Industry and Trade: Industrialisation;

technology; privatisation; import

substitution and/or export promotion.
 Balanced Growth: In the standard exogenous growth model the type of equilibrium studied
is a balanced-growth equilibrium. In the balanced-growth equilibrium the capital intensity of
the economy—its capital stock divided by its total output—is constant. However, other
variables like the capital stock, real GDP, and output per worker are growing.
 Rosenstein-Rodan: government planning. Three major invisibilities and externalities: 1.
Social overhead capital: e.g. training, transport, infrastructure. These investments must
precede private investment. Long time frames: setting up and returns to investment. 2.
Complementarity of industry: need government support up to critical self-sustaining point.
3. Low level savings trap.
 Argue need big push to get into self sustained growth. Endogenous growth theory has been
used in support of this.

 Unbalanced Growth: balanced growth not work because: balances injections of funds =
massive. Where does Complementarity end?
 Markets best respond to imbalance. Development of demand leads to increased prices in
one market, and thus falling costs and prices in another. Therefore not planned economy, let
free market respond to shortages/surpluses of unbalanced growth.
 Policy prescription: focussed investment: Korea-state-owned steel industry = investment in
national infrastructure (communications, transport links etc)

 But whole balanced/unbalanced argument is a bit false anyway: can’t get balance
planned/funded for in whole economy; but larger the initial Investment, the greater the
likelihood of overcoming invisibilities.

 Import Substitution: reduce foreign dependency through local production of industrialised

products.
 It should be noted, as well, that import substitution does not mean import elimination: as a
country industrializes, it begins to import other kinds of goods which become necessary for
its industry, such as petroleum, chemicals, and the raw materials it may lack. The real
objective of import substitution is therefore not to eliminate trade, but to lift it to higher
stage – that of exporting value-added products, which are not as susceptible to economic
fluctuations as raw materials, according to the Singer-Prebisch thesis.
 Prebisch Thesis: potential to maintain rapid rates of growth in producing primary produce is
limited. Need for reinvestment in manufacturing, but this means have to overcome foreign
economies of scale.
 But leaving free market to overcome this alone (in presence of underdeveloped/missing
markets) may not be the most socially efficient development strategy.
 Prebisch believed that developing countries needed to create local vertical linkages, and
they could only succeed by creating industries that used primary products already being
produced domestically.
 Fogarty: Australia and Canada: exporting primary produce is a sustainable development
strategy – in contrast to the Prebisch thesis. Nature of development that this opportunity
offers depends upon the economy’s supply-side.
 Protectionism good for infant industry argument. If all markets are infant = whole national
protection.
 Protection promote “learning by doing” = comparative advantage in new industries
 E.g. Korean motor industry
 Employed in most of Latin America in 1930s
 Peron (Argentina) want state-induced industrialisation
 ISI failed in Latin America, being one of the only factors that led to the lost decade. Others
argue that ISI led to the “Mexican Miracle” (1940-1975) where economic growth was 6% or
more.
 Colombia: import substitution in face of Great Depression. Success of coffee exports =
incentive for non-traditional exports e.g bananas, cut flowers, mining, manufacturing. Coffee
= 80% exports (1954) – 40% (1974).
 Average tariffs (1980): 168% Brazil vs. 15% SE Asia
 Hirschmann: said that for 1940s-50s ISI worked, need for protectionism to be only
temporary. Only selected industries protected; protect industries with strong linkages.
 Argentina: ISI strongly endorsed by Peron. Economic policies employed that built a large and
heavily protected manufacturing sector – which grew without any corresponding increase in
the productivity of the agricultural sector.
 the Brazilian ISI process, which occurred from 1930 until the end of the 1980s, involved
currency devaluation as a means of boosting exports and discouraging imports (thus
promoting the consumption of locally manufactured products), as well as the adoption of
different exchange rates for importing capital goods and for importing consumer goods.
Moreover, governmental policies toward investment were not always opposed to foreign
capital: the Brazilian industrialization process was based on a tripod which involved
governmental, private, and foreign capital – the first being directed to infrastructure and
heavy industry, the second to manufacturing consumer goods, and the third, to the
production of durable goods (such as automobiles). Volkswagen, Ford, GM and Mercedes all
established in Brazil in the 1950s and 1960's.

 Export Promotion: if countries fail with import substitution (maybe because governments in
developing countries are more prone to fail than markets) may resort to export promotion.
 a trade and economic policy aiming to speed-up the industrialization process of a country
through exporting goods for which the nation has a comparative advantage. Export-led
growth implies opening domestic markets to foreign competition in exchange for market
access in other countries
 Gives opportunity to achieve economies of scale in manufacturing.
 Added international competition = increased efficiency of domestic firms to enable them to
compete.
 criticisms include that export orientated industrialization has limited success if the economy
is experiencing a decline in its terms of trade, where prices for its exports are rising at a
slower rate than that of its imports. This is true of many economies aiming to exploit their
comparative advantage in primary commodities as they have a long term trend of declining
prices, noted in the Prebisch thesis though there are criticisms of this thesis as practical
contradictions have occurred. Primary commodity dependency also links to the weakness of
excessive specialization as primary commodities have incredible price volatility, given the
inelastic nature of their demand, leading to a disproportionately large change in price given
a change in demand for them
 Small scale domestic savings and investment, can be improved by opening up to economy to
FDI flows. This brings greater access to capital. Also transfer of skills form MEDCs – LEDCs
this has particularly benefitted Singapore and Hong Kong.
 Post war period of buoyant world trade exploited by Asia, by remaining competitive and
aggressively seeking out new markets. Opening up their economies improved efficiency and
facilitated their growth.
 Chile under military government (1973) free market reforms implemented. Chile go through
export expansion.
 Cristobal Kay: main lesson to learn form East Asia is that free markets, free trade and export
orientated development strategy are key to economic success.

 Import substitution OR export promotion? Depends upon nature and efficiency of public vs.
Private institutions.

 Technology: limitations on type of technology purchased:

 1. Policies in imperfect domestic markets push up wages and cheapen the cost of imported
capital = entrepreneurs buy inappropriate technology instead of employ more labour. Main
cause of dualism.
 2. Choice of techniques available for some industrial techniques may not be great.
 3. Information about appropriate technologies may be lacking.
 4. Due to the demonstration effect, customers may insist on high product standards which
rule out more prosaic production techniques.
 5. Pressure from the West (e.g. tied aid) may push LEDCs into buying inappropriate
techniques.
 6. Development means keeping in touch with modern technology. As technological frontier
is continually moving forward, if buy old technology, never close the gap between rich and
poor.

 Privatisation: import substitution polices supported by nationalist politics = expansion of

public sector in many developing countries in post war period. SOEs become larger
employers, supplying subsidised products and guaranteeing incomes = keep cost of living
low.
 But public finances deteriorated = governments take out loans. = force up interest rates,
crowds out private sector investment. Due to underdeveloped financial markets, borrowing
= international debt.
 Need to repair public finances = privatisation. Also international debt crisis: governments
have to restructure SOEs and subsidies to get international backing = privatise. Also,
privatise because: improve efficiency, increase incentives, wider ownership.
Privatisation shown to produce following results in developing world:
 Stimulate investment
 Productivity and efficiency improve, because bureaucracy reduced.
 Competition = increased consumer choice and decreased prices
 Capital markets expand develop and modernise
 Public sector budgets balance. Debt reduced.
 BUT privatisation has many difficulties. Need:
 Strong political commitment t to overcome vested interests.
 Firm regulation (e.g. over monopoly)
 Transparency, to prevent corruption
 Openness to all to participate, to maximise efficiency and equity.
 Chile: follow ‘Chicago Boys’: privatise previously nationalised industries. Inflation reduce
(600% 1973 – 200% 1976) slowly because of demand for money for privatisation purposes.
But no increased investment, just a change of ownership.
 Chile: Edwards and Edwards (1992): privatisation, trade liberalisation in 1975-80 = success of
post 1985 rooted in earlier reform.
 Mexico: reprivatisation of commercial banks after 1982 debt crisis = lending boom and too
many non-performing-loans.
 Asia: (1) Newly Industrialised Economies (NIEs) (hong Kong, Korea, Singapore, Taiwan)
1960s: rapid industrialization and openness to international economy. (2) China etc. 1970s
because of agrarian reform. Includes Indnesia, Malaysia, Thailand. Both phases lead to later
change in India.

 Flying Geese Paradigm: dominant economy acting as the growth centre, followed by other
developing economies/industries.
 1. Follower economy import foreign goods, demonstration effect, help local industrial
development.
 2. Import substitution.
 3. Local production increase further to the extent that excessively produced goods begin to
be exported.
 Western economies as leaders. Asian economies as followers. Or Japan as leader to rest of
Asia.
 Lower value added businesses replaced by higher value added products.

 Agriculture: Industrialisation can stimulate agriculture by providing productivity enhancing

inputs, and a market for its output.
 Use of agricultural surplus, especially initial stages of development. Later stages production,
this flow reverses with resources going to help the agricultural sector.
 South Korea and Taiwan: agrarian reform before any significant industrialisation. Whereas
most agrarian reform in Latin America happened after industrialisation was firmly
established.

 South Korea and Taiwan: land reform significant in starting industrialisation. South Korea: all
tenants entitled to ownership of the land they farmed (when became independent of
Japan). Tenants – owners = increased efficiency and production. Taiwan: (1949) farm rents
reduced from 50% harvest to 37.5% harvest. “land-to-the-tiller act” (1953): landlords obliged
to sell all tenanted land above three hectares of paddy field to the government, then this
resold to the tenant.

 Corbon article: Latin America mistake: substantial part of education budget spent on tertiary
education, while quality and coverage of primary and secondary education remained very
poor.
 First wave reform, SR after debt crisis: focus policy on expenditure reduction rather than
boosting output (to reduce current account deficits) because latter policy produces slower
results. Policy include: reduce public sector deficit; real depreciation; privatisation. Initiated
in Chile in mid 1970s.
 Second wave reform, LR after debt crisis: policy for macro stability and conditions for
markets to work efficiently without government interference.
 Evans article (East Asia): main lessons to learn from East Asia experience: 1) need a coherent
economic bureaucracy (2) government independent of, but closely connected to, business
community.
 Role for government: “market friendly model” (World Bank, 1993): government preserve
macroeconomic stability and provide the ‘rules of the game’ that are transparent. Shift
capital to sectors worth pursuing, from the declining sectors (role for government here in
terms of allocation of subsidies etc)
 Root (1996): egalitarian character of East Asian growth as ‘the key to the Asian miracle’.
 Quality of bureaucracy example: civil services quality requirements:
 Japan and Korea: entrance exams, only 2% pass = top quality workforce.
 Singapore: identify the best pupils at secondary school level = scholarships through
university. Singapore also purposefully keeps public sector wages above private sector
wages.
 “Chaebol” (e.g. Hyundai) seen as crafty and untrustworthy in immediate post war years, but
government realise need to use them as focus for development. State were confident to
shift power to the private sector, because need to get industrialisation.
 Samsung: put into Schumpeterian risk taking situations
 ACER: (Taiwan) nurtured and protected.
 Past Exam Questions

2008: Q2. Is specialisation in the export of primary produce a viable development strategy?
Critically assess the theoretical arguments for and against this policy and compare your conclusion
against the experience of one developing country you have studied.

ANSWER: Some discussion on the Prebisch thesis of falling terms of trade for primary produce might
be expected. Evidence for this may not now be entirely convincing and indeed the counter argument
of resource curse is common in the era of strongly rising resource prices – thanks to Chinese and
Indian economic growth sucking in imports. Gylfason (2004) illustrates the argument of ‘resource
curse’ with a strong negative correlation between primary production and %GNP growth. This he
bases on the evidence that rich primary resources promote 1. ‘Dutch disease’ and overvalued
exchange rates; 2. a rent-seeking, not risk-taking business culture; and similarly 3. a false sense of
security. Collier (2007) emphasises the corrupting influence of resource rents on government.

Sachs and Warner (EER, 2001, amongst others) argue that the technical innovation that drives long
run endogenous growth is most often found in manufacturing industry and not extractive or
resource-based enterprise: The more the latter crowds out the former, the less dynamic the
economy. (I’m not much convinced by this argument!)

The fact that some countries have not managed their natural resources productively (Nigeria,
Venezuela, Russia?), of course, does not condemn all nations so richly endowed to be similarly
cursed. Stabilisation funds held in foreign currencies (Norwegian oil, Chilean copper) can prevent
overvaluation; transparent, incorruptible and efficient bureaucracies (Botswanan diamonds) can
guard against rent seeking and corruption and a determined effort to diversify industry and exports
(UAE tourism and financial services) prevents a false sense of security. Many other examples may be
quoted both for and against specialisation in primary produce but only one country case study is
called for.

2007: Q7. According to Cristobal Kay (2002), ‘statecraft’ has been a key factor underlying both East
Asia’s impressive growth and Latin America’s sluggish economic record. Critically assess this view
with regard to Argentina’s experience, in particular.

2006: Q4. Gylfason notes that heavy dependence on primary produce correlates negatively with
economic growth. Are there any conclusions you can draw from this with specific reference to Latin
America?