The Golden Age and the Origins of Protectionism

1. The Golden Age and the Origins of Protectionism Lecture # 6 Week 3

2. Structure of this class • Export – led growth revisited • Economic performance as of 1914 • Ideology • The origins of protectionism • Conclusion

3. Recall from last class: the stellar performance of Latin America during third quarter of 19th C

4. And let’s ask the question again:In what way this export-led growth period differs from the current globalization trend? At least four differences: • World markets more integrated now (trade and finance) • The US and then China as major trading partners • The emergence of trading blocks (NAFTA, MERCOSUR, CAFTA..) • WTO

5. However, export performance continues to be viewed as an important determinant of economic performance • Export – growth highly correlated with GDP Growth • And, as argued in the last class that during that period - last quarter 19th C - Latin America grew as fast as the US (“Golden Age”) • Export – led growth continued during up until early 20th C • Catching – up with the US did not take place as Latin America had lost two centuries of sustained growth

6. Performance as of 1914 • Then…. • Commodity markets became more unstable   VOLATILITY • Transfer of British economic hegemony in Latin America to the US • Export growth continued after the World War I but volatility persisted • Industrial growth started under “weakly” protective environment (lacked coherent industrial policy) • Great Depression in the 1930s: Trade and economic activity slowed down considerably overall, with some countries more vulnerable than others, deflation, defaults on sovereign debt, government spending increased overall, currency devaluations → political unrest, and emergence of radical parties

7. Six arguments for protection (Cardoso – Helwege (1992)) • Volatility of primary commodity prices • Declining terms of trade (Prebisch – Singer dependencia School • in the 1950s) • Infant industry • Low wages due to FDI into labor – intensive export sector • No demand spillovers

8. Ideology • “Infant Industry” arguments (Furtado on World War I) • Prebish – Singer “Dependencia School” in the 1950s Center and periphery The role of multinational corporations viewed as detrimental in that: • Contribute to the declining terms of trade • Offers little stimulation to the rest of the economy Moreover: ↓ domestic savings, ↓foreign exchange reserves, ↓government revenues, ↑income inequalities→ bourgeois elite and landed aristocracy versus blue collars and peasants • Government intervention as stimulus to lack of domestic demand (J. M. Keynes) → How to finance government spending?→ most likely will lead to fiscal deficits

9. The origins of protectionism • High and positive correlation between protectionism (tariffs) and high growth in 19th C North America • Irwin would however argue that there is no causality • Non-traded sector in North America played an exceedingly important role as a determinant of rapid growth in the 19th C • The emergence of a service sector (not a manufacturing sector) played a major role for US to catch up with UK • While protectionist policies in the US together with the emergence of a strong service sector were mutually reinforcing and triggered high and sustained growth……

10. Protectionism in Latin America according to Coatsworth – Williamson (2002) started much earlier • In particular, their empirical investigation: • Data for a sample of eight Latin American countries (pre-1914 • export growth) shows that tariffs in the region were higher than anywhere else • The countries in their sample include: • Argentina, Brazil, Chile, Mexico, Uruguay, Colombia, an Peru

11. OLS panel 1870 – 1950 • time fixed effects (TS) • cross-section fixed effects (CS) • fixed effects for both (FE)

12. And their empirical investigation suggests 3 main motives for protection: • Government revenue – via specific import duties – to finance wars • Protection of nascent manufacturing in the interior in the advent of lower transport costs – railways connecting ports with the interior • Protection of urban capitalists by oligarchic governments

13. Were the motives for protection the same after 1913? • 4 findings: • Revenue motives for protection became more powerful after 1913 • “Strategic” trade policies became relevant starting in 1913 • The size of the domestic market became more important as of 1913 • Transport costs to the interior were less important after 1913

14. LEGACY • Example 1: Taxes on incomes and profits < 5% in 2001 compared to 12.5% • in high-income economies (Artana, Lopez Murphy, and Navajas(2003) • Example 2: Very high administrative costs relative to industrialized • countries (IMF data for 1998) • Example 3: Volatile government revenues due to swings in income • associated with the production of primary commodities • Example 4: Small increase in revenues for financing public expenditures • (IMF data for 1994 and 2001)

15. In conclusion • While in North America, protectionism for rapid industrialization was reinforced by the rapid development of a service sector - high growth rates I.e., The US became net creditor in the 20th C • Protectionism in Latin America did not seem to have the same effect because of lack of domestic demand, underdeveloped service sectors, among others… • Reliance on export sector persisted…