growth because free trade
provides a number of benefits:
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TRADE OPTIMIST-ARGUMENTS
1. It promotes competition, improved resource
allocation, and economies of scale in areas where
developing countries have a comparative advantage.
Costs of production are consequently lowered.
2. It generates pressures for increased efficiencies,
product improvement, and technical change, thus
raising factor productivity and further lowering costs
of production.
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TRADE OPTIMIST-ARGUMENTS
3. It accelerates overall economic growth, which raises
profits and promotes greater saving and investment
and thus furthers growth.
4. It attracts foreign capital and expertise, which are in
scarce supply in most developing countries
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TRADE OPTIMIST-ARGUMENTS
5. It generates needed foreign exchange that can be used to
import food if the agricultural sector lags behind or suffers
droughts or other natural catastrophes.
6. It eliminates costly economic distortions caused by
government interventions in both the export and foreign-
exchange markets, and substitutes market allocation for
the corruption and rent-seeking activities that typically
result from an overactive government sector.
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TRADE OPTIMIST-ARGUMENTS
7. It promotes more equal access to scarce resources, which
improves overall resource allocation.
8. It enables developing countries to take full advantage of
reforms under the WTO.
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TRADE PESSIMIST VS. TRADE OPTIMIST
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TRADE PESSIMIST VS.
TRADE OPTIMIST
WHICH ARE YOU?
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THANK YOU
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