Trade and Development II: Economic Reform

1. Trade and Development II: Economic Reform READING ASSIGNMENT: Oatley – Chapter 7

2. Plan • Culture vs. Interests & Institutions Why did Asia “beat” Latin America? • Politics of shifting from ISI to “neoliberalism” Cases of Ghana & Nigeria • Foreign aid, loans, conditionality, & reform: The role of the IMF • The East Asian Miracle: Export-oriented industrialization

3. PART 1: Culture vs. Interests & Institutions http://www.youtube.com/watch?v=Cwq-XdPfpeA http://www9.georgetown.edu/faculty/jrv24/friends.html Studies: Teaching: Research: Presentations:

4. 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

5. 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 • Cold War allies? • Latin American Debt Crisis led to Structural Adjustment programs of the IMF

6. 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? • Manufactured goods were not globally competitive – only sold domestically • Marketing Boards weakened agriculture • Governments preferred overvalued exchange rates (this, sadly, contributed to making exports less competitive)

7. Why was it hard to break free of ISI? Pro-trade  URBAN-RURAL CONFLICT Anti-trade 

8. Part 2: The politics of shifting from ISI to “neoliberalism” The cases of Ghana & Nigeria

9. 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, … 1979

10. 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.

12. Part 3: Foreign aid, loans, conditionality, & reform The role of the IMF

13. How did governments keep the system going until the 1980s? • Foreign loans • Bilateral aid • IMF loans • Were politically important countries “hurt” in the long-run? • Perverse impact of foreign aid

14. The Empire Strikes Back Structural Adjustment… or… • 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?)

15. 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?

16. How does bringing in the IMF help push through economic reform? Figure 1: The logic of bringing in the IMF Payoff to veto player -1 (change policy) Accept Veto player Without the IMF Reject 0 (maintain the status quo) Executive With the IMF -1 (change policy) + loan Accept Veto player Reject -r (reject the IMF)

17. 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

18. Part 4: The East Asian Miracle: Export-Oriented Strategy

19. 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: • Low inflation • Helps encourage savings • Appropriately valued exchange rates • Helps promote exports • Conservative fiscal policies (borrowed little)

20. 3 Stages of the East Asian Model of Development • Industrial policy promotes labor-intensive light industry (easy ISI – e.g., textiles) • Target heavy industries (e.g., steel, shipbuilding, petrochemicals) • Target high skill plus R&D-intensive industries (e.g., computers) • (How is this different from Latin America?)

21. 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)

22. 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

23. Economic reform in China • 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 • 1984: The Enterprise Responsibility System • Enterprises encouraged to acquire inputs and sell outputs on world markets • Reduced government subsidies • 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?

24. 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

25. Thank youWE ARE GLOBAL GEORGETOWN!

26. Trade liberalization & the WTO… or… Return of the Jedi! • 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