Import substituting industrialisation?
- Trade policy adopted by many low and middle income countries before the 80s
- Aimed to encourage domestic industries by limiting competing imports
Principal justification of import substituting industrialisation?
Infant Industry Argument
* Countries may have a potential comparative advantage in some countries, but these industries cannot initially compete with well-established industries in other countries
* To allow these industries to establish, gov should temporarily support them until they have grown strong enough to compete internationally
Problems with infant industry argument?
- May be wasteful to support industries now that will have comparative adv in future
- With protection, infant industries may never grow up
- No justification for gov intervention unless there is a market failure that prevents the private sector investing in the infant industry
Infant industries and market failure?
- 2 arguments for how market failures prevent infant industries becoming competitive
- Imperfect financial asset markets –
- Bc of poorly working financial laws and markets, firms cannot save/borrow to invest in production process
- If creating better functioning markets isn’t feasible, high tariffs are a 2nd best policy to increase profits in new industries
- Appropriability –
- Firms may not be able to privately appropriate the benefits of their investment in new industries bc those benefits are public goods
- Knowledge created when starting an industry may not be appropriable (may be a public good) bc of lack of property rights
- If establishing a system of property rights isn’t feasible, high tariffs would be 2nd best policy in encourage growth
Import-substituting industrialisation - in practice?
- In Latin America encouraged manufacturing industries in the 50s and 60s
- But economic development was the ultimate goal
- However, countries adopting these policies grew slower than others
- Appeared infant industry argument not as valid as initially believed
- Import-substitution industrialisation involved costs and promoted wasteful use of resources –
- Involved complex, time consuming regulations
- Set high tariff rates for consumers, including firms that needed to buy imported inputs
- Promoted inefficiently small industries
Trade Liberalisation?
- Some that had relatively free trade had higher average economic growth
- By mid 80s, many gov lost faith in import sub and began to liberalise
- Dramatic fall in tariff rates in India and Brazil, less drastic reductions in many other developing countries
- Trade lib occurred along with a dramatic increase in vol of trade
- Share of trade in GDP tripled 1970-88, with most happening after 85
- Share of manufactured goods in developing country exports surged, coming to dominate the exports of the biggest developing economies
Evidence for promoted development - trade lib?
Evidence mixed
* Growth rates in Brazil and other Latin American countries slower than they were during import-substituting industrialisation
* But unstable macroeconomic policies and financial crises contributed to slower growth since the 80s
* Others like India grown rapidly since liberalising in the 80s, but unclear to what degree liberalisation contributed
* Some argue it has contributed to income inequality as Heckscher-Ohlin predicts
Trade and growth - takeoff in Asia?
- Instead of import-sub, several East Asian countries adopted policies promoting exports in targeted industries (Japan, Hong Kong, Taiwan, South Korea, Singapore, Malaysia, Thailand, Indonesia, China)
- Generated high volume of exports and imports relative to total production
- Possible to develop through export-oriented growth
- However, Latin American nations such as Mexico and Brazil did not see comparable take-offs – suggest other factors must have played a role in Asia
- High saving and investment rates as a contributor
- Rapid growth in education led to high literacy and numeracy rates – important for productive labour force
- Also undertook other economic reforms
