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Trade and Development II: Economic Reform
READING ASSIGNMENT: Oatley – Chapter 7
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Plan
1. Culture vs. Interests & Institutions
Why did Asia “beat” Latin America?
2. Politics of shifting from ISI to “neoliberalism”
Cases of from Africa
3. Foreign aid, loans, conditionality, & reform:
The role of the IMF
4. The East Asian Miracle:
Export-oriented industrialization2
PART 1: Culture vs. Interests & Institutionshttp://www.youtube.com/watch?v=Cwq-XdPfpeA https://www.youtube.com/watch?v=49AfuuRbgGo
http://www9.georgetown.edu/faculty/jrv24/friends.html
Studies:
Teaching:
Research:
Presentations:
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Why did Japan, Korea, Taiwan, Singapore, and Hong Kong “beat” Argentina, Brazil, Mexico, Chile, and Colombia?
• Was it culture? Religion?
• Are Asians just better economists?
• Interests and institutions:
– “Losers” from globalization gain power world-wide with Great Depression
– World War II decimated the political power of interest groups throughout Asia:
• Clean slate
– Latin American interest groups remained in tact• Losers from globalization remained in power
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Shift from ISI to “neoliberalism” & export-oriented industrialization
• Why the shift? – ISI generated economic imbalances (current account
deficits)
– Group of East Asian countries outperformed rest of the world
• Neoliberal?• Export-Oriented• Geo-politically strategic Cold War allies?
– Latin American Debt Crisis led to Structural Adjustment programs of the IMF
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ISI problems & the current account
• Current account:– Registers a country’s imports & exports of both goods
and services– Deficit means imports>exports
• How did ISI lead to deficits?1. Manufactured goods were not globally competitive –
only sold domestically
2. Marketing Boards weakened agriculture
3. Governments preferred overvalued exchange rates (this, sadly, contributed to making exports less competitive)
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Pro-trade
Anti-trade
URBAN-RURAL
CONFLICT
Why was it hard to break free of ISI?
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Part 2: The politics of shifting
from ISI to “neoliberalism”
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Ghana 1971• Oatley p136, http://rulers.org/rulg1.html#ghana
• Ghanaian prime minister devalued the exchange rate
– Oatley: 1971 p136
– www.Rulers.org – 1972:
Edward Akufo-Addo, 31 Aug 1970 - 13 Jan 1972
– DEPOSED IN A COUP days after the devaluation!
– Urban residents contributed in the coup effort
concerned that prices for imported goods would rise
– The new regime restored the overvalued XR
– IMF arrangements: ’66, ’67, ’69, … 197910
Example: Nigeria 1983• President Shagari, facing an economic crisis, turned to the IMF hoping to
initiate some reforms.
• He faced opposition in the legislature & elections on the horizon.
• The president’s officials admitted,
“the whole idea of bringing in the IMF is to get the alibis to persuade the politicians of what we need to do.”
• But the demands of the IMF were too harsh, considering the president’s political constraints.
• No agreement was concluded.
• Side note:
– Democracy soon collapsed & the new dictator pushed through reforms without the IMF.
– When the dictatorship finally requested an IMF loan in ’87, it was granted. 11
• Mid-1980s: The IMF was willing to grant an agreement to General Babangida, who had already pushed through economic reform without IMF political support,
• But the IMF had not been willing to grant an agreement to President Shagari, who sought political support to push through limited reform.
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Part 3: Foreign aid, loans, conditionality, & reform
The role of the IMF
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How did governments keep the system going until the 1980s?
• Foreign loans
• Bilateral aid
• IMF loans (without serious policy conditionality)
• Were politically important countries “hurt” in the long-run?
• Perverse impact of foreign aid14
The Empire Strikes Back
• Governments needed to take a smaller role in policy areas where markets work reasonably well
• Stable macroeconomic environment – – transform budget deficits into surpluses; raise interest
rates; devalue the exchange rate cut demand; change current account deficits into
surpluses
• Liberalize trade
• Privatize State-Owned Enterprises
• Neocolonialism? (Dependency theory?)
Structural Adjustment… or…
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Role of domestic politics
• “Losers” attempted to block reforms
• “Winners” attempted to promote reforms
• Governments mediated between winners & losers
• Brought in the IMF to help push through reforms?
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Executive
Without the IMF
With the IMF
Veto player
Accept
Reject
Payoff to veto player
-1 (change policy)
0 (maintain the status quo)
-r (reject the IMF)
Figure 1: The logic of bringing in the IMF
Veto player
Accept
Reject
-1 (change policy) + loan
How does bringing in the IMF help push through economic reform?
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Suppose you have a president representing the “winners” but a legislature representing “losers”…
• Reform involved an intense distributive struggle reforms were implemented unevenly
• PARTIAL REFORM!
– Vreeland 2003: “By bringing in the IMF, governments gain political leverage - via conditionality - to push through unpopular policies. For certain constituencies, these policies dampen the effects of bad economic performance by redistributing income. But IMF programs doubly hurt others who are less well off: They lower growth and exacerbate income inequality.”
• But see Oatley p149, figure 7.2
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Reform index from IADB 1997Growth rates from World Bank
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Part 4: The East Asian Miracle:
Export-Oriented Strategy
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The East Asian Model• Export-oriented strategy
• Scholars disagree on the role of the state– Neoliberal interpretation: East Asian success due to market friendly
development strategies– State-oriented interpretation: East Asian success due to state-led industrial
polices
• Immediately after WWII: “easy ISI”
• Late-1950s / Early-1960s: shift emphasis to exports– Forced manufacturers to worry about international competitiveness– Invested resources in domestic industries that were profitable in world
markets (Latin American & African countries did not)
• Relied on protectionism for their domestic markets
• BUT allowed selective liberalization to lower costs for “critical inputs”
– (so did Latin America, no?)
• Stable macroeconomic environment:1. Low inflation
– Helps encourage savings2. Appropriately valued exchange rates
– Helps promote exports– Conservative fiscal policies (borrowed little)
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3 Stages of the East Asian Model of Development
1. Industrial policy promotes labor-intensive light industry (easy ISI – e.g., textiles)
2. Target heavy industries (e.g., steel, shipbuilding, petrochemicals)
3. Target high skill plus R&D-intensive industries (e.g., computers)
• (How is this different from Latin America?)
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Using monetary policy to promote EXPORTS:
• Exporting firms paid interest rates of 6-12%
• Other borrowers paid 20-22%
• Short-term loans unlimited for confirmed export orders
• Credit also made available to exporters’ input suppliers (and the suppliers’ suppliers)
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Was success due to markets or states?
• Centralized or Decentralized mechanisms of allocation?
• Mix?
• Used industrial policy to shift resources to the export industry
• Used world markets to “get prices right” for export industry
• Emphasized exports rather than the domestic markets
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Economic reform in China1. Late 1970s: The Household Responsibility System
• Encourage farmers to lease land from their agricultural commune• Part of the crop sold to state (at reformed prices), part at market prices (&
keep the profits)• Increased agricultural productivity and led to rural-urban migration
2. 1984: The Enterprise Responsibility System• Enterprises encouraged to acquire inputs and sell outputs on world markets • Reduced government subsidies
3. Open Door Policy• Liberalizing foreign direct investment• Does this “crowd out” domestic investment?
• Per capita income doubled from 1979 to 1990 and then doubled again in the 1990s!
• Was success due to centralized mechanisms, decentralized mechanisms, or a mix?
• “Orthodox” vs. “heterodox” reforms
• Did political institutions play a role in mediating between winners and losers?
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Take homes
• Winners, losers & economic reform
• Neo-liberalism & Export-oriented industrialization
• Perverse impact of foreign aid
• Role of the IMF
• Conservative macroeconomic policies– Low inflation– Appropriately valued exchange rates– Conservative fiscal policies (low spending, adequate taxation)
• Partial reform
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Thank youWE ARE GLOBAL GEORGETOWN!
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Trade liberalization & the WTO… or…• Doha Round:
– Agriculture for Non-Agricultural Market Access (NAMA)
• G20 vs. G7
• Perhaps the G20 believes that the lowering of agricultural tariffs will not bring enough benefits given the costs of lowering NAMA barriers No deal
• But perhaps this is a story of private information and reputation
• They seek to extract more concessions & want to establish a “tough” negotiation reputation
• Games of private information & signaling of “type”• http://www.youtube.com/watch?
v=3EkBuKQEkio&feature=PlayList&p=81BDB99A37EE7D5C&playnext=1&playnext_from=PL&index=7
Return of the Jedi!
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