Articles_readings_for_development_2.docx
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Articles_readings_for_development_2.docx
- 1. Kniivilä, M., 2007. Industrial development and economic growth: Implications for poverty reduction and income inequality. Industrial development for the 21st century: Sustainable development perspectives, 1(3), pp.295-333. 1. Import Substitution (IS) Strategy Definition: Replacing imported goods with domestically produced goods through protectionist measures such as tariffs, quotas, and subsidies. Mechanism: o Protective tariffs on imports. o Encouragement of local production (e.g., manufacturing of radios and bicycles). o Joint ventures with foreign firms for local production. Arguments for IS: o Reduces dependence on imports. o Protects "infant industries" to help them grow. o Promotes self-reliance and industrialization. Key Findings (from research studies): Industrial Inefficiency: o Many IS industries remained costly and inefficient due to lack of competition (Kabelwa, 2004). o Example: Tanzania - South African companies had the potential for technology transfer but domestic industries failed to develop efficiently. High Tariff Structures and Protection Measures: o Nominal Protection: Raised domestic prices above world prices. o Effective Protection: Increased cost of inputs and discouraged diversified growth. o Example: Pakistan and Uruguay had >300% effective protection rates, leading to market distortions. Adverse Impact on Agriculture: o Overvalued exchange rates discouraged agricultural exports and hurt rural development (Athukorala & Jayasuriya, 1988). o Example: Sri Lanka (1981) - Protectionist policies led to a decline in agricultural competitiveness. Failure to Achieve Long-Term Growth:
- 2. o Many industries failed to “grow up” and remained dependent on protectionist policies. o Foreign firms often benefited more than domestic producers (Busjeet, 1980). o Example: Mauritius and the Philippines - Export Processing Zones (EPZs) had mixed results. 2. Export Promotion (EP) Strategy Definition: Encouraging industries to focus on producing goods for international markets rather than relying on domestic consumption. Mechanism: o Export incentives such as tax breaks and subsidies. o Foreign investment in export industries. o Flexible exchange rate policies to maintain competitiveness. Key Findings (from research studies): Economic Growth and Efficiency Gains: o EP strategies promoted competition, efficiency, and higher growth rates (Rodrik, 2006). o Example: South Korea and Taiwan successfully transitioned from IS to export- oriented growth. Technology Transfer and Upgrading: o Export-oriented industrialization led to rapid technological advancements. o Example: China and India - Governments actively supported innovation and technology absorption. Role of Government in EP Strategies: o South Korea’s model: Used targeted industrial policies to promote high-tech exports. Provided subsidies and credit incentives for exporters. o Chile’s model: Focused on agriculture and resource-based exports, achieving sustained growth. Challenges of EP Strategies: o Market volatility: Relying on exports makes economies vulnerable to global demand fluctuations.
- 3. o WTO trade rules: Some government support mechanisms may violate international trade agreements (Rodrik, 2006). 3. Key Comparisons: IS vs. EP Aspect Import Substitution (IS) Export Promotion (EP) Economic Impact Initial growth, but long-term inefficiencies Sustained growth with higher efficiency Government Role High protection, subsidies Targeted support for export industries Employment Capital-intensive, few jobs More labor-intensive, job creation Market Competition Weak due to tariffs Strong due to global markets Examples Latin America (1950s-1970s), Africa East Asia (South Korea, Taiwan), China Conclusion Import substitution was widely used in the 20th century but often led to inefficiencies and reliance on protectionist policies. Export promotion has shown better long-term results, especially in East Asian economies. Successful development strategies require a balance between IS and EP, ensuring domestic industry growth while remaining globally competitive. 2. Foreign Aid: Good or Bad? IMF Survey: Foreign Aid – Good or Bad? Authors: Andrew Berg (IMF Research Department) and Arvind Subramanian (Peterson Institute for International Economics, former IMF economist) Key Themes of the Debate 1. Effectiveness of Foreign Aid o Supporters argue aid enhances healthcare, infrastructure, and investment, leading to poverty reduction and economic growth. o Critics claim there is no strong evidence linking aid to long-term economic growth, and aid may even hamper domestic investment. 2. Potential Benefits of Aid (Andrew Berg’s Perspective) o Boosts growth when efficiently invested and aligned with good policies. o Can fund healthcare, education, and infrastructure, laying a foundation for future growth.
- 4. o Example: Tanzania and Mozambique – Countries that implemented institutional reforms received significant aid and showed development progress. 3. Challenges and Risks of Aid (Arvind Subramanian’s Perspective) o Weakens institutional development: Governments become dependent on aid rather than strengthening tax collection and governance structures. o "Dutch Disease" effect: Aid inflows appreciate local currency, making exports less competitive. Evidence suggests that countries receiving more aid tend to export less, leading to slower growth in the long run. o Example: Sub-Saharan Africa – Countries with high aid dependence often struggle with institutional reforms and economic diversification. 4. Alternative Approaches to Aid (Proposed by Subramanian) o Funding Global Public Goods: Investing in R&D for health and technology (e.g., Green Revolution). o Improving Governance: Enforcing transparency in foreign bank accounts to prevent corruption. o Increasing Market Access: Reducing trade barriers for developing countries instead of just providing aid. Conclusion Aid can support development if well-targeted, but it should not replace the need for domestic institutional reforms. Countries must balance aid dependency with policies that promote self-sufficiency and sustainable economic growth. Future discussions should shift from government-to-government aid toward broader economic reforms and capacity-building strategies.