136 Chapter 6 Trade and Development I: Import Substitution Industrialization Web Links The United Nations Conference on Trade and Development can be found at http://www.unctad.org and the Group of 77 website at http://www.g77.org. Visit the World Bank at http://www.worldbank.org. You can also visit the regional development banks: The African Development Bank: http://www.afdb.org. The Inter-American Development Bank: http://www.iadb.org. The Asian Development Bank: http://wwiv.adb.org. The WTO devotes a section of its site to developing countries and the international trade system: http://wivw.wto.org/english/tratop_e/devel_e/devel_e.htm. The Electronic Development and Environment Information System (ELDIS), based at the Institute of Development Studies in Sussex, England, maintains a website with good links to information about development issues. This page can be found at http://ntl.ids.ac.uk/eldis/ eldis.htm. Suggestions for Further Reading For a readable introduction to structuralism and development strategies more generally, M see Ian Little, Economic Development (New York: Basic Books, 1982). For an in-depth look at J Latin America, see Jeffry Frieden, Manuel Pastor, Jr., and Michael Tomz, eds., Modern Political Economy and Latin America: Theory and Policy (Boulder: Westview Press, 2000), and Victor Bulmer-Thomas, The Economic History of Latin American since Independence (Cambridge, Cambridge University Press, 2003). For a detailed examination of the New International Economic Order, see Stephen Kras-ner, Structural Conflict: the Third World against Global Liberalism (Berkeley: University of i California Press, 1985). Chapter 7 Trade and Development II: Economic Reform ^XThereas structuralism and import substitution industrialization shaped develop-V V ment strategies during the first 35 years of die postwar period, the last 20 years t-have been dominated by neoliberalism and export-oriented industrialization. In con-;,trast to structuralism, with its skepticism of the market and faith in the state, neoliberalism is highly skeptical of the state's ability to allocate resources efficientiy and places great faith in the market s ability to do so. And in contrast to structuralism s advocacy of f-protectionism and state intervention is neoliberalism's advocacy of the withdrawal of the state from the economy, the reduction (ideally, elimination) of trade barriers, and irehance on the market to generate industries that produce for the world market. Like structurahsm, neoliberalism has dramatically affected policy. Across the developing world, governments have reduced tariffs and removed other trade barriers, fithereby opening their economies to imports. They have sold state-owned enterprises isto private groups. They have deregulated domestic markets and allowed prices to ^reflect the underlying scarcity of resources. They have shifted their emphasis from i producing for the domestic market to producing for the global market. Countries that !/had never joined the GATT sought membership in die WTO. Thus, the last 20 years have brought a complete reversal of the development strategies that most goveni-kments had adopted. Belief in the power of states has been replaced by belief in the feefficacy of the market; skepticism about trade has been replaced by concerted efforts a/to integrate deeply into die world trade system. Neoliberalism has replaced structural-is-ism. as the guiding philosophy of economic development. The shift from structuralism to neoliberalism emerged from the interplay bbetween three developments in the global economy. First, by the early 1970s, import substitution industrialization was generating some serious economic imbalances. The temergence of these imbalances suggested that economic reform of some type was jjequired, although it did not point to a specific solution. Second, at about the same lime, it was becoming apparent that a small group of East Asian countries were out-p*erforming all other developing countries. In only 30 years, these East Asian countries 137 138 Chapter 7 Trade and Development II: Economic Reform Emerging Problems with Import Substitution Industrialization 139 transformed themselves from traditional agricultural societies into powerful industrial-! ized economies capable of producing sophisticated products that were sold in Western . markets. East Asian societies achieved this success through what many viewed as aj neoliberal strategy: rather than insulate themselves from the global economy, they integrated deeply into world markets. The contrast between economic performance in" East Asia and that in the rest of the developing world suggested, therefore, that a ^ neoliberal strategy might deliver better results than import substitution could. Consequently, neoliberalism offered a compelling model upon which to base reforms. Third,: a severe economic crisis in the early 1980s forced governments to finally embark on| reform, and as they did, the International Monetary Fund and World Bank strongly ' encouraged them to base reform on the neoliberal model. We examine each of these three developments. We look first at the factors thatj caused import substitution industrialization to generate economic imbalances. This examination allows us to understand the problems ISI created and the reasons that reform of some type was necessary. We then turn our attention to the East Asian coun-i; tries. We briefly compare their performance with that of the rest of the developing^ world. We next examine two contrasting explanations for tiiis remarkable performance;;' one that emphasizes the neoliberal elements of those countries' strategies, and one that emphasizes the role East Asian states played in the development process. We then . turn to -economic crisis and reform. We look at how die crisis pushed developing eoun-tries to the World Bank and IMF and at how these two institutions shaped the content/j of the reforms governments adopted. The chapter concludes by examining the challenges that developing countries now confront as active participants in the WTO. Emerging Problems with Import Substitution Industrialization By the late 1960s, import substitution industrialization was generating important eeo: nomic imbalances, indicating that the approach might be nearing its limit as a useful1, development strategy Two such imbalances were particularly important. The first lay government budgets, in which ISI tended to generate persistent deficits because it prescribed heavy government involvement in the economy. Since governments believed! that the private sector would not invest in industries that were important for the sue-1 cess of secondary ISI, governments themselves often made the investments, either in* partnership with private-sector groups or alone by creating state-owned enterprises. Yet, many of these state-owned enterprises never became profitable. By the latef 1970s, state-owned enterprises in developing countries were running combined operating deficits that averaged 4 percent of GDP (Waterbury 1992, 190). Governments" kept tiiese enterprises afloat by using funds from die state budget. The combination qf| government investment and the subsequent need to cover the losses of state-owned! enterprises contributed to large budget deficits throughout die developing world. || Domestic politics aggravated the budget deficits generated by ISI. For many govjl ernments, the urban residents employed in the nontraded-goods sector provided critic cal political support. Governments maintained this support by raising the standard q| .living of urban residents through subsidies for essential items. Electricity, water and sewer, transportation, telephone service, and food were all made available to urban presidents at prices well below the market price. This was possible only by using government revenues to cover the difference between the true cost and the price charged. In addition, many governments used state-owned enterprises and die civil service to provide jobs to urban dwellers. In Benin, for example, the civil service . tripled in size between 1960 and 1980, not because the government needed so many civil servants, but because the government needed to find some way to employ urban presidents. Governments used state-owned enterprises for similar purposes. However, Jauch practices simply added to government expenditures while doing little to increase Igovemment revenues, thereby worsening the budget deficit. Import substitution industrialization also generated a second important imbalance: persistent current-account deficits. The current account registers a country's timports and exports of both goods and services. A current-account deficit means that a I'country is importing more than it is exporting. Import substitution gave rise to current-|atcount deficits because it generated a considerable demand for imports while simultaneously reducing the economy's ability to export. On the import side, ISI generated t|;a. steady demand for imported capital goods and inputs. Industrialization required igfcountries to import the necessary machines, and once these machines were in place, I production required the continued import of critical intermediate inputs that were not produced in the domestic economy. Somewhat ironically, therefore, import substitu-£tion industrialization became heavily dependent upon imports. Exports declined for two reasons. First, the manufacturing industries created | through import substitution were not competitive in international markets. Production i|n many of the heavy industries that governments targeted in secondary ISI is charac-Kterized by economies of scale. The domestic market in most developing countries, Ihbwever, was too small to allow domestic producers to realize economies of scale. These inefficiencies were compounded by excess capacity—the creation of more pro-lauction capacity than the domestic market could absorb. (See Little, Scitovsky, and Scott 1970, 98.) Consequently, the newly created manufacturing industries could not Kxport to the world market. Second, the policies that governments used to promote industrialization weak-pned export-oriented agriculture, thereby causing agricultural exports to fall. The Hecline in agricultural production was most severe in Sub-Saharan Africa, which, as a .region, taxed farmers more heavily than did other developing countries (Schiff and |!/aldes 1992). Heavy tax burdens reduced farmers' incentives to produce, and as a gesult, the rate of growth of agriculture declined. In Ghana, for example, the real value |rif the payments that cocoa farmers received from the government marketing board ifell by about two-thirds between 1960 and 1965. Falling prices gave cocoa farmers lit-jpie incentive to invest in order to maintain, let alone increase, cocoa output (KiUick 1978, 119). In addition, cocoa farmers smuggled much of what they did produce into Ke Ivory Coast, where they could sell cocoa at world prices (Herbst 1993, 40). These microeconomic inefficiencies were reinforced by die tendency of most gov-|||iirnents to maintain overvalued exchange rates. The exchange rate is the domestic currency price of foreign currencies. Ideally, a government should maintain an jtchatir.e rate that equalizes the prices of goods in the domestic and foreign markets. 140 Chapter 7 Trade and Development II: Economic Reform The East Asian Model 141 However, under import substitution industrialization, many governments intentionally! set the exchange rate higher than that, and as a result, foreign goods were cheaper rn;j the home market than they should have been and domestic goods were more expend sive in foreign markets than they should have been. Because foreign goods were! underpriced in the domestic market, capital goods and intermediate inputs could bei acquired from abroad at a lower cost than they could be produced at home. This difc ference in price created a strong incentive to import, rather than creating the capacity^ to produce the goods locally. The result was rising imports. Because domestic goodsIT were overpriced in foreign markets, domestic producers, even when efficient, found iti difficult to sell their products in those markets. The result was falling exports. The emergence of the twin imbalances of budget deficits and current-accounts! deficits indicated that ISI was creating an economic structure that couldn't pay for^ itself. Many of the manufacturing industries created during secondary ISI could not! sell their products at prices that covered their costs of production. Many developing! countries could not export enough to pay for the imports demanded by the manufac-5 hiring industries they were creating. The system was therefore unsustainable. That is,'* the imbalances could not persist forever; some reform was clearly necessary. Yet, the domestic political dynamics that had given rise to import substitution alsof made it exceedingly difficult for governments to implement the far-reaching reforms! that were needed to remove the imbalances. On the one hand, most governments! remained committed to rapid industrialization based on the logic of ISI. Far-reachmgl reforms would require them to reevaluate both this goal and the underlying strategy! they were using to achieve it. And the only available alternative to ISI was a markets oriented development strategy (one we look at in detail in the next section). In thea 1960s and 1970s, however, it was precisely this market-oriented strategy that thel Group of 77 was fighting against in the UNCTAD and with the NIEO. Even moderate! reforms held little appeal. Most governments were unwilling to scale back their indus-J trialization strategies. Instead, they looked for a way to cover the twin deficits without! having to scale back their ambitious plans. Even if governments had been more willing to implement reforms, they wouldj have faced considerable obstacles to doing so, because the political dynamics of IS| had created a vested interest in the continuation of the system. On the one hand, gov-| emment intervention had established an environment conducive to rent seeking3g (Krueger 1974; Bhagwati 1982)—efforts by private actors to use the political system ttf achieve a higher-than-market return on an economic activity. Consider, for example! the consequences of government controls on imports. Governments controlled imports by requiring all residents who wanted to import sometihing to first gam thef permission of government authorities. Such import-licensing systems created ar§j incentive for rent seeking. The restrictions themselves meant that imported goodsf were scarce. As a consequence, imports purchased at the world price could be sold ataj much higher price in the domestic market. The difference between die world pi and the domestic price provided a rent to die person who imported the good. A J emment license to import, therefore, was potentially very valuable. Consequential people had incentives to pay government civil servants to acquire licenses, and gove ment civil servants had incentives to sell them. Such behavior was extraordinarily costly as people invested considerable time i .i'ig energy pursuing licenses rather than engaging in productive behavior. It has been e ! Yet- reliance on foreign loans could provide only a temporary solution; foreign ■genders would eventually begin to question whether money they had lent could be ||paid. When they concluded that it couldn't, they would be unwilling to advance pdditional loans, and governments would be forced to address the imbalances that ISI %ad created. That point v/as reached in the early 1980s and ushered in a period of cri-Ss and reform. Before we can examine this period, however, we must look at economic developments in East Asia, as tiiese developments played a critical role in shaping the ^lontent of the reforms adopted throughout the developing world after 1985. g^e East Asian Model y^hde import substitution industrialization was generating imbalances in Latin Amer-g'jtand Sub-Saharan Africa, a small number of East Asian countries were realizing dra-Tjh'itic gains on the basis of a very different development strategy. Four of these East 142 Chapter 7 Trade and Development II: Economic Beform The East Asian Model 143 Table 7.1 Comparative Economic Performance, Selected Developing Countries (Average Annual Rates of Change) Table 7.2 Growth of per Capita GNP East Asia and the Pacific Sub-Saharan Africa South Asia Latin America and the Caribbean Growth of Manufacturing East Asia and the Pacific Sub-Saharan Africa South Asia Latin America and the Caribbean Growth of Exports East Asia and the Pacific Sub-Saharan Africa South Asia Latin America and the Caribbean 1965-1990 5.3 0.2 1.9 1.8 10.3 n.a.° 4.5 . 8.3 8.5 6.1 1.8 -1.0 1985-1995 7.2 -1.1 2.9 0.3 15.0 0.2 5.3 2.5 9.3 0.9 6.6 5.2 °n.a. = not available. Source: World Bank, World Development Report, various issues. Asian economies—Hong Kong, Singapore, South Korea, and Taiwan—consistently! outperformed all other developing countries throughout the entire postwar period.^ This superior economic performance is evident in three simple economic indicators (See Table 7.1.) First, between 1965 and 1990, the rate of per capita income growth in these foufjj East Asian economies was, on average, more than twice as high as the rate of incomei growth in Latin America and South Asia and more than 26 times the rate of per capitafj income growth in Sub-Saharan Africa. Second, East Asian manufacturing output grew at a very rapid rate, averaging! 10.3 percent per year between 1965 and 1990. While Latin America fared relativelyl well in comparison to East Asia for the early part of the postwar period, Latin AmerrEl can rates of growth were not sustained. Third, East Asian exports grew rapidly, while exports from other developing coun-'J tries grew hardly at all. The contrast with Latin America is perhaps most stnlang:| whereas East Asian exports grew at an annual average rate of 8.5 percent between-! 1965 and 1990, Latin American exports in the same period shrank by an average ofj§ 1 percent per year. The contrast with Africa was also stark: while exports from Sub=j Saharan Africa grew relatively rapidly between 1965 and 1980, by the mid-1980s thisj rate of growth had dropped sharply. / The consequences of these faster growth rates are illustrated in Tables 6.1, 6:! and 7.2. The importance of manufacturing industries in the East Asian economie grew while the importance of agriculture diminished. Similarly, while agriculture share of GNP shrank in both Africa and Latin America, but, in contrast to the situation 1960 1990 Percent Change Hong Kong 2,247 14,849 561 Singapore 1,658 11,710 606 Taiwan 1,256 8,063 542 Soudi Korea 904 6,673 638 Mexico 2,836 5,827 105 Malaysia 1,420 5,124 261 Argentina 4,462 4,706 5 Chile 2,885 4,338 50 Brazil 1,784 4,042 127 Thailand 943 3,580 280 Zaire/Congo 489 2,211 352 Indonesia 638 1,974 211 Pakistan 638 1,394 118 India 766 1,264 65 -Nigeria 567 995 75 Kenya 659 911 38 Zambia 965 689 -29 Tanzania 319 534° 67 "Data for 1988. zSource: Penn World Tables. ||n East Asia, manufacturing's share failed to grow. The increased importance of manu-Macturing in East Asia was translated into significant, changes in the commodity compo-pihon of East Asia's exports. (See Table 6.2.) By the mid-1990s, manufactured goods accounted for more than 80 percent of East Asian exports. By contrast, only in Brazil, ^Mexico, India, and Pakistan did manufactured goods account for more than 50 percent |pf total exports by the 1990s, and most of these gains were realized after 1980. Finally, J.rncomes (i.e., gross national product per capita) in East Asia soared above those in Ipther developing countries (Table 7.2). In 1960, per capita incomes in East Asia were llpwer than per capita incomes in Latin America; by 1990, East Asian incomes were Ihigher than—in some cases twice as large as—per capita incomes in Latin America. Why did East Asian countries outperform other developing countries by such a klarge margin? Most who study East Asian development agree that the countries in the Ifegion distinguished themselves from other developing countries by pursuing an lexport-oriented strategy of development. In an export-oriented strategy, emphasis placed on producing manufactured goods that can be sold in international markets. |nch an approach contrasts sharply with the emphasis on producing for the domestic "narket, a central tenet of ISI. Where scholars disagree is on the relative importance of teg market versus the state in creating these export-oriented industries. One position, |b|neoliberal interpretation, is articulated most forcefully by the International Mone-uy Fund and the World Bank. This thesis argues that East Asia's success was a prod-ac'tiof market-friendly development strategies. Another position, the state-oriented 144 Chapter 7 Trade and Development II: Economic Reform The East Asian Model 145 interpretation, is advanced by many scholars specializing in East Asian political economy. This viewpoint argues that East Asia's success is due in large part to state-led industrial policies. The IMF and the World Bank contend that East Asia's economic success derived from their adoption of a neoliberal approach to development. In particular, this inter- . pretation places primary emphasis on East Asia's embrace of international markets : and ability to maintain a stable macroeconomic environment. (See World Bank 1989, 1991, 1993; Little 1982; Lai 1983; for critiques, see Toye 1994 and Rodrik 1999) Most East Asian governments adopted ISI strategies in die immediate postwar period. Unlike governments in Latin America and Africa, however, East Asian governments shifted to export-oriented strategies once they had exhausted the gams from easy ISI. Thus, whereas Latin American and African governments followed easy. ISI with secondary ISI, both of which emphasized production for the domestic market, the East Asian governments followed easy ISI by encouraging the manufacturing industries they had created under easy ISI to export to the advanced industrialized countries. In Taiwan, for example, the government shifted in 1958 from production for the : domestic market to a strategy that emphasized production for export markets. South. Korea adopted similar reforms in the early 1960s. A second wave of newly industnahz-: ing countries (NICs)—a group that includes Indonesia, Malaysia, and Thailand-adopted similar reforms beginning in the late 1960s (World Bank 1993). The emphasis on exports forced Asian manufacturing firms to worry about international competitiveness. This approach stood in great contrast to that of Latin American firms, which pro-; duced for domestic markets sheltered from foreign competition. As a result, the-World Bank and IMF argue, Asian societies invested their resources in domestic; industries that were profitable in world markets, while Latin American and African^ governments did not. The shift to export-oriented strategies was followed by selective import liberalization. Asian governments did not engage in wholesale import liberalization. The Taiwanese and South Korean governments continued to rely heavily on tariff and nontanff M barriers to protect domestic markets. In Taiwan, for example, approximately two-thirds 1 of imports were subject to some form of tariff or nontanff barrier greater than 30 per-f cent, and as late as 1980 more than 40 percent of imports faced protection greater than-; 30 percent (World Bank 1993, 297). A similar pattern appeared in South Korea, where,3 as late as 1983, "most sectors were still protected by some combination of tariffs and» nontanff barriers" (World Bank 1993, 297). However, selective HberaUzation helped? promote exports by reducing the cost of critical inputs. By reducing tariffs on key lnter-Ij mediate goods, such as looms and yam in the textile industry, domestic producers were! able to acquire inputs at world prices. This kept exports competitive in international! markets. The export orientation thus promoted investments in sectors that exploited anf underlying comparative advantage, while import liberalization helped ensure thatj these sectors' advantages were not eliminated by high input prices. East Asian governments also maintained stable macroeconomic environment Three elements of the macroeconomic environment were particularly importanj First, inflation was much lower in East Asia than in other developing countnej Between 1961 and 1991, East Asian economies experienced an average rate of rnfla uon of only 7.5 percent over the period. By contrast, annual inflation rates in the rest of the developing world averaged 62 percent over the same period (World Bank 1993, 110). Second, because inflation was kept under control, East Asian governments were able to maintain appropriately valued exchange rates. In many developing countries, high inflation caused the domestic currency to rise in value against foreign currencies, making tilings difficult for exporters. In the East Asian countries, by contrast, govern; ments were able to maintain exchange rates that allowed domestic firms to remain s competitive in foreign markets. (We will explore exchange-rate issues in greater detail fern Chapter 14.) Third, East Asian governments pursued relatively conservative fiscal fk policies. They borrowed little, and when they did borrow, they tapped domestic savings .rather than turning to international financial markets. This approach was in stark con-.. trast to that of Latin American governments, which accumulated large public-sector lb deficits financed with foreign capital. More conservative fiscal policies allowed East . Asian governments to minimize the growth of foreign debt. This stable macroeconomic environment had beneficial consequences for Asian K: economic performance. Low inflation promoted high rates of saving and investment i (World Bank 1993, 12). Savings rates in the Asian NICs averaged more than 20 percent > of GDP per year, almost twice the level attained in other developing countries, while H' investment rates were 7 percentage points of GDP higher, on average, than in other ^developing countries (World Bank 1993, 16, 221). A stable macroeconomic environs' ment also made it easier to open the economy to international trade. Because inflation i was low and exchange rates were maintained at appropriate levels, trade liberalization =;did not generate large current-account deficits that forced the government to reimpose tirade barriers. Finally, the ability to maintain relatively stable and appropriately valued |real exchange rates encouraged private actors to invest in export-oriented industries. The interaction among the export orientation, the relatively liberal import policy, |and the stable macroeconomic environment promoted economic development. As fDoner and Hawes (1995, 150) put it, the p. pattern of limited government intervention in the market, coupled with cheap labor and an open economy, [has] guaranteed the private sector stability and predictability, the means to achieve competitiveness on a global scale, and access to the international market so that entrepreneurs could actually discover areas where they have comparative advantage. In shorthand, the model is often reduced to "getting the prices right" and letting market-based prices determine resource allocation. Doing so results in export growth that is in turn positively correlated with broader economic growth. lAccording to the World Bank and IMF, East Asia succeeded because markets played a iarge role, and states played a small role, in allocating resources. Other scholars have argued that East Asia's successful pursuit of an export-Ibnented development strategy had less to do with allowing markets to work and much nore to do with well-designed government industrial policies. (See Wade 1990; Amsden 3989; Haggard 1990). In what has come to be called the East Asian model of develop-Bent, economic development is conceptualized as a series of distinct stages of industrial-Ifipn. Government intervention at each stage is aimed at identifying and promoting jfpjfic industries that are likely to be profitable in the face of international competition. In Tie.iirst stage, industrial policy promotes labor-intensive fight industry, such as textiles and 146 Chapter 7 Trade and Development II: Economic Reform other consumer durables. In the second stage, industrial policy emphasizes heavy industries such as steel, shipbuilding, petrochemicals, and synthetic fibers. In the third stage, governments target skill- and research-and-development-intensive consumer durables and industrial machinery, such as machine tools, semiconductors, computers, telecommunications equipment, robotics, and biotechnology. Governments design policies and organizations to promote the transition from one stage to the other (Wade 1994,70). These three stages of industrialization are evident in Taiwan and Soudi Korea. (See Table 7.3.) In Taiwan, industrialization focused initially on light manufacturing, textiles in particular. By the mid-1950s, textiles were Taiwan's most important export. The government also encouraged the domestic production of simple consumer durable goods such as television sets. In the late 1950s, die Taiwanese government began to emphasize the heavy industries characteristic of the second stage of ISI. A joint venture between several Taiwanese firms and an American firm was formed in 1954 to produce syndietic fibers (Wade 1990, 80). In 1957, a plant to produce polyvinyl chloride was constructed under government supervision and then handed to a private entrepreneur, Y.C. Wang (Wade 1990, 79). The government created state-owned enterprises in the steel, shipbuilding, and petrochemical industries. During the 1970s, government emphasis shifted to skill- and R&D-intensive industries, with particular emphasis on machine tools, semiconductors, computers, telecommunications, robotics, and biotechnology (Wade 1990, 94). By the mid-1980s, electrical and electronic goods had replaced textiles as Taiwan's largest export (Wade 1990, 93). The South Korean government adopted similar policies (Amsden 1989). In the 1950s, the government emphasized textile production, and textiles became South. Korea's first important manufacturing export. During the late 1960s, emphasis shifted to ■■ the second stage of ISI, as the South Korean state initiated the development of the chem-: ical and heavy-machinery industries. In 1968, the government created the Pohang Iron ■■■ and Steel Company, known as POSCO, which subsequently became one of the world's ? leading steel producers. The government also provided extensive support to Hyundai! Heavy Industry, a shipbuilder formed in the early 1970s and that subsequently became a world leader in this industry. During the late 1970s, the South Korean government began -to give priority to skill- and R&D-intensive sectors, and it is during this period diat the < South Korean electronics and automobile industries began to emerge (Amsden 1989). In the East Asian model, therefore, government policy drives industrialization -from initial low-skilled, labor-intensive production to capital-intensive forms of pro-. duction and from there to industries that rely on high-skilled labor and research and -M development. Each stage is associated with particular types of government policies, and as each stage reaches the limits of rapid growth, emphasis shifts to the next stage »1 in the sequence (Wade 1994, 71). Moreover, at each stage, governments stress the need to develop internationally competitive industries. East Asian governments implemented industrial policies in pursuit of four broad ■■ objectives: reducing the cost of investment funds in the selected industries, creating incentives to export, protecting infant industries, and promoting the acquisition anda application of skills. Taiwan and South Korea created incentives to invest in indus?| tries that state officials identified as critical to development. To do so, governments nil both countries provided firms investing in these industries with preferential access toS low-cost credit. In South Korea, the government nationalized the banks in the earlyl in 3 ■o C co o N m "> 8, £ 55 I 3 £ a'S 2 <° o. ft 1? "3 § M c3 tu o £ ■a t- v a. H 2 <± H o (J A 4 £ S ° 2 CO o O I to 1 °J ., o , o - I oil 5 I- w til &S Jl CU -« -H t! ■a n "3 o c o cL, V TD °. 53 s w> b ™ c B >- 'S <£ -9 .2 ^ -9 °- S s. a w C >- O JU C « Export-oriented Industrialization Export-oriented Strategy . Mulbfiber Arrangement ', NeohberaMsm Privatization Real Exchange Rates Rent Seeking Structural Adjustment Tariff Escalation Tariff Peaks Conclusion Neoliberalism supplanted structuralism as the guiding philosophy of economic development as a result of the interplay among three factors in the global economy. Import substitution generated severe economic imbalances that created pressure for reform of some type. The success of East Asian countries that adopted an export-oriented development strategy provided an alternative model for development. Finally, the emergence of a severe economic crisis in the early 1980s, a crisis that resulted in part from the imbalances generated by ISI and in part from developments in the global economy, pushed governments to launch reforms under the supervision of the IMF and World Bank. By the mid-1980s, most governments were implementing reforms that reduced the role of die state and increased the role of the market in economic development. The implementation of these reforms has been neither quick nor painless. The depth of the reforms brought substantial short-run costs as average incomes fell and as this smaller income was redistributed among groups. The proponents of neoliberal reforms argue that the short-run costs are worth paying, however, for they establish the framework for strong and sustainable growth far into the future. Achieving that outcome will require developing societies to consolidate and build upon the reforms already implemented. In addition, it will require the advanced industrialized countries to accept short-run adjustment costs of their own in order to meet the legitimate demands that developing countries now make about market access. The adoption of neoliberal reforms in the developing world is also transforming the -global economy. For the first time since the early 20th century, the developing world has integrated itself into that economy. In doing so, developing countries have altered the dynamics of global economic exchange. Standard trade theory tells us to expect trade between capital-abundant and labor-abundant societies. Yet, trade barriers have greatly limited such trade for most of die postwar era. As these barriers have fallen during the last 20 years, trade between countries with different factor endowments has become increasingly important. Businesses are increasingly locating their activities in those parts of the world where they can be performed most efficiently. Labor-intensive aspects of ; production are being shifted to developing societies, while the capital-intensive aspects7; of production remain in the advanced industrialized countries. The expansion of' North-South trade is thus creating a new global division of labor. Web Links The United Nations Conference on Trade and Development website can be found at http://wwio.unctad.org and the Group of 77 website at http://www.g77.org. Visit the World Bank at http://www.worldbank.org. -You can also visit the regional development banks: The African Development Bank: http://www.afdb.org. The Inter-American Development Bank: http://wwio.iadb.org. The Asian Development Bank: http://www.adb.org. The WTO devotes a section of its site to developing countries and the international trade system: http://www.wto.org/english/tratop_e/devel_e/devel_e.htm. The Electronic Development and Environment Information System (ELDIS), based at the Institute of Development Studies in Sussex, England, maintains a website with good links to information about development issues. The site is found at http://ntl.ids.ac.uk/eldis/eldis.htm. Suggestions for Further Reading On the Asian Model, see Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton: Princeton University Press, . 1990), and Stephan Haggard, Pathways from the Periphery: The Politics of Growth in the Newly tj:. Industrializing Countries (Ithaca, NY: Cornell University Press, 1990). For a concise summary 2 of the World Bank view, see World Bank, The East Asian Miracle: Economic Growth and Public •Policy (Washington, DC: World Bank, 1994). On structural adjustment, see Tony Killick, Aid and the Political Economy of Policy Change (London: Routledge, 1998), and World Bank, Adjustment in Africa: Lessons from Country Case (■Studies (Washington, DC: World Bank, 1998). On the politics of reform, a useful place to start is ; Stephan Haggard and Robert Kaufman, eds„ The Politics of Economic Adjustment: Intema-txonal Constraints, Distributive Conflicts, and the State (Princeton: Princeton University Press, :1992), and John Williamson, ed., The Political Economy of Policy Reform (Washington, DC: ■ Institute for International Economics, 1994). For a more recent work, see Anne O. Krueger, ^Economic Policy Reform (Chicago: University of Chicago Press, 2000).