Import Substitution Industrialization And East Asian Model

In the current international economic system, the behaviors and interactions of emerging states indicate that the previous norms of an open, global, and liberal international economy are being replaced with their own interests, which Stewart Patrick as well as Andrew Nathan and Andrew Scobell examine in their articles.

Krueger argues that trade liberalization is the only way developing countries can spur a rapid economic growth. He argues that industry substitutes industrialization (ISI) is a failed policy when it comes to development of developing countries. Unlike Stiglitz, he mentioned even with the protection, the developing countries growth slows down eventually. The main intention of ISI was to provide protection for domestic industries against the developed countries industries. Because of that protection, the export earning grew less rapidly and real GDP

Globalization over the past twenty has become an issue in many countries. This industrialization of second and third world countries by Western Civilization creates many opportunities for the inhabitants. Not only does it expand trading markets, but also promotes productivity and efficiency; thus improving the country and integrating it into the industrial world. This process not only benefits third world counties, but also industrialized nations by allowing them to export goods to the developing world and increase their profit margin.

Although its main goal was to strengthen the national economy to better compete in the global market, ISI has had very controversial results. Positively speaking, it has resulted in a decrease in imports, which has favoured certain national industries such as electric materials for construction, textiles, chemicals, etc., the nationalization of natural resources, betterment of term of trade, state intervention in economics (which led to the development of education, health and employment), strengthening of social organizations, but most importantly, the consolidation of the middle class. On a negative note, these nations led to become greatly dependent on technology, there was an increase of external capital control over developed areas, an under qualified labour force for factory jobs, increase in prices of manufactured goods and inflation, migration from rural to urban areas and as a result an increase in social problems, and finally, the industrial sector did not bother to conquer external markets which essentially contradicted the whole purpose of ISI. For these reasons ISI was seen as a

Nations that practiced ISI could never entirely eliminate their dependence on the world economy, and ISI’s bias against exports left nations with very little export revenue which could be used to pay for things that the nation absolutely had to import. These balance of payments crises hurt domestic economies, often leading to social unrest and coups. Compounding the problems caused by balance of payments problems, nations which practiced ISI also tended to have high inflation rates as well as high income-inequality caused by privileging industrialization at the expense of agricultural classes. Ultimately, ISI nations began experiencing massive social, political, and economic problems which stifled further development.

Before the ISI many of the Latin American countries were mercantilist countries. The economy thrived on cheap land and cheap labor. However, this model could not last, things fell apart during World War 2 and the great depression. The solution to this for many of the Latin American countries was the ISI. The ISI is a state-led developmental process wherein the foreign imports are substituted by domestic products. This idea led many of these countries to sell a lot of their leading exports to buy machines to produce their own goods and decrease dependency on foreign products. However, the exchange rate was artificially kept high so these countries could buy the machinery for cheaper. The ISI was therefore not self-sustaining; with manipulation of the exchange rate, it caused inflation. Furthermore, the increase in inflation discouraged foreign investments.

Trade is an engine of growth; it has many effects and benefits that can help to grow the economy on a global scale. The benefits of trade can be viewed in different perspectives depending on the view that is taken the benefits and the receivers change. Trade can be viewed from the perspective of the economic nationalist, which argues that protectionism is a need to help grow the states economy and power. While in another approach trade can be seen as positive sum game by the means of comparative advantage through the lens of liberalism. Lastly there are some that argue that specialization of goods is a way to increase productivity and economic growth. The focus of my paper will be to present these perspectives on and suggest

Inequality is also abundant in countries that are not integrated into global markets. It is clear to see that, “developing countries that have been open to trade have had the fastest growth, reducing global inequality” (Birdsall, 84), but what about the countries that have not been able to adapt and join commercial links to the outside world? African countries have always remained the poorest economically, as they do not have the means to produce and export goods to countries around the world. These countries vastly differ from those such as Japan who sought out economic relations in other countries through technology licensing, and openness to foreign investment (Birdsall, 84). This widespread development is happening all across Asia, especially in China and India. Although these two countries have surpassed the development speed of developed first world countries over the past 15 years, “it would take them almost a century of constant growth at rates higher than those in today’s industrialized countries” (Birdsall, 80) to even be at par with the current level of income in the United States.

A widespread view developed among economists and policymakers in the early post World War II period Import substitution policies were popular amongst developing economies was that the best way for these countries to develop more rapidly was to stimulate industrialisation by adopting import-substitution policies. At the time, there seemed to be a number of good reasons for such an approach. The policy makers of the newly independent nations were keenly aware not only that most of the countries from whom they obtained independence had much higher per capita income levels and were much more industrialised but that their former rulers had imposed economic policies in the past which discouraged industrialisation within the new nations and industrialisation seemed to offer the possibility of achieving faster growth, higher per capita income levels and the economic and military power needed for national security. An economically sensible way of achieving industrialisation seemed to be to restrict imports of manufactured goods for which there already was a domestic demand in order both to shift this demand toward domestic producers and permit the use of the country’s primary- product export earnings to import the capital goods needed for industrialisation. There also appeared to be a number of examples where high levels of import protection contributed positively to industrialisation. Although Great Britain had adopted a policy of free trade during its period of rapid growth in the

Nowadays, developing countries all around the world face a great amount of disillusionment. Development as proposed by the IMF and the WTO has not had the positive effect it was supposed to have. In fact, the policies preached by these international actors have in times exacerbated economic problems leading to recessions. Countries, that have achieved higher economic growth throughout the years, have achieved this, not by following the dictates of the Washington Consensus exactly, but rather by applying them in an unorthodox fashion. Nevertheless in recent years globalization has become a replacement for a sound development strategy. In his article Trading in Illusions, Dani Rodrik (2001) argues against the line of thinking promoted by

The various parts of this essay are organized as follows: In section 2, we discuss the historical background of the trade patterns of two identified countries being analyzed. It states the recent trade patterns of US-China and recent developments of trade policies since China’s WTO accession in 2001. Section 3 will provide an in-depth analysis of various economics policies adopted by both countries and critically discuss their contribution to the aspect under analysis in section 2. In section 4, we provide with theoretical evidence to support the argument provided in the previously reviewed empirical findings depicting the impact of trade policies over the trade pattern of US-China. Section 5 concludes the essay by highlighting our key findings and policy implications and provides US on this trade perspective on how to improve the trade relations by addressing to the arising disputes with China.

Since World War II, trade between growing and manufacturing nations has strengthened and borrowing of poor countries from the rich countries has increased. The growing link between these two groups of economies increased eventually in addition to the increase in the rate of dependability amongst them. With the rapid growth in wealth and industrialization of the First World, only a few developing countries managed to have adequate economic growth on the line of the developed countries. Many of the developing countries which were poor at that time still remained to be poor today even today in comparison to the industrialized nations. Dearth of capital and skilled labor produces a low level of per capita income preventing the developing countries to realize their economies of scale through which many of the developed countries benefit from. Several attempts have been made by developed countries to decrease the disparities between rich and the poor economies. To finance their domestic investment, developing countries rely on other governments or international organizations like International Monetary Fund (IMF) and World Bank to procure loans. Besides these loans, foreign investments in these countries are financed by private companies, this from of investment is known as Foreign Direct Investment (FDI). In case of FDIs, the foreign companies, especially Transnational Corporations (TNCs), invest in the growing nations and remain as the solitary owners of these

The purpose of this approach was to achieve a trade surplus while avoiding a trade deficit. By growing exports and trade utilizing a strategy known as protectionism, rulers were able to accumulate more gold and affluence for their countries. While mercantilism is one of the earliest trade theories, it is a method for present-day thinking as many Asian countries and even Germany still prefer exports and discourage imports through a system of neo-mercantilism in which the countries encourage a mixture of protectionist strategies and limitations accompanied by domestic-industry appropriations. It is important to note that approximately every country has at one time, executed some form of protective rule to safeguard critical commerce in its economy. Although export-oriented companies characteristically back protectionist procedures that indulge their industries, trade barriers, hurt others. It is remarkable that a theory introduced back in the sixteenth century gave way to free enterprise or capitalism giving us insight into the evolution as well as the importance of the concept of international trade this is as important today to the stability of a nation as it was back when it was introduced. The one drawback of the mercantilism system was the oversupply produced that had to result in serious inflation.

Although it is right that globalization promotes free trade among the states and unites them, but there are also negative outcomes, which states whether rich or poor try to protect their own interests? These negative outcomes of globalization have made the dependency theory significant in describing the state of affairs in the present world. Poor countries attempt to protect their national markets and become self-reliant (Hewison, 1999). Self-reliance can be seen as supporting a strategy of controlled relations with the world economy. Poor nations should only approve relations on the condition that the relations will enhance the societal and financial well being of the larger population. However, endeavour by the peripheral states to oppose the impact of dependency can result in results in financial sanctions and/or military attack (Sen, 2010). One example of such resentment against globalization is “localism“that surfaced during the financial crisis in Thailand (Hewison, 1999). Localism is an illustration of populist response to the changes and disparities created by globalization. Localism gained substantial energy from the Thai King’s speech in 1997, where he recommended a self-contained economy to counter the negative effects

Virtually, all industries in Thailand can be argued to be partaker of this industrialization boom experienced, because of both direct and indirect influence of globalization. However, the economic contributions of these industries to Thailand GDP varies. Nevertheless, the effects of globalization common to these industries is the increase in B2B relationship and presence of both foreign and local suppliers. As argued by scholars of globalization, globalization brought both pro and cons to economies. In the case of Thailand, it was argued that the globalization has influenced industrialization of which higher percentage can be attributed to the SMEs in manufacturing sector who produces and export their produce (Pardo, 2007).