Trade and Development: Sanctions Overview

Trade and Development, Sanctions

• Sanctions are a tool of foreign policy
• Sanctions aim to force another state to change policies or behavior
• Sanctions come in many forms
• Trade Sanctions are the most common type
• Export and Import sanctions are common types
• Aid can be used as positive or negative sanctions
• Finance can be used as sanctions—lending or investment restrictions
• Monetary sanctions can destabilize a country's currency
• Asset targeting involves seizing a country's (or individual's) assets

Review Questions

• Global supply chains make individual economic interests in trade policy complex
• Export-oriented workers don't always benefit from free trade
• Import-oriented workers benefit more from protectionism
• All consumers don't benefit from free trade

Game Plan

• Development and trade topics include Import Substitution Industrialization (ISI) in Latin America; Export Oriented Industrialization(EOI) in East Asia
• Sanctions: what they are, and when they work
• Exam will include short answer questions

A very brief history of trade and development

• Prior to World War II: most developing countries had liberal trade policies(similar to colonialism)
• Post World War II: many developing countries began implementing protectionist trade policies as part of Import Substitution Industrialization
• Later in the 1980's-1990's: many developing countries opened back up to global trade

Why the Move To and Away From Import Substitution Industrialization?

• The presentation includes questions to explore this topic

What is ISI?

• Import substitution industrialization (ISI) is a trade policy where a country restricts imports to encourage the domestic production of goods previously purchased from abroad
• It aims to reduce reliance on foreign imports

The Stages of ISI/EOI

• Initial phase (EASY ISI): production of simple consumer goods (soda, beer, clothing) using easily obtainable technology and low-skilled labor
• Secondary phase (Secondary ISI) or Export-Oriented Industrialization(EOI): produce less simple goods (cars etc) in order to export them globally

Government policies to promote (secondary) ISI

• Trade barriers
• Investment in activities that the private sector wouldn't invest in (roads, etc)
• State-Owned Enterprises (mixed-owned)
• Tax policies promoting agricultural exports through marketing boards

"Neo-Liberal" Criticism of ISI

• States are poor planners of industries and resource distribution
• Government intervention is inefficient
• State cover industry losses (creating budget deficits and increased borrowing)
• Industrial production was not profitable and couldn't keep up with global demand
• Persistent trade Imbalances, importing more than exporting

Why ISI?

• Policy economists point out that ISI can lead to poor economic growth

The Economic Ideas Behind ISI: Structuralism

• Prebisch-Singer Hypothesis : Free trade doesn't benefit developing countries (developed countries' demand elasticity for primary commodities is less elastic than demand for manufactured goods)
• Industrialization is necessary for development
• Big Push required for industrialization
• Government coordination and infrastructure provision for industrialization

Interest-Based Explanations for ISI

• After independence, who were the winners from globalization?
• Trade politics in developing countries dominated by urban-rural cleavage

Who benefits/loses from ISI?

• Generally, developing countries are land-abundant and capital-scarce
• Agriculture is land-intensive
• Manufacturing is capital-intensive
• Landowners tend to benefit more from free trade as their assets are abundant
• Capital owners in countries implementing ISI tend to benefit more as the implementation of this type of trade policy makes it harder for them to source imports from countries that are not implementing this policy

Who Held Political Power?

• Pre-WWI: Landowners held political power
• Post-WWI/Depression and WWII:
  • States stepped in as good needed to be produced domestically
  • Capital and labor became prominent political forces as economic importance rose

How did ISI perform?

• Data for various developing countries (East Asia, Latin America, etc.) shows their performance

East Asian Model: Export Oriented Industrialization

• Shift emphasis from easy ISI to exports
• Forced/invested in domestic industries that were profitable internationally
• Focus on labor intensiveness to capital intensiveness, and ultimately technology and skill intensiveness
• Relied on protection for domestic markets but did allow selective liberalization
• Encouraged macroeconomic stability and savings
• Established a favorable exchange rate
• Avoided sovereign borrowing

Why did the Asian "Tigers" reform and not the states of Latin America?

• WWII decimated the political power of existing interest groups in Asia
• In Asia, they started with a clean slate/new policies post-war
• In Latin America, interest groups remained intact

Why didn't states move away from ISI quicker?

• Political leaders and their political supporters are primary motivators
• Good politics and good policies are not the same
• Policies contrary to supporter interests resulted in politicians being removed or threatened
• Workers became more dependent on industries and subsidies implemented during ISI

How did states move away from ISI?

• Trade imbalances as a result of ISI forced a change
• Debt crises in 1980's and beyond created a move away from ISI
• IMF and World Bank loans conditional on neo-liberal policies

Core Takeaways

• Import Substitution Industrialization (ISI) and Export Oriented Industrialization (EOI) are two divergent paths
• ISI and EOI adoption are a product of domestic interests/institutions, economic ideas, and global forces

Do Sanctions Work?

• Many in the policy community believe sanctions are ineffective
• In some cases, sanctions produce intended outcomes
• Some sanctions haven't been effective in achieving goals
• Collected data on each sanctioned situation shows a low effectiveness rate.

Why do we see sanctions imposed then?

• Target miscalculation of the costs of sanctions compared to policy changes
• Sender miscalculation of the costs of sanctions vs. policy change
• Resolute target
• Economic Statecraft
• Appeasing domestic audience

The Costs of Sanctions (For Target State)

• Citizens often bear the brunt of sanctions
• Leaders often hope that sanctions force citizens to overthrow the regime and/or put pressure on the regime.
• Sanctions can cause dramatic and harmful consequences for entire countries

Comprehensive vs. Targeted Sanctions

• Comprehensive sanctions target an entire economy
• Targeted sanctions target policymakers or key supporters

Do Targeted Sanctions Work Better?

• Difficult to evaluate their actual effectiveness in recent times
• Anecdotal evidence suggests that, in some cases, they have been successful

Limits of Economic Coercion

• Interdependence can lead to states choosing to avoid interdependence altogether
• Many problems a state faces are so fundamental that mere economic power isn't sufficient to force a change
• Human rights sanctions often harm the people more than they harm the perpetrators and can lead to worsen repression

Core Takeaways

• Sanctions come in many forms
• Impossible to measure the effectiveness by looking at the effect of imposition
• Sanctions effectiveness depends on their level of success in achieving the political aims

Next: Monetary Policy

• The next topic will be Monetary Policy

Explore the role of sanctions as a tool of foreign policy and their impact on trade and development. This quiz covers various forms of sanctions, including trade sanctions and their effects on global supply chains, economic interests, and countries' behaviors. Test your understanding of key concepts like Import Substitution Industrialization and Export Oriented Industrialization.