Trade and Development

1. Trade and Development • Benjamin Graham • Lecture 10: Trade and Development Benjamin Graham

2. Today’s Plan • Reading quiz • Trade and Development • Lecture 10: Trade and Development Benjamin Graham

3. Housekeeping • Midterm is next Tuesday (October 2) • Lecture 10: Trade and Development Benjamin Graham

4. Reading Quiz (1) What kinds of trade problems do developing nations face in seeking to reap the gains from trade?  • A. Problems related to having their exports concentrated in only one or a few primary products.   • B. Agricultural export subsidies of advanced nations.  • C. Tariffs on agricultural products and textiles • D. A and C • E All of the above • Lecture 6: Barriers to Trade Benjamin Graham

5. Reading Quiz (2) Which of the following is not considered a primary product? • Raw materials • Fuels • T-shirts • Agricultural goods  • IR 213: Introduction Benjamin Graham

6. Reading Quiz (3) If advanced nation’s wages are forced down by competition from countries with lower labor costs and abusive labor conditions, this is called • A. Elasticity of Labor • B. Cost and Demand Differences • C. Social dumping • D. Labor subsidization • E. Labor darwinism • Lecture 6: Barriers to Trade Benjamin Graham

7. Colonial Legacies • Many of todays poor countries are former colonies • But not all former colonies are poor • It matters who you were colonized by and how you were colonized • Economic institutions • Political institutions • Infrastructure • Human capital • Lecture 7: Domestic Politics of Trade Benjamin Graham

8. The Colonial Archetype • Colonial government: • Low investment in infrastructure or human capital • Colonies produce raw materials (mining, agriculture) • Trade exclusively with colonial metropole on unfavorable terms (mercantilism) • Lecture 7: Domestic Politics of Trade Benjamin Graham

9. Legacies of Colonialism • Colonies were governed better where the colonists actually resided themselves • Less malaria -> less colonists dying -> more colonists staying • US, Canada, Australia (genocide), South Africa (Apartheid) • Colonists continued to rule after colonial ties ended. • Lecture 7: Domestic Politics of Trade Benjamin Graham

10. Better or worse colonizers The core questions: • Was there investment investment in education and infrastructure? • Were there efficient courts, rule of law, etc? • Did the protection of these courts extend to locals, or just colonizers? • Did these institutions survive when the colonizers exited? • Lecture 7: Domestic Politics of Trade Benjamin Graham

11. If nothing else, hope that you were colonized by the Brits • The Brits hired locals into their civil service • Developed local capacity & human capital • When they left, this civil service persisted • India is a prominent example: • Hundreds of languages, 30 of which have at least 1 million speakers, several major religions, huge regional economic imbalances • Picture ruling all the Americas as a single country -- only harder • Also, the common-law system and English • Lecture 7: Domestic Politics of Trade Benjamin Graham

12. Development after Decolonization • Developing countries export raw materials, import manufactured goods • “Terms of trade” favor rich countries: at the time, raw materials (commodities) were becoming cheaper relative to manufactured goods. • Powerful MNCs often struck deals with poor-country governments that were not good for the developing country. • Decolonization was an economic disappointment • Lecture 7: Domestic Politics of Trade Benjamin Graham

13. Development after Decolonization • Neocolonialism • Dependency Theory: • “Core” wealthy states enrich themselves at the expense of “peripheral” states • International division of labor with unskilled labor at the periphery and skilled labor at the core • Peripheral states cannot develop due to their place in the “World System” • System is static and peripheral states cannot join the core • Poverty at the periphery is necessary to sustain wealth at the core • Recommendation: Poor states should withdraw from the global economy • Import-substituting industrialization (ISI) • Lecture 7: Domestic Politics of Trade Benjamin Graham

14. Review Why were you better off being colonized by the British? • A. Have you seen King Leopold’s Ghost? The Belgians were horrific. • B. The brits trained locals to serve in the civil service (i.e. the bureaucracy) • C. The common law system has historically better for business because it adapts better over time. • D. English is a convenient second language in the global economy • E. All of the above • Lecture 7: Domestic Politics of Trade Benjamin Graham

15. Review Economic development following decolonization was, generally speaking: • A. A disaster – way below expectations • B. Middling, but a welcome respite after colonial oppression • C. A runaway success • Lecture 7: Domestic Politics of Trade Benjamin Graham

16. Dependency Theory over Time • Dependency theory is Marxist in origin • Like Marxism more generally, it provided a compelling explanation for a set of facts at one time • But made bad predictions going forward • Empirical problems for dependency theory • Peripheral states can grow wealthy (and have) • The poor countries that have developed most successfully have been states that trade heavily with the core • Import-substituting industrialization failed (by most measures) • Lecture 7: Domestic Politics of Trade Benjamin Graham

17. Import-Substituting Industrialization • Core prescriptions: • Tax agriculture and subsidize key industries • Protect those industries with high tariffs • Aim for economic self-sufficiency (i.e. autarky) • Rapid industrialization: By 1970s many developing countries are self-sufficient in manufacturing • Costs: • These industries are inefficient, produce low quality goods • Temporary subsidies become permanent • No gains from trade!!!! • Lecture 7: Domestic Politics of Trade Benjamin Graham

18. Export-Oriented Industrialization • Similar in many ways to ISI: • Tax agriculture (also keep wages low), subsidize key industries • But subsidize exports in particular • “National Champions” model • South Korea is the archetypical case • Cheap labor provides the key competitive advantage • Government investment helps develop higher value-added industries. • But government intervention has its risks... • Lecture 7: Domestic Politics of Trade Benjamin Graham

19. Checking Understanding In import substituting industrialization and export oriented industrialization, who gets taxed to fund government subsidies of selected industries? • A. Other industries • B. Farmers • C. Banks • D. Industrial workers via an income tax • E. Sales tax on consumer goods • Lecture 7: Domestic Politics of Trade Benjamin Graham

20. Checking Understanding What is the core advantage of export-oriented industrialization over import substituting industrialization • A. ISI involves the government picking winners, leading to corruption. In EOI the government doesn’t pick winners. • B. In ISI subsidies intended to be temporary can become permanent. This can’t happen in EOI • C. In ISI, states give up most of the gains from trade. EOI is all about maximizing the gains from trade. • Lecture 7: Domestic Politics of Trade Benjamin Graham

21. ISI didn’t die easily • Theories don’t die just because the facts become inconvenient • Entrenched domestic political interests • The 1980s debt crisis sealed the deal • The IMF essentially forced countries off of ISI • Conditional loans: • We’ll bail you out, but only if you adopt the policies we prescribe • Lecture 7: Domestic Politics of Trade Benjamin Graham

22. The Washington Consensus • Neoliberal economic policy • Liberalize trade • Privatize state-owned assets • Fiscal austerity to fix current account deficits • Open up to foreign capital and foreign investment • Turns out, this hurts a lot • Taking away the government safety-net in poor countries has high human costs • “bitter medicine” that may not even work • Economic pain = political instability • Lecture 7: Domestic Politics of Trade Benjamin Graham

23. Group Questions • There is a strong empirical finding that Americans with a college education, and especially Americans with a graduate degree, are more likely to support free trade. Why do you think this is? • Lecture 7: Domestic Politics of Trade Benjamin Graham