Economic Development Strategies

• Strategies for Economic Development include primary export-led, import-substitution, and outward-looking approaches.

Primary Export-Led Development Strategy

• Policies exploit natural comparative advantages, increasing production of a few export goods based on natural resources.
• Examples include Columbia (coffee), Mexico and Nigeria (petroleum), and Malaysia (rubber).
• This strategy encourages intensive use of abundant resources and attracts foreign investment.
• It provides linkage effects to other industries as one industry expands (backward and forward).
• Cotton industry produces a backward linkage effect such as the textile industry, and a forward linkage effect such as the clothing industry.
• This strategy is prone to sluggish demand or oversupply.
• World markets for primary products may not grow fast enough to support development.
• Prices of primary products relative to manufactured goods tend to fall.

Import-Substitution Development Strategy

• Policies promote rapid industrialization with high trade barriers for specific industries.
• Low tariffs allow extensive use of imported capital goods in local production.
• Infant industry argument exemplifies this strategy.

Outward-Looking Development Strategy

• Government supports manufacturing sectors with potential comparative advantage.
• It encourages labor-intensive industries when well-endowed with low-skilled labor.
• Successful cases include Japan, Korea, Singapore, Taiwan, and China.

Trade and Growth

• Economic growth shifts a country's production possibility frontier (PPF) outward.
• Growth affects international trade by impacting both production and consumption.
• Three types of growth are noted, including neutral economic growth, protrade biased growth and antitrade biased growth.

Neutral Economic Growth

• Involves a proportionate increase in resources and consumption.
• Trade expands proportionally to the economy's growth.
• After growth, the economy continues to produce and consume two goods in the same ratios as before.
• For a large country, the terms of trade tend to fall as the country grows.

Protrade Biased Growth

• Increasing resources used intensively in export goods production.
• Export goods output rises relative to import goods production.
• International trade expands to more than the rate of GDP growth.
• For a large country, terms of trade deteriorate more than under neutral growth.

Antitrade Biased Growth

• Increasing resources used intensively in import goods production.
• Output of import goods rises compared to export goods.
• A country's international trade falls, pushing toward autarky.
• Antitrade biased growth improves the terms of trade.

Immizerizing Growth

• Growth reduces a country's welfare level.
• Bhagwati (1958) suggested growth can make a country worse off.
• Strong protrade biased growth produces more export goods and inelastic demand lowers the price.
• Subsequently, the terms of trade reduces to a low welfare level.

Is Immizerizing Growth Common?

• No, because precise conditions and demand must be met.
• Conditions on both the nature of growth and world demand must hold.
• A country is large enough with strong protrade biased growth.
• The county has inelastic demand for goods exported.
• Government policy, such as export tariffs, may counter negative growth effects.

Technological Change

• Occurs when the same output is produced with fewer inputs.
• Or when greater output is created from the same inputs.

Types of Technological Change

• Neutral technological change results in an equi-proportionate reduction in all factors to produce one unit of output.
• Labor-saving (capital-saving) technological change reduces the use of labor relative to other factors to produce one unit of output.

Industry Effects of Technical Change

• If neutral technical progress occurs in one industry, output increases at the expense of another.
• If progress allows an industry to save on the use of a factor it uses less, its output could rise or fall.
• Innovation lowers costs of that industry and subsequently output expands.
• The output of the other industry must rise to absorb the saved factors.
• Rybczynski Theorem: With increasing factor supply, a country produces more of the product intensive in that factor and less of the other.