Trade and Development, Sanctions 2024 Block II PDF

Trade and Development, Sanctions Block II 2024 Dr. Toenshoff  Review Questions How do global supply chains complicate individual economic interests in trade policy? - Not all workers in export-oriented sectors benefit from free trade - Not all workers in import-oriented sectors benefit fro...

Trade and Development, Sanctions Block II 2024 Dr. Toenshoff  Review Questions How do global supply chains complicate individual economic interests in trade policy? - Not all workers in export-oriented sectors benefit from free trade - Not all workers in import-oriented sectors benefit from protectionism - Not all consumers benefit from free trade - None of the above What combination of factors is most likely to lead to vertical FDI? - Intangible assets and natural resource-based locational advantages - Intangible assets and desire to access the local market - Specific assets and natural resource-based locational advantages - Specific assets and desire to access the local market 2 Game Plan Development and trade:  Import Substitution Industrialization  ISI In Latin America  Export Oriented Industrialization  EOI in East Asia Sanctions:  What are they?  (When) do they work? Examples of short answer questions in the exam 3 A very brief history of trade and development Up through WWII, developing countries had liberal trade policies (um… colonialism?) By late 1950s, turned protectionist as part of “Import Substitution Industrialization” By mid-1980s/1990s, many developing countries had opened back up to trade 4 Why the Move To and Away From Import Substitution Industrialization? 5  What is ISI? Substituting previously imported manufactured goods with domestically produced goods As opposed to focusing on producing goods that can be exported to international markets (export-oriented industrialization) 6  The Stages of ISI/EOI Everyone starts with EASY ISI: Domestic manufacturing of relatively simple consumer goods (soda, beer, apparel, shoes, furniture) for the home market  Technology and machines easily acquired from abroad  Relies on low-skilled labor Once benefits of easy ISI exhausted, two options: Start exporting easy ISI products to the world (East Asian Model) = Export Oriented Industrialization Secondary ISI: manufacture less simple goods for the home market (e.g. cars) (Latin American Model) 7 Government policies to promote (secondary) ISI Trade barriers Investment in activities the private sector would not produce:  Roads, transportation networks, electricity, telecommunications  Large-scale operations – steel plants, auto plants State-owned Enterprises (& mixed-owned)  Chemical, telecommunications, electricity, railways, metal fabrication Tax policies:  “Taxed” agricultural exports through “Marketing Boards”  Marketing Board – purchased crops from farmers at below-world market prices, then sell them on the world market at world market prices 88 “Neo-Liberal” Criticism of ISI States are bad planners  They can’t foresee which industries will be competitive and which will be successful  State are poor at distributing resources efficiently Gov’t had to cover industry losses  Created budget deficits  Industries weren’t profitable  Funded through borrowing  Increased national debts Persistent trade imbalance (Current Account)  Importing more than exporting  Agriculture was taxed and thus less efficient (less exports)  MFG goods not competitive internationally (more imports) 9 The Yugo - Worst Reviewed Car in US History 10 10  Why ISI? Why implement a policy economists tell us will lead to poor growth? 11 The Economic Ideas Behind ISI: Structuralism Dominant in Development Economics: Industrialization -> Development Prebish-Singer Hypothesis: Free trade does not benefit developing countries  Developing countries’ terms of trade (price of exports vs. price of imports) diminishes over time because demand in primary commodities is less elastic than demand in manufactured goods  Most research disputes this claim, but governments believed it (initially) Belief that industrialization wouldn’t happen by itself, required “Big Push” by governments  Coordination problems  Infant Industry Arguments  Need for government provided infrastructure 12 Interest-Based Explanations for ISI After independence, who were the winners from globalization? Tradepolitics in developing countries dominated by urban-rural cleavage 13 13  Who benefits/loses from ISI? Generally, developing countries are abundantly endowed with land and poorly endowed with capital… Agriculture is the Land-Intensive sector [Capital-Intensive/Land-Intensive]  Export-Oriented SECTOR [Export-Oriented/Import-Competing] Manufacturing is the Capital-Intensive sector [Capital-Intensive/Land-Intensive]  Import-Competing SECTOR [Export-Oriented/Import-Competing] So, land-owners should be pro-free-trade [pro/anti] Owners of capital should be anti-free-trade [pro/anti] 14 14  Who Held Political Power? Pre-WWI :  Land-owners (abundant factors) had political control (through less than democratic means) The depression and WWII: led to price shocks and closed markets  State had to produce their own goods  Land-owners lost income because of tough times  Capital and labor grew as political forces  Because of their new economic importance After WWII:  Capital (and some labor) now had political control and thus imposed protectionist (ISI) measures to maintain their incomes. 15 How did ISI perform? East Asian Model: Export Oriented Industrialization After WWII they adopt “easy”-ISI Late 50s-Early 60s: shift emphasis to exports  Forced manufacturers to worry about international competitiveness  Invested in domestic industries that were profitable in world markets (LA & Africa didn’t)  Path to development: Labor intensive -> capital intensive -> technology and skill intensive Relied on protectionism for their domestic markets BUT allowed selective liberalization to lower costs for “critical inputs” (just like Latin America) Also benefited from a stable macroeconomic environment  Low inflation (helped encourage savings)  Fairly valued exchange rate (helped promote exports)  Conservative fiscal policies (didn’t run deficits that required sovereign borrowing) 17 Why did the Asian “Tigers” reform and not the states of Latin America? One explanation: Interests and Institutions  “losers” from globalization gain power with Great Depression/World Wars worldwide  WWII decimated the political power of existing interest groups in Asia  In Asia, they start from a clean slate  In Latin America, interest groups remain intact  “losers” of globalization remain in power 18 Why didn’t states move away from ISI quicker? Politics:  The primary motivation of leaders is to remain in power  Good politics ≠ good policies Leaders that tried to adopt policies against the interests of their political supporters were removed (or threatened with removal) from office  Your book provides the example of Ghana (p.136) ISI persisted not because it was good policy but because those in political power would lose from liberalization.  Workers grew dependent on the manufacturing industries and subsidies  Farmers (who would benefit) lost power and couldn’t support politicians that would adopt export-oriented approaches.  ISI became entrenched East Asia didn’t have this problem because WWII provided a clean slate 19  How did states move away from ISI? States financed ISI through marketing boards, but also sovereign borrowing Trade imbalances and debts couldn’t last forever. Eventually: Latin American and Sub-Saharan African countries experience debt crises (1980s) – more on that later  creditors stopped financing loans and politicians couldn’t provide the goodies that individuals had grown accustomed to. In danger of losing power, they sought aid from the IMF and World Bank The IMF and World Bank made loans conditional on adopting neo-liberal policies  Known as “the Washington Consensus”  More on IMF, World Bank and their policies in a few weeks! 20 Core Take-Aways Two divergent policy paths: 1. Import Substitution Industrialization (ISI) 2. Export Oriented Industrialization (EOI) ISI and EOI adoption are a product of domestic interests/institutions, economic ideas and global forces.  Great Depression, WWII  IMF intervention in 1980s/1990s. Good politics ≠ good policies  Leaders (eventually) knew ISI wasn’t a strong path to growth but couldn’t adopt reforms without losing office 21 10 Minute Break Economic Sanctions 23 Economic Coercion Refers to the use of a state’s economic power, rather than military power, as a tool of foreign policy Goal: force another state to change policies or behavior 24  FIVE forms of Economic Sanctions: 1. Trade Sanctions (most common) Further distinction:  Export sanctions OR import sanctions Unilateral – One state 2. Aid (more on this in a later lecture) imposes sanctions  positive OR negative 3. Finance Multilateral – Many states  Lending and investment restrictions impose sanctions – the more  positive OR negative the better as there are few 4. Currency (Monetary) alternative markets.  Destabilize the value of country’s currency 5. Asset Targeting  Seizure of a country’s (or individual’s) assets Kirshner (1997) Micro-Foundations of Economic Sanctions 25 Western Sanctions Against Russia: https://www.youtube.com/watch?v=2tasyz_Q2eA Russian GDP 26 Sanctions usually require (inter)dependence Existing ties or dependence on another country is (often) necessary for sanctions to be useful. The US & EU give aid to many countries and have large consumer markets that are a magnet for imports. Many countries are dependent on their aid and market. 27  Domestic Economic Cost With interdependence comes mutual costs. Sanctions hurt the target state but also hurt the sending state Lost trade & investment These winners & losers are sometimes politically important constituents. Sanctions can be costly signals if they impose a significant cost on the sender.  The more it hurts the more resolved the sender is.  i.e. the more serious you know the sender is. 28 Do Sanctions Work? 29 No? Many in the policy community believe sanctions are ineffective  Are they right or do they have bad quantitative reasoning skills? Haubauer, Schott & Elliot (1990, 2009) Economic Sanctions Reconsidered  Collected data on each imposition of sanctions and stated goals  Found that 34% of sanctions have been effective at achieving goals Pape (1997) Why Economic Sanctions do not Work  But wait. Most economic sanctions compliment military threats/actions  When we consider only economic sanctions, only 4% are effective 30 There is a problem in this research design… Can you spot it? Think strategically about the process of using sanctions to get what you want. What would you do first before imposing sanctions? When are we most likely to see sanctions imposed? 31 To Sanction or not to Sanction… 32  Imposition is the failure of a threat Drezner (2003), Lacy & Niou (2004): We have a selection bias problem in observing only imposition effectiveness If sanctions get states to change behavior, simply the threat of a sanction should do so. States should be capable of determining, before imposition, if the costs of sanctions > the cost of policy change. Successful sanction events should end at the threat stage. 33  Why do we see impositions then? Miscalculation by the target  Target thought costs of sanctions for target < the cost of policy change.  Imposed sanctions can eventually work if the cost > cost of policy change  Hovi et al (2007) ”When do Imposed Economic Sanctions Work” World Politics Miscalculation by sender:  Sender thought : costs of sanctions for target > the cost of policy change. 34  Why do we see impositions then? Resolute target Sender has alternative goals – Baldwin (1985) Economic Statecraft: There is no reason that policy change be the only, or most important, goal or reason to impose sanctions  “making an example” (a wider audience)  Demonstrate meaningful threat  Appease domestic audience  Punishment  Deprivation of important military equipment 35  The Costs of Sanctions (For Target State) The costs of sanction often fall on average citizens.  This is often intentional as senders hope the people will overthrow or put pressure on the regime.  UN Sanctions on Iraq 1990s  Food prices increase 25 times over in 5 years (Hoskins 1997)  100k - 227k deaths (many young children) 1991- 1998 (Garfield 1999) Elites can benefit from sanctions.  They have a monopoly on essential products and can control black markets  Corruption in UN Food for Oil Program (Iraq) 36  Comprehensive vs. Targeted Sanctions Comprehensive sanctions target an entire economy – and thus impose widespread costs Policymakers have started to favor targeted sanctions that impose direct costs on policymakers or key supporters of the government. 37 Do Targeted Sanctions Work Better? Hard to tell as it is a recent phenomenon of the post 9-11 world. ”More Humane, Less Effective” - Drezner (2011) Anecdotal evidence that in a few cases it might have mattered.  Libya, Angola Comprehensive sanctions probably work better on democracies - Lektzian and Souva (2007) 38 Limits of Economic Coercion “Weaponized interdependence” may lead to states seeking to avoid interdependence with those that abuse economic relationships. Farrell & Newman (2019)  US/China abuse of economic leverage may backfire in the long run. Some problems are so fundamental to a regime’s survival that economic power is not sufficient  North Korean Nuclear Weapons  US sanctions on Cuba (regime change)  Russia backing down from Ukraine War Human rights sanctions can make repression worse when leaders see them as threats to their political survival  Though some success stories (Apartheid South Africa) 39 Core Takeaways Sanctions come in many forms Impossible to determine sanction effectiveness by looking at the effect of imposition  Threats matter! Sanctions require dependence and thus often imply costs at home There are important limits to economic coercion 40 Next: Monetary Policy