Transcript Document
Outline for 12/10: International Development II Import Substitution Industrialization (ISI) Latin American Debt Crisis The New IMF: structural adjustment loans Washington Consensus Export-Oriented Growth Asian Financial Crisis Shock Therapy: Eastern Europe in the 1990s Africa? Import Substitution Industrialization (ISI) A strategy to move up the economic development ladder Industrialization means moving into manufacturing Start by manufacturing the items that are currently imported Big government role 1. Obtain capital to fund the shift to manufacturing. Government may even need to start the new industries: state owned enterprises (SOEs) 2. Close domestic markets to foreign producers. Why did so many Latin American countries follow this strategy? Latin American Debt Crisis Where to get the capital for ISI? Borrow from Northern banks Why would Northern banks loan to risky governments in the South, notably those in Latin America? Oil Shocks and petrodollars Did ISI work? Not very well Twin deficits: Government Budget Deficit Trade Deficit Inflation and currency over-valuation Southern governments could not pay back Northern banks Why bad for the North? Why bad for the South? The New IMF: Structural Adjustment Loans Make loans to Southern govts so that they could repay Northern banks. Then Southern govts need to repay the IMF, their new creditor. Why would Southern governments take these loans? Why would the IMF take on this new role? But how will the Southern countries be able to grow enough to repay the IMF? Structural Adjustment: cut G, raise i The Washington Consensus (1990s) New view after the debt crisis that too much government was the problem. Developing countries should: Engage in free trade: cut trade barriers Decrease government spending Increased law/order and strengthen private property rights Northern governments should decrease foreign aid Export-Oriented Growth (EOG) Industrialize, but focus on manufactured goods that can be exported Strategy associated with Asian Tigers (NICs) Arguably worked better than ISI, but why? Asian governments had more domestic capital, did not need to borrow as much Under-valued exchange rates (makes exporting easier) Asia got on the light manufacturing rung before Latin America. Often identified as “more capitalist” development strategy than ISI, but a big state role in EOG Exchange rate management Industrial policy Is EOG really different than ISI? Asian Financial Crisis Late 1990s – period of non-inflationary growth in Global North, lots of capital available at low interest rates Asian banks borrowed capital from Northern banks, then lent this capital out domestically If you borrow in foreign currency, then you want to keep your ex rate high. But if you follow an EOG strategy, then you want to keep your ex rate low. International investors saw Asian banks to be over-extended Took their money out, ex rate fell even further IMF structural adjustment again IMF as a moral hazard problem Shock Therapy: Eastern Europe in the 1990s How to move from a centrally planned economy to a capitalist one very quickly? Do everything at once: sell SOEs (privatization) open markets (remove trade barriers and price controls) Why do it all at once? Did it work? Can its success be replicated elsewhere? Africa? Lowest regional GDP per capita Disadvantaged both geographically and historically How to get capital into Africa? Trade FDI Remittances Loans from Northern banks IGO lending Foreign aid