Flashcards in Developing Countries Deck (13)
Until when was economic development thought to heavily depend on what/
What is import substituting industrialisation?
- a trade policy adopted by many low and MICs before 1980s.
- Aims to limit competing imports and encourage domestic manufacturing.
What belief is ISI often accompanies by?
That rich countries exploit poorer ones through international financial markets and trade.
What argument justifies ISI and expand.
Infant industry argument.
- May have potential comp adv but cannot compete in SR = need temporary protectionism.
3 problems with infant industry argument
1. timing may not be right - too early/too late.
2. Moral hazard.
3. If infant industry looks promising, why aren't private investors moving in?
2 market failures that can prevent infant industries from becoming competitive on their own.
1. Imperfect capital markets.
2. The problem of appropriability.
Explain imperfect capital markets problem
Inadequate financial institutions and markets = new industries cannot borrow to grow = restricted economic growth.
1st and 2nd best polices to correct imperfect capital markets
1st = better functioning laws and markets.
2nd = high tariffs to increase profits to invest.
Explain the problem of appropriability
Firms may not be abet exclusively use the benefits of their investments in new industries because the benefits are PUBLIC GOODS. Lack of property rights and corrupt legal system.
1st and 2nd best policies for appropriability.
1st. = establish decent property rights.
2nd = high tariffs to encourage growth.
Reasons why developing countries prefer tariffs not subsidies for ISI?
- subsidies are expensive
- tariff revenue is attractive
Problem with ISI (5)
1. draws resources away from export sector e.g. less available labour / at a higher wage.
2. Promote inefficient small industries
3. costs and wasteful use of resources to manage trade policies.
4. do not address deeper issues - maybe not just lack of experience.
5. higher prices for consumers and importing firms.