A Level Economics Essay 10: Development Policies

Consider how effective the interventionist policies of import substitution and export-led industrialisation are likely to be in raising the levels of economic growth and development in LEDCs. 

Import substitution and export-led industrialization are two interventionist policies that countries can adopt to promote economic growth and development. Let's consider how effective these policies are likely to be in raising the levels of economic growth and development in LEDCs (Less Economically Developed Countries).

1. Import Substitution: Import substitution is a policy strategy where a country aims to reduce its dependence on imported goods by promoting domestic production of those goods. The idea is to protect domestic industries from foreign competition and foster self-sufficiency. LEDCs adopting import substitution policies typically impose high tariffs and trade barriers on imported goods, making them more expensive and less competitive compared to domestically produced goods.

The infant industry argument comes into play in import substitution policies. According to this argument, emerging industries in LEDCs may initially face disadvantages compared to established industries in developed countries. They may lack economies of scale, experience higher production costs, and face technological and managerial challenges. To overcome these obstacles and enable the growth of these industries, protectionist measures are implemented.

However, import substitution policies have shown mixed results in raising economic growth and development. While they may initially protect domestic industries and promote industrialization, there are several drawbacks:

a) Lack of competitiveness: Import substitution policies often lead to the development of industries that are not internationally competitive. Due to limited exposure to global competition, these industries may struggle to innovate, achieve economies of scale, and produce high-quality goods at competitive prices.

b) Limited market size: LEDCs generally have smaller domestic markets compared to developed countries. Relying solely on domestic demand can limit the growth potential of industries. Without access to international markets, firms may face challenges in achieving economies of scale and attracting investment.

c) Dependency on inefficient industries: Import substitution policies may lead to the development of industries that are protected from competition but are inefficient and less productive. This can result in a misallocation of resources and hinder overall economic growth.

Example: During the mid-20th century, many LEDCs, including India and some Latin American countries, implemented import substitution policies. While they initially aimed to reduce dependency on imports and develop domestic industries, the results varied. Some industries thrived, but others became inefficient and uncompetitive. Over time, many countries shifted towards more market-oriented policies to promote economic growth.

2. Export-Led Industrialization: Export-led industrialization is a policy approach where a country focuses on developing industries that can compete in international markets and promotes exports as a driver of economic growth. This strategy involves implementing policies such as export incentives, infrastructure development, investment in human capital, and market-oriented reforms to attract foreign investment and boost exports.

Export-led industrialization has been relatively more successful in promoting economic growth and development compared to import substitution policies. Some reasons include:

a) Access to larger markets: By focusing on exports, LEDCs can tap into larger international markets, allowing their industries to achieve economies of scale and expand production. Export-oriented industries are driven by international demand, which can provide sustained growth opportunities.

b) Technological spillovers: Engaging in global trade can expose LEDCs to advanced technologies and knowledge from developed countries. This transfer of technology can contribute to productivity improvements and innovation, benefiting the overall economy.

c) Foreign direct investment (FDI): Export-led industrialization policies often attract foreign investment, which brings in capital, technology, and managerial expertise. FDI can help boost industrialization, create employment opportunities, and enhance productivity in LEDCs.

Example: China and Japan are notable examples of countries that successfully implemented export-led industrialization policies. China, through its policy reforms and export-oriented approach, has become a global manufacturing powerhouse, exporting a wide range of goods to countries around the world. Japan also pursued export-led industrialization after World War II and transformed into a major exporter of automobiles, electronics, and machinery.

In conclusion, while both import substitution and export-led industrialization have been employed by LEDCs, export-led industrialization has generally proven more effective in raising economic growth and development. By focusing on exports, LEDCs can access larger markets, benefit from technological spillovers, and attract foreign investment. However, each country's specific circumstances and policy implementation play a crucial role in determining the success of these strategies. The infant industry argument provides a theoretical justification for protectionist measures under import substitution policies, acknowledging the initial disadvantages faced by emerging industries. However, striking a balance between protection and competitiveness is essential to avoid long-term inefficiencies and promote sustainable development.

Does the WTO help a poor nation become rich? Economic History in Small Doses 4

 Girish Menon*

Today, when we look at the world that we live in, we find that Huawei (a Chinese technology company) is being subjected to a systematic campaign of defamation and discrimination among the US led group of developed countries. And the WTO watches on helplessly. Yet, in its “WhatWe Stand For” page the WTO (The World Trade Organisation) states it’s first principle as:

Non-discrimination

A country should not discriminate between its trading partners and it should not discriminate between its own and foreign products, services or nationals.

The question this article attempts to explore is whether the WTO’s purpose is compatible with the desire of developing countries to join the ranks of the developed world.

 Let’s start with India and it’s Hindustan Motors (HM) company. Today HM’s cars are as ubiquitous as the dodo. Till the early 1990s it was so popular that it even enabled G D Birla to get a seat in heaven**. Ever since the Narasimha Rao government was forced to open up the Indian economy, after the economic crisis of the late1980s, HM has entered the books of Indian corporate history. The Indian government failed to protect HM because of the non-discrimination clause of the WTO and today there is no Indian car manufacturer visible on the horizon while her roads are choked with foreign brands.

The globalisation rhetoric dictates that countries stick to what they are already good at (theory of comparative advantage). Stated bluntly, this means that poor countries are supposed to continue with their current engagement in low-productivity activities. But their engagement in those activities is exactly what makes them poor. If they wish to leave poverty behind they have do the more difficult things that bring them higher incomes. And the WTO’s non-discrimination principle stops them from improving their earning capabilities.

 Today Toyota is the leading global brand in car manufacturing. It took Toyota more than 30 years of protection and subsidies to become competitive at the lower end of the car market. It was a good 60 years before it became one of the leading car makers in the world. It took nearly 100 years from the days of Henry VII for Britain to catch up with the Low Countries in woollen manufacturing. It took the US 130 years to develop its economy enough to feel confident about doing away with tariffs. Without such long time horizons, Japan might still be mainly exporting silk, Britain wool and the US cotton.

Unfortunately, poor countries are not allowed to adopt such time frames for developing their industries. The non-discrimination clause of the WTO demands that poor countries compete immediately with more advanced foreign producers, leading to the demise of their domestic firms before they can acquire new capabilities.

Like any other investment, investment in capability building is fraught with risk and does not guarantee success. Some countries make it and some don’t. And even the most successful countries will bungle things in certain areas.

However, economic development without investment in enhancing productive capabilities is a near impossibility.

 

* Adapted and simplified by the author from Ha Joon Chang's Bad Samaritans - The Guilty Secrets of Rich Nations & The Threat to Global Prosperity

 

** When GD Birla died his secretary tried to get him a seat in Vaikuntha. The Dwarapalaka (gatekeeper) asked the secretary to state the reason why GD should be let into heaven.

The secretary: ‘GD is one of the biggest industrialists in India’.

Dwarapalaka: ‘Usually that involves doing acts which are not acceptable here. This is Vaikuntha; not some unquestioning tax haven for moneybags! Please let me know what he has done in the name of God’

The secretary: ‘GD has established many Birla temples all over India’

Dwarapalaka: ‘Birla is worshipped in these temples. Not good enough!’

The secretary: ‘GD is the owner of Hindustan Motors’

Dwarapalaka: ‘I am confused. How is that a case for entering heaven?’

The secretary: ‘Because whenever someone gets into an Ambassador car he says “Oh God” and whenever someone reaches her destination she says “Thank God”.

Dwarapalaka: That has definitely advanced the cause of God. Please ask him to come in’

This anecdote was first narrated by the late Sharu Rangnekar. It has been modified by the author.

Ideological Positions and Economic History

 

My response to Shekhar Gupta's video

Dear Mr. Gupta

I believe your thesis on economic history is flawed when you argue that Japan, Korea, Taiwan and Singapore have grown because of economic freedoms i.e. I presume you mean free market practices. I have often heard you say that India too should follow free market practices to achieve similar heights. In the above process the elephant in the room i.e. how China rose with state intervention, has also been ignored.

Kindly permit me to state a few historical facts extracted from 'Bad Samaritans The Guilty Secrets of Rich Nations...' by Ha Joon Chang

1.  When Robert Walpole became the British Prime Minister in 1721 he launched a Swadeshi* policy aimed to protect British manufacturing industries from foreign competition, subsidise them and encourage them to export. Tariffs on imported foreign manufactured goods were significantly raised while tariffs on raw materials were lowered. Regulation was introduced to control the quality of manufactured goods so that unscrupulous manufacturers could not damage the reputation of British products in foreign markets. Walpole’s protectionist policies remained in place for the next century, helping British manufacturing industries catch up with and then finally forge ahead of the counterparts on the Continent.By the end of the Napoleonic wars in 1815 British manufacturers were firmly established as the most efficient in the world and it was then that they started campaigning for free trade.

2. The US too followed similar protectionist policies, espoused by Alexander Hamilton, which included protective tariffs, import bans, subsidies, export ban on key raw materials, financial aid...until the end of the Second World War (WWII). It was only after WWII, with its industrial supremacy unchallenged, that the US started championing the cause of free trade. Even when it shifted to freer trade, the US government promoted key industries by another means; namely public funding of Research and Development (R&D). Without government funding for R&D the US  would not have been able to maintain its technological lead over the rest of the world on key industries like computers, semiconductors, life sciences, the internet and aerospace.

3. In Japan the famous MITI (Ministry of International Trade and Industry) orchestrated an industrial development programme that has now become a legend. After WWII, imports were tightly controlled through government control of foreign exchange. Exports were promoted in order to maximize the supply of foreign currency needed to buy up better technology. This involved direct and indirect export subsidies as well as information and marketing help from JETRO the state’s trading agency.

4. Even Korea has not been an exception to this pattern. The Korean miracle was the result of a clever and pragmatic mixture of market incentives and state direction. The Korean government did not have blind faith in the free market either. While it took markets seriously, the Korean strategy recognized that they often need to be corrected through policy intervention.

5. Singapore has had free trade and relied heavily on foreign investment, but even so, it does not conform in other respects to the neo-liberal ideal. It used considerable subsidies to MNCs in industries it considered strategic. It also has one of the largest state owned enterprises which supplies housing and almost all land is owned by the government.

To conclude, I feel that Mr. Gupta’s advocacy of free markets is based on a fundamentally defective understanding of the forces driving globalisation and a distortion of history to fit the theory. Free markets and trade was often imposed on rather than chosen by weaker countries. Virtually all successful economies, developed and developing, got where they are through selective strategic integration with the world economy rather than unconditional  global integration.

Regards

Girish Menon

* Swadeshi  is a conjunction of two Sanskrit words: swa ("self" or "own") and desh ("country"). Swadeshi is an adjective which means "of one's own country".