Trade and Development: Paradigm Shifts and Economic Performance PDF

Trade and Development: Paradigm Shifts and Economic Performance Prema-chandra Athukorala Arndt-Corden Department of Economics Crawford School of Public Policy Australian National University [email protected]...

Trade and Development: Paradigm Shifts and Economic Performance Prema-chandra Athukorala Arndt-Corden Department of Economics Crawford School of Public Policy Australian National University [email protected] 1 References De Grauwe, Paul (2017), The Limits of the Market: The Pendulum between Government and Market, Oxford: Oxford University Press (Chap 1 & 2) Krueger, Anne O. (1997) ‘Trade Policy and Economic Development: How We Learn’, American Economic Review, 87(1): 1-22. Krueger, Anne O. (2020), International Trade: What Everyone Needs to Know, Oxford: Oxford University Press, Chapters 3 and 20. Srinivasan, T. N. (2000), ‘The Washington Consensus a decade later: ideology and the art and science of policy advice.’, The World Bank Research Observer 15, no. 2 (2000): 265-270. Athukorala, Prema-chandra, Edimon Ginting, Hal Hill and Utsav Kumar (eds) (2018), The Sri Lankan Economy: Charting a New Course, Manila: Asian Development Bank. Athukorala, Prema-Chandra (2024),‘The Sri Lankan economy: From optimism to debt trap’, Asian Economic Policy Review, doi: 10.1111/aepr.12483. 2  Paradigm shifts: evolution of development thinking Divergent patterns of economic growth 3 Paradigm shifts Phase 1: From 1950s until about the late 1970s: the era ‘state- led’ development Phase 2: From about the late 1970s: Convergence of policy debate towards Washington Consensus Phase 3: From about the early 1990s: Reconsideration of Washington Consensus 4 Phase 1: From 1950s until about the late 1970s: the era of Inward-oriented development State-led growth, with emphasis on development planning. The state was considered as the ‘omniscient’ leader of the development process ‘Import-substitution’ as the basic tenant of development policy A strategy for economic development based on replacing imports with domestic production. 5 Drivers of import substitution emphasis Mistrust of market mechanism as it applied to developing countries - The widely-held view at the time that the mainstream economics is of little validity in developing countries because they have their own ‘structural’ peculiarities. Demonstration effect of the highly-publicized 'success' of the Soviet Union at the time (even until about the late 1970s) in achieving rapid industrialization under a command economy. 6  Anti-colonial sentiments that naturally accompanied the attainment of independence: strong perception that the ex-colonial powers had enforced the primary commodity- dependent status on the developing countries, thereby shifting them to the periphery of the capitalist world. Export pessimism The Prebisch-Singer thesis: ‘There is a structural tendency for the terms of trade of primary commodities in world trade to deteriorate relative to manufactures’ TOT = (Px/Pm)*100 (net barter terms of trade) Prebisch, Raul (1950), The Economic Development of Latin America and its Principal Problems, New York: UN Economic Commission for Latin America Singer, Hans W. (1950), ‘The Distribution of Gains Between Investing and Borrowing Countries’, American Economic Review, 40(2), 473-485. and The widely held view at the time that developing countries have little room for diversifying their primary-commodity dependent economies by diversifying into export-oriented 7 manufacturing. Outcome Many developing countries experienced rapid growth at the early stage of import substitution of consumer goods and other light manufactures. When, this ‘easy’ import-substitution opportunities dried up, further growth was naturally limited to the rate of growth of domestic demand. Almost in every country, and particularly in small countries, import-substitution policies encouraged high-cost, inefficient activities which showed little productivity gains over time, partly due to their sheltered position in the domestic market. Import-substitution, which was rationalized as a means of reducing dependence on the international economy, in fact increased import dependence: - Newly established industries highly dependent on imported intermediate inputs - Protection of competing industries discouraged export production (anti-export bias in the incentive structure). 8  Heavy import dependence of domestic production and export stagnation created foreign exchange shortages (worsening balance of payment position), with deleterious effects on economic expansion. Overall, import-substitution strategy failed to achieve the original objectives of achieving sustainable growth and poverty reduction. By contrast, The few countries that shifted early to export-oriented industrialization moved up on the income scale, with substantial improvement in their overall economic performance. - Rapid and sustained growth in these countries was accompanied by a remarkable equity outcome - more equal distribution of income and rapid reduction in poverty. (export-orientation alleviate poverty through both: faster growth and greater employment intensity of growth (labour is the only resource owned by most poor people) 9  Phase 2: From about the late 1970s to Early 1990s: resurgence of neo-classical policy advocacy, culminating in ‘ Washington Consensus’ A notable shift in development thinking in favor of outward-oriented, private-sector led development with greater outward orientation (Read Krueger 1997) The policy shift was drive by a combination and interaction of two factors: Contrasting development experiences of those developing countries rigidly followed import-substituting policies for a long time and a few of them which made an early shift towards export orientation (eg. South Korea, Taiwan, Hong Kong, Singapore) and A notable revival of mainstream economics in both theoretical and applied trade and development literature 10 Washington Consensus Three reform imperatives came out of analyses of growth/development experiences in the 1950s and 1960s: liberalisation, stabilization, and privatisation A powerful and well-organized epistemic community developed around these ideas, gaining key positions in the US government, World Bank and IMF, and also in finance ministries and central banks of many countries. John Williamson (1989) labelled the new policy advocacy ‘Washington Consensus’ Williamson, John (1989), ‘What Washington Means by Policy Reforms’, in John Williamson (ed.), Latin American Readjustment: How Much has Happened, Washington, DC: Institute for International Development. 11 Williamson summed up the broadly agreed reform agenda of the Washington institution (World Bank, IMF and the US Treasury) under 10 items: Fiscal discipline Reordering public expenditure priorities Tax reforms Liberalisation of interest rates Competitive exchange rate Trade liberalisation Liberalisation of foreign direct investment regime Privatisation Deregulation of domestic prices Secure property rights 12  Phase 3: Reconsideration of the Washington Consensus (from about the early-1990s) Propelled by, Mixed results of Washington Consensus reforms in many countries (and ‘partial’ assessment of reform outcome in most countries, without paying attention to the half-hearted nature of the reform process) Political economy constraints in the implementation of Washington Consensus reforms (in particular trade liberalisation) helped some poor but hurt others, making reforms politically unpalatable New (and sometimes conflicting) evidence coming for a number of studies on the nature of the reforms process and the role of the government) in newly industrialised countries (in particular Korea, Taiwan and Singapore) and also Japan Also, the attack on the ‘Washington Consensus’ was partly ideologically driven Policy reaction has resulted in Augmenting/modifying the Washington Consensus 13 Augmenting the Washington Consensus The year 1990 marked a tipping point in the evolution of ideas about economic development. The World Bank’s Word Development Report 1990 UNDP’s first Human Development Report 1990 (containing the human development index (HDI) World Development Report 1990 presented the first ‘dollar-a-day’ headcount measure of global poverty (Estimated 1.1 billion people lived in extreme poverty at the time) and Proposed a three-pronged strategy for poverty alleviation - Promote market-oriented growth - Direct basic health and education services to poor - Develop social safety net to assist individuals unable to take advantage of market opportunities (conditional income transfer and providing social safety net) 14 The HDI and its ideological underpinnings provided ‘left of centre’ social activists with a coherent framework for arguing for direct government action to attack poverty. The subsequent years in the 1990s saw a proliferation of works on causes of poverty and strategies for poverty alleviation. By the dawn of the new millennium, a more pluralistic framework had emerged: increased recognition of the complexity of poverty, and the need for ‘proactive’ government policies for poverty eradication. However, overall the development policy advocacy has decisively moved away from the early emphasis on state-led development in favour of more market- friendly policies and increasing economic openness. Subsequently, enforcement of the rule of law (in particular property rights) and creation of sound business environment were added to the reform package (based on the ‘new growth’ literature). 15 Now it is widely accepted that ‘economy growth’ is central to poverty alleviation, and outward-oriented growth is generally more pro-poor. But, growth is not a panacea. Government policy has an important role to play: ‘even though growth opens the doors, the traction in the legs of the poor many not be enough to carry them through these doors’ (Bhagwati, Jagdhish ( 2004), In Defence of Globalization, Oxford: Oxford University Press) 16 Divergent patterns of economic growth 17 The first growth prediction: Rosenstein-Rodan, Paul (1961), ‘International aid for underdeveloped countries“’, The Review of Economics and Statistics, 43(2), 107-138. Africa: ‘prospects of good rates of growth in Ghana, Tanganyika (Tanzania), Nigeria, Kenya and Uganda’ Latin America: generally better growth prospects compared to Asia and Africa; ‘high and sustained rates of growth in Argentina, Brazil, Chile, Colombia and Mexico’ Asia: mixed prognoses India, Pakistan and Burma ‘are the only countries in Asia with prospects of a high rate of growth’ - ‘India seems to be in a ‘take-off’ stage’. - ‘Pakistan’s tempo of growth appears to be somewhat lower [than in India], but is promising’ - ‘Burma should be able to initiate a high rate of growth’. Korea , Taiwan, Malaysia, Thailand are ‘low growth trajectory’ countries 18 What is the performance record? East Asia: ‘East Asian growth miracle’ (Table 1) World Bank (1993), The East Asian Miracle: Economic Growth and Public Policy, New York: Oxford University Press. Latin America: Edwards, Sebastian (2010), Left Behind: Latin America and the False Promise of Populism, Chicago: University of Chicago Press. Growth in Latin America stagnated after 1980 (The 1980s is called ‘the lost decade in Latin America’): growth in 1970s – 3.1%; 1980s – 0.2%. Some recovery in the 1990s and beyond. Only notable success story: Chile But, recent social uprising. Is growth without equity sustainable? ‘Remodelling the model: Can Chile reinvent itself? https://www.economist.com/the- americas/2020/03/12/can-chile-reinvent-itself 19  Table 1: Per capita income of Asian countries relative to the USA, 1940-2019 1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2010-11 2015-19 Northeast Asia 5.7 5.3 6.3 7.0 9.3 12.4 23.6 26.8 China 5.3 4.8 5.5 5.6 6.8 9.2 19.9 23.0 South Korea 6.9 8.3 11.4 19.3 36.4 50.5 65.2 67.7 Taiwan 9.0 12.0 19.4 32.8 52.8 68.3 77.2 79.6 Southeast Asia 7.4 8.0 6.8 8.8 9.2 9.2 16.3 18.9 Indonesia 7.7 8.4 5.7 8.8 8.9 7.6 16.4 19.5 Malaysia 16.4 14.1 15.4 23.8 23.8 26.2 37.4 42.4 Myanmar 3.8 4.4 3.6 3.5 2.6 3.2 7.3 11.3 Philippines 8.3 9.9 9.2 10.3 10.1 9.1 11.4 13.3 Singapore 15.1 13.4 19.7 32.0 42.8 81.4 124.8 127.2 Thailand 6.5 7.6 9.4 11.4 15.1 15.3 26.2 26.8 Viet Nam 5.8 6.0 4.1 3.6 3.4 5.0 9.3 11.1 South Asia 8.6 7.3 5.3 4.1 4.0 4.5 8.8 10.4 Bangladesh 7.1 6.6 5.6 3.8 3.8 3.0 5.2 6.0 India 9.1 7.7 5.1 3.8 3.5 4.5 9.2 11.0 Pakistan 7.5 6.1 6.7 6.5 6.7 5.6 8.7 9.8 Sri Lanka 9.4 8.3 7.1 7.4 8.6 9.5 16.9 20.7 USA, US$ 15684 18117 24177 29835 36723 45883 49471 52803 Source: https://www.rug.nl/ggdc/historicaldevelopment/maddison/releases/maddison-project- database-2018 20 Latin America (continued) Brazil ‘The eternal land of the future’ (Edwards 2010) Argentina: The best know growth/development failure in the modern era: One of the wealthiest countries in the world at the beginning of the 20th century, but has slipped below some dynamic developing countries over the past five decades. Per capita GDP (at 1990 $) 1913 1950 1990 2003 Argentina 3797 4987 6436 7665 USA 5301 9561 23201 29037 Australia 5157 7412 17106 23287 Data from Angus Maddison (2007), Contours of the World Economy, 1-2030 AD: Essays in Macroeconomic History, Oxford: Oxford University Press, Table 2.9b (p. 104) 21  African: ‘growth tragedy’ Average growth increased in the first three decades or so following the end of the colonial era, but growth faltered after about 1980 (with many countries recording negative growth) Notable positive growth in some countries in the first decade of the New Millennium, but too early to be optimistic. The income gap between the richest countries in the world and the poorest African countries, now stands at 18:1 (The largest gap in income between rich and poor regions the world has ever known) Behind this broader gloomy picture there are two notable success cases: Botswana, Mauritius. 22 Mauritius Hopeless initial conditions: Mead, James (1961), ‘Mauritius: A Case Study in Malthusian Economics’, Economic Journal, 71, 521-534. ‘Indeed, in the author’s opinion, Mauritius faces ultimate catastrophe unless effective birth control can be introduced fairly promptly’ Naipaul, V.S. (1972), ‘The Overcrowded Barracoon’, Sunday Times Magazine, 16 July (reprinted in V.S. Naipaul (2002), The Writer and the World: Essays, Picador, 106-133). Growth record - Per capita GNI grew an average rate of 3.7% during 1980-2018. - Now an upper-middle income country with a per capital income of about US$12000 (in 2018). 23