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BDS Current Issue Volume XX, No. 3 & 2, 1992

Mexico's Trade and Industrialization Policies in the 1980s: A Preliminary Assessment

Author: Jaime Ros

As many other developing countries in Latin America and elsewhere, but perhaps faster and farther than most of them, Mexico has been moving the 1980s towards a liberalized trade regime after a long period of import substitution industrialization. Compared to other experiences, and especially to those which are also well advanced in this process such as Chile and Bolivia in Latin America, the Mexican case shows a number of singular features which, over a longer time span, will probably make it a unique case of economic and political success in terms of the smoothness of its transition, the small adjustment costs involved, the virtual absence of political tensions and resistance to change.This paper argues that—besides the critical role of non-economic factors, including geography and polities—this outcome can largely be attributed to the no less successful experience that Mexico had with import substitution industrialization and, perhaps more paradoxically, to the very adverse macroeconomic conditions under which trade reform was undertaken in the 1980s. At the same time, and for related reasons, the paper is rather skeptical about the long term benefits that the particular form adopted of trade liberalization is likely to bring.

Successful Adjustment to Oil Shocks: The Rare Case of Indonesia

Author: Sadiq Ahmed and Ajay Chhibber

Oil-windfalls have been more of a bane than a boon. Indonesia is a rare outlier in this list and, despite external shocks and unfavourable exchange movements, has maintained creditworthiness through swift adjustment. Moreover, despite heavy adjustment, important social gains were achieved, as reflected in a substantial reduction in the incidence of poverty. This paper sets out a framework to analyze Indonesia’s adjustment policies quantitatively. Starting with a discussion of the analytics of open-economy adjustment, in particular the interaction between the exchange rate, the interest rate, growth and debt, the implications of the open capital account for Indonesia’s adjustment are analyzed. Empirical estimates of the macroeconomic model are derived; the key parameters are the interest and exchange rate sensitivity of private consumption and investment, and the elasticity of exports and imports to the real exchange rate. The model is then used to illustrate the nature of external adjustment necessary to ensure the consistency of growth with external balance and the implications for exchange rate management. The internal adjustment that must accompany the required external adjustment, how much of it occurs in the public versus the private sector and the role of fiscal policy in effecting this adjustment is also examined.

Review of the Chilean Trade Liberalization and Export Expansion Process (1974-90)

Author: Patricio Meller

Chile replaced a highly complex and restrictive foreign trade regime by a flat 10% nominal tariff rate in a span of 5 years. In the Chilean case, the credibility of the trade reform is related more to the overall macroeconomic and policy reform itself.A trade reform generates a reallocation of resources according to comparative advantage: In the chilean case, at the intersectorial level, there was a substitution within tradables where exports of natural resources (mining, forestry, fish, fruit) displaced industry. At the intrasectorial level, there was a restructuring within industry where there was an expansion of manufacturing related to processing of (Chilean) natural resources while there was a contraction of manufacturing competing with imports.It is important to be aware of some problems that could happen during the implementation of a trade reform. From the Chilean experience the following may be mentioned (1) : Tariff reductions could generate a drop in fiscal revenues close to 1% of GDP. (2) An unilateral trade liberalization could generate an important commercial disequilibrium. Consumer (non-food) imports are highly elastic in the Chilean case income and price elasticies close to 2 and-2 have been observed. External resources required to finance Chilean import liberalization reform required 5% of GDP per year during 5 consecutive years. (3) Keeping the “right” level of the real exchange rate is the key variable to ensure the “success” of a trade reform. To achieve this objective is not easy in an inflationary environment. (4) Chilean trade reform generated a reduction of industrial employment close to 10%. (5) Export expansion is a very slow process. Some specific measures taken by the State during the 1969s in those sectors where Chile had a comparative advantage e.g. natural resources were crucial to the increase of exports in the 1970s (under a neutral incentive system).

Macroeconomic Instability and Trade Performance in Brazil: Lessons from the 1980s to the 1990s

Author: Regis Bonelli, Gustavo B. Franco and Winston Fritsch

The objective of the paper is to evaluate, based on the experience of the 1980s, the threats posed by macroeconomic conditions to the trade liberalization process in Brazil under way since March 1990. The authors begin by reviewing Brazil’s macroeconomic and trade performance during the 1980s. The main aspects of the current trade liberalization programme are then analysed, with emphasis on the policy dilemma inherent in sustaining such a programme in a highly unstable inflationary environment. A simple macroeconomic model is constructed and used to assess these policy questions. A few economic policy recommendations close the paper. It was found that the erosion of Brazil’s traditionally large government surplus—due to rising government consumption in the second half of the 1980s, inflationary pressures and limited foreign financing—interfered with government investment programmes. These developments and a restrictive import regime led to a loss of competitiveness. Exchange rate policies are expected to play an important part in solving this dilemma—as indeed happened in 1991-92. Highest priority should be given to stabilization, but care should be taken to avoid long periods of exchange rate appreciation.

Structural Adjustment and Macroeconomic Performance in Bangladesh in the 1980s

Author: Sultan Hafeez Rahman

Beginning in the early 1980s for over a decade now, Bangladesh has been contracting structural adjustment loans from the IMF and World Bank. The loans were obtained at highly attractive terms but, were contingent upon fulfillment of stringent policy conditionalities. This study provides an assessment of macroeconomic performance during an entire decade of adjustment, i.e., the 1980s. The macroeconomic performance of Bangladesh in the 1980s has been discouraging. Though, the fiscal and external gaps showed a decline during the adjustment period, other major objectives relating to economic growth, investment, public expenditures, inflation etc. remained unfulfilled. The evidence suggests that contractionary demand management policies while, unable to restrict inflation significantly slowed down economic growth. Coupled with exchange rate depreciation, aggregate demand management policies failed to achieve real exchange rate depreciation. The expected results of the trade liberalization on the industrial sector in particular, were not observed as the sector continued to stagnate. Financial sector reforms were initiated very late in the reform process reflecting a major sequencing problem. Bangladesh’s experience with adjustment policies while raising questions about the design of standard structural adjustment packages also revels the critical importance of strong commitment to reforms and skilful economic management.

East and South-East Asia : Comparative Development Experience

Author: Gustav Ranis

By the 1970s, it had become clear that NIEs were emerging in East Asia, South-East Asia, and Latin America, while most of the rest of the developing world was being left behind. This paper examines the development process of four of these NIEs in Asia. Taiwan and South Korea, East Asian Systems are used as examples of states which are small, natural resource poor, and initially labour surplus and human resource rich. Thailand and the Philippines, South-East Asian countries, are used as examples of states which are medium in size, favourably endowed with natural resources and initially intermediate in labour surplus and human capital dimensions. One commonly asked question then is what are the differences in the development in these two kinds of NIEs. The principal difference lies in the move—after primary import substitution—of East Asian countries to the export of labour intensive consumer non-durables, while South-East Asian countries enter a phase of secondary import substitution and develop the domestic ability to produce consumer durables. A second commonly asked question is why this marked divergence in strategy and consequent performance between these two kinds of NIEs occurs, i.e., what are the reasons for the policy choices made, development paths followed, and the timing of different phases of development?Initial conditions are seen to have a substantial impact on the policy choices available since this affects not only initial levels of income and welfare but also the degree to which the institutional heritage is susceptible to obstructing or accommodating economic change. Colonial heritage and geographic and cultural cohesion are dimensions which have a direct bearing on the process of development. In East Asia, a confidence in national goals and an attitude of pragmatism allowed the expectation of economic attainment to be clear and permitted the government to take actions which were politically unappealing but economically sound. There were consequently less harmful price distortions and governments showed restraint in good times and flexibility in bad times. In South-East Asia, on the other hand, citizens were more concemed with competing for their rights; there was less pursuit of clear rational economic goals; and often the government would undertake a politically popular policy only to have this policy cause problems in the future. Thus, the East Asian countries can be characterized as pursuing a steady progression to economic maturity, while the South-East Asian countries can be characterized as having oscillated along a path which is less certain to achieve steady growth consistent with enhanced equity.

Trade, Trade Plicy and Economic Development in very Low-Income Countries

Author: Gerry Helleiner

Analysis of the role of trade and trade policy in very low-income countries has been sparse. This paper surveys the relevant theoretical and empirical literature. It concludes that exports and trade policy are extremely important, but not the only part of development strategy. “Openness” is not the panacea that some suggest.

Polonius Lectures Again : The World Development Report, the Washington Consensus, and How Neoliberal Sermons Won't Solve the Economic Problems of the Developing World

Author: Lance Taylor

This paper is a critique of recent mainstream ideas about appropriate policies for economic development, e.g. the “Washington consensus”. It begins with a review of the of the macroeconomic, fiscal, and foreign balances of typical developing economies, and then reviews the major proposals of the World Bank’s 1991 World Development Report. An important distinction between allocative and productive efficiency is drawn, and used to analyze issues of industrial and trade strategy, privatization, market deregulation, and financial reform. After a discussion of macroeconomic stabilization, the paper closes with a “non-Washington synthesis” of alternative policy views.

Adjustment Policies of the International Monetary Fund and Long-Run Economic Development

Author: Jacob A. Frenkel and Mohsin S. Khan

The purpose of this paper is to outline the basic policy content of adjustment programmes supported by the International Monetary Fund (IMF), and to show how these policies work in achieving macroeconomic stability, and thereby higher economic growth. Although the IMF is not a development agency, nevertheless by establishing macroeconomic equilibrium in the economy, it lays the necessary foundation of development to take place. The policies it recommends, which typically include aggregate demand policies, structural policies, exchange rate policies, and external debt policies, are all designed towards the objective of balance of payments viability, price stability, and a sustainable high growth rate that would support a steady improvement in living standards of the population. The paper reviews available empirical evidence which indicates the IMF-supported adjustment programmes have had beneficial effects in terms of reducing external and internal imbalances in a broad sample of developing countries, The paper also discusses the empirical evidence demonstrating a link between macroeconomic stability and higher long term economic growth. Therefore, it is concluded on both theoretical and empirical grounds that the adjustment policies recommended by the IMF are supportive of the basic structural and social transformations which make up the process of economic development.

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