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Development issues

Page history last edited by PBworks 14 years ago



see the main page:  Economic Development




Growth Models:


export-oriented industrialization vs. import-substitution industrialization:


It is interesting that both models were ultimately trying to achieve the same objective: encourage national economic development and to build up their economies to avoid poverty. Both regions were aware of the “two faces of development”. On one hand they were attracted to the promise of less poverty, better health, longer lives and greater international status. But at the same time, both regions were aware of the threat of dependence and were repulsed by the high cost of development, the potential loss of culture and independence.


Asia vs. Latin America


The two regions were heavily influenced by the world around them. In East Asia, the “tigers” saw the amazing economic transformation that Japan had undergone post WWII, and they were determined to follow a similar model. In much of Latin America, they were more influenced by their historical connections with Europe, and they looked to France and even Russia as influencers.


The Asian countries were ultimately better able to jump out of poverty and make the faster transition to economic development. A big part of this leap was that they were less afraid of the repulsive “face” of development, and they embraced the attractive face with more enthusiasm. The Asian countries tried to take more advantage of the opportunities that were presented by the international markets and they tried to maximize the benefits of modernization. In order to minimize the risks of the “ugly face”, the Asian markets typically relied on a very strong state intervention to protect their home markets. In general, the Asian politicians were willing to risk dependency and went after the benefits of development. They tried to limit that risk with a strong state. They were influenced by a mix of liberal and mercantilist perspectives.


The Latin American countries were more concerned about the threat of dependency than the Asian ones were. In general, they saw the international market forces as a threat, and they attempted to wall off their markets and develop internally. Brazil is a very good example of a country that thought they could use the Import substitution model as a means for growth. This had its root in the 1950s when influential scholars were critical of the “comparative advantage” theory of the division of labor, and produced the “dependency critique”. This led to a feeling that culturally and economically, Latin America needed to avoid dependency and needed to self-develop their own markets and manufacturing base. The goal was to produce “home grown” industries and technologies.


In a way, both the Asian and the Latin American experience were very similar in the beginning. Both wanted to get away from just exporting raw materials and importing finished goods. They were both concerned about the foreign exchange drain of being just a primary goods exporter and a finished goods importer. They both wanted to develop their manufacturing base and to develop economically. What is interesting is that the second stage of development is where the Asian and the Latin American strategies diverged.

The Asian strategy has been branded the “export-oriented industrialization” because their main focus was to build up a manufacturing base with the express intent on exporting their products to the world markets. The Latin American strategy, on the other hand, has been called “import-substitution industrialization” because their main focus was to build up their local manufacturing base with the intent on servicing their home markets. While the Asians sought to build advanced machinery to export to the world, the Latin Americans sought to build products to service their local markets.


One of the key reasons why the Asian model has been so successful is that because they focused on producing goods and services for the world markets, they had to continuously focus on improving the quality of their goods and they had to continuously seek ways to become more efficient and produce at a lower cost. The Latin Americans on the other hand, but just focusing on their local markets, they sought to protect themselves from global competition. As a result of not facing global pressures of quality and price, many of their industries fell behind in technology and in business practices.


The Latin American “walled-off” markets were much smaller than the ones faced by the Asian companies. Instead of trying to sell to the whole world, the Brazilian companies just tried to sell their products to other Brazilians. The problem is that countries such as Brazil had large portions of their population as very poor, so there was a tendency of the companies to just focus on the relatively small population of consumers that could afford to buy their products. With a small relative market size, the companies inside of the import-substitution economies became complacent.


The Asian development story is actually quite interesting. They had a very strong influence by the government in choosing winners and losers and re-organizing the national economy to help promote export oriented growth. They would choose an industry where they thought that they would have a comparative advantage, and then they would protect those national companies with import barriers. They would also invest heavily in education and in technology to try and create a comparative advantage relative to other companies in other parts of the world. They focused at first on consumer goods, but later expanded into heavy industries such as petrochemicals, and automobile production (for world wide consumption, not just for their local markets). In order to pull off this economic “miracle”, the Asian governments encouraged a high level of national savings and investment. The governments also helped establish private banks to ensure the free flow of capital. They removed import barriers on essential raw materials essentially lifting all barriers to FDI. By investing in high levels of education and job training, the Asian governments attempted to increase productivity relative to other countries.


The part of the Asian “miracle” that doesn’t get talked about as frequently is that countries such as South Korea and Taiwan were some of the largest recipients of US aid. Even until today, S Korea benefits largely from the US military presence in the region. But during their development, these countries were seen as strategically important in combating communism and therefore the USA looked the other way at some of the more questionable tactics that they employed in order to develop. South Korea, for example, went through a military coup in the 1960s and then later repressed all forms of labor unionization. In today’s world, the US turning the blind eye to this kind of behavior would not be tolerated in the world press. Also, the US poured billions of dollars into these economies, but at the same time, they allowed them to impose high import tariffs on US made goods. This kind of double standard…allowing them to export with not barriers but putting high import barriers on our products…this was tolerated because these countries met other IPE objectives of the US at the time.


Also, it is important to note that Taiwan and Singapore and Hong Kong are all very small nation-states with a relatively short history as primary goods producers. This is in stark contrast to a country like Brazil who has a massive farming and agricultural base and has traditionally been a primary exporter of raw materials. The book points out that it was easier said than done as Latin America tried to get away from relying on primary good exports.


In general, I think governments should study both of these experiences carefully because they both hold some of the keys to economic development. From the Asian experience, we can clearly see that it is better to keep an eye on the international markets and that you should try and compete globally. By allowing your products to compete internationally you will expose yourself to international pressures to innovate and improve. Also, the Asian countries taught us that strong mercantilist policies can be very useful for helping a country develop. While it may not be beneficial for all countries in the world to act like economic nationalists, it is clear that if the rest of the world is acting liberal, and if you find it possible to behave as a mercantilist, then you will have an advantage in developing. In some of these Asian examples, they took advantage of other global IPE concerns (spread of communism) and used the chance to develop their economies.


From the Latin American experience I think we learn a lot about what not to do. But, while the book may have been a bit critical of the import-substitution policies of Latin America, I am left to wonder if it really was all that bad of a thing. Take a country like Brazil for example; I actually think the ISI model worked quite well in getting foreign automobile companies to invest in local manufacturing facilities inside of Brazil. Before the ISI policies were put in place, the foreign auto industries that wanted access to Brazil’s huge internal market were able to just import them from abroad. With the implementation of ISI policies (high import duties), these same companies were forced to set up local manufacturing plants. Over the past 30 years, those same plants have modernized and now produce some of the most sophisticated engines anywhere. Back in the 1970-80’s, Brazil decided to be self-reliant on ethanol rather than gasoline for automobiles. Now, today, Brazil is the world leader in Ethanol cars.


macro economics - more....


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