Active development states or passive free markets?
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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The development strategies that the international economic community advocated for developing countries during the 1980s and 1990s were flawed and need to be changed according to the latest United Nations thinking.
In their annual Trade and Development report for 2006 released last week UNCTAD, the United Nations Conference on Trade and Development, is encouraging developing countries to be proactive in their industrial and growth policies and to adjust tariffs and subsidies so as to nuture promising innovative businesses in their countries.
In fact, the best historical example of development we have in recent history is South Korea which went from almost nothing in 1953 to 12th largest economy in the world 50 years later.
South Korean president Park Chung Hee, the president during the era (1961-1979), led the Korean economy, often micromanaging it, into the era of the Heavy-Chemical Industry (HCI) drive. Since this time, South Korea has established its own chemical, steel, shipbuilding, and automotive industries independent of foreign multinational corporations.
The UNCTAD report is available for downloading and reading online.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What three recommendations did UNCTAD give to LDCs in their recent report?
2. Which approach to economic development is an active approach and which is a passive approach, according to UNCTAD?
a. Relying on market mechanisms and market forces.
b. Strengthening domestic industries.
3. What was responsible for rapid industrialization in East Asian countries like South Korea and Taiwan?
4. What approach to development did international financial institutions and banks advocate during the 1980s and 1990s? Did this approach work?
5. What effect did the economic liberalisation approach have on poverty?
6. Provide an example of an inconsistency or lack of coherence in development policymaking during the era of economic liberalisation.
7. How should the governments of developing countries shelter infant industries?
8. What should subsidies to infant industries be designed to do?
9. What should be the ultimate goal of protecting industries from competing foreign imports?
10. In the worst case what can government intervention result in?
Article
Countries urged to be proactive
Passive approach is not recommended WORANUJ MANEERUNGSEEDeveloping and least-developed countries should take proactive steps in their policymaking to attract private investment, upgrade their technology and stimulate market forces to generate growth, according to the United Nations Conference on Trade and Development (Unctad).
A report released last week said governments should not adopt a passive approach to economic development and depend on market forces alone, an approach widely recommended throughout the 1980s and 1990s.
Activist policies were needed to strengthen domestic industries, said Unctad economist Shigehisa Kasahara.
"I am not saying that market mechanisms are bad, but that the current economy and marketplace is more sophisticated and needs a more efficient systems for management,'' he said.
The report noted that East Asia's rapid industrialisation stemmed in large part from industrial policies.
On the other hand, reforms pushed by international financial institutions and banks on poor countries failed to deliver results during the 1980s and 1990s.
Conventional wisdom at the time emphasised macroeconomic stability, a reliance on market forces and liberalisation and openness to international competition.
But in many cases, private investment did not rise as predicted, and instead stagnated.
Many developing nations already struggling with high levels of poverty found that these steps towards liberalisation actually increased rather than decreased inequality.
According to Mr Kasahara, a lack of coherence among policy bodies also resulted in problems in the past.
In the wake of the 1997 Asian economic crisis, South Korea devalued its currency following advice of the International Monetary Fund, allowing the country to increase its exports of cars to the US.
The increase of exports resulted in allegations of price-dumping and violations of World Trade Organisation rules.
Furthermore, reports suggest that governments should protect fledgling enterprises when necessary, including through careful application of subsidies and tariffs, until domestic partners can meet international competition in the sale of increasingly sophisticated products.
Designed subsidies can foster innovative investment and temporary import protection can allow learning processes to unfold among domestic businesses.
The report recommended maintaining internationally approved tariffs at a relatively higher level and modelling applied tariffs on particular industrial sectors around a relatively lower average level.
But proactive trade and industrial policies should not be understood to mean inward-looking, protectionist defence mechanisms to support weakened industries which can not compete with successful foreign businesses.
Vocabulary (in discussion above)
least developed countries (LDCs) - a UN classification for the poorest countries in the world (See Wikipedia)
proactive - acting to cause change and improvement, rather than merely passively reacting to events (this is the first good habit of the "Seven habits of highly effective people," See Wikipedia on Proactive)
United Nations Conference on Trade and Development (UNCTAD) - "established in 1964 as a permanent intergovernmental body, UNCTAD is the principal organ of the United Nations General Assembly dealing with trade, investment and development issues" (See Wikipedia)
passive - let things happen to oneself, rather than acting, not being proactive
activist policies - actively making policy to mold and shape industries rather than passively relying on market forces
x stemmed from y - x resulted from y, y caused x
in a large part... - the main reason was...
stagnated - stopped changing and improving, stop making progress
liberalisation - being less strict with regulations and laws and allowing people more freedom of action
coherence - when all the parts fit together into a unified whole, without contradictions
devalued its currency - make its currency worth less so that exports are cheaper and more competitive on international markets
International Monetary Fund (IMF) - the "international organization that oversees the global financial system by monitoring exchange rates and balance of payments, as well as offering technical and financial assistance" (See Wikipedia)
allegations - a formal statement saying that someone has done something wrong
price dumping - "Selling merchandise in another country at a price below the price at which the same merchandise is sold in the home market or selling such merchandise below the costs incurred in production and shipment." (Source; See also Wikipedia)
fledgling - new and without experience
subsidies - money paid by the government to help an industry or business
tariffs - government taxes on imports
inward-looking - thinking only of your own country, not thinking about working with other people in the world also
protectionist - when a company protects its own industries by putting large taxes (tariffs) on imports
Answer Key:
1. What three recommendations did UNCTAD give to LDCs in their recent report?
i. Attract private investment.
ii. Upgrade their technology.
iii. Stimulate market forces to generate growth.
2. Which approach to economic development is an active approach and which is a passive approach, according to UNCTAD?
a. Relying on market mechanisms and market forces. (passive)
b. Strengthening domestic industries. (active)
3. What was responsible for rapid industrialization in East Asian countries like South Korea and Taiwan?
Industrial policy.
4. What approach to development did international financial institutions and banks advocate during the 1980s and 1990s? Did this approach work?
They advocated the liberalisation of developing economies which meant "a reliance on market forces," and an "openness to international competition," while maintaining "macroeconomic stability," but this approach did not work.
5. What effect did the economic liberalisation approach have on poverty?
The economics liberlisation approach "increased rather than decreased inequality," which means that the poor got poorer and the rich got richer.
6. Provide an example of an inconsistency or lack of coherence in development policymaking during the era of economic liberalisation.
The IMF ordered South Korea to devalue its currency after the 1997 economic crisis. This led to increased exports of cars, but other countries complained that South Korea was dumping and violating WTO rules. The IMF told them to do implement a policy, but the WTO said they couldn't reap the benefits of this policy.
7. How should the governments of developing countries shelter infant industries?
They should provide subsidies and lower tariffs until the domestic companies "can meet international competition in the sale of increasingly sophisticated products."
8. What should subsidies to infant industries be designed to do?
Subsidies should be designed to "foster innovative investment."
9. What should be the ultimate goal of protecting industries from competing foreign imports?
Some "import protection" allows "learning processes to unfold among domestic businesses."
Too much import protection will cause local innnovation to stop. India barred all automobile imports for decades. The result was that for a long time automobile technology in India didn't keep pace with international developments. Even today most cars on the road look like they are 60 years old.
10. In the worst case what can government intervention result in?
Protectionism that supports "weakened industries which can not compete with successful foreign businesses."
