HIST363: Global Perspectives on Industrialization

Any consideration of action to deal with resource dependence needs to begin with an assessment of whether a country's current level of dependence on agricultural and resource-based products is excessive in relation to policy goals such as growth, stability or considerations of poverty and vulnerability. The analysis of the problem should aim to specify the problem very carefully, as the policy solution is likely to depend heavily upon the specific nature of the problem. A problem of excessive income variability in a context of, for instance, rigid wages that translate terms of trade shocks into unemployment may have quite different solutions than a problem of resource rent dependence that leads to rent seeking, or provides funding for civil insurgencies. If the problem is one of excessive income variability, then there is a prima facie case for dealing with it through a financial policy instrument such as the use of futures contracts, rather than through changes in the mix of output in the economy. 

If the analysis of the problem suggests that problem requires action to change the structure of the country's output and export mix, then policy should focus on achieving this change in ways that overcome market failures and maximize the development payoff. 

A key priority is likely to be to stimulate the accumulation of physical and human capital. Not surprisingly, attempts to stimulate the development of sectors that are more intensive in physical and human capital than the current output mix without providing additional capital inputs are likely to distort resource use throughout the economy. The fact that financial capital remains relatively immobile internationally means that attempts to increase the accumulation of physical capital are likely to focus on stimulating domestic saving. Loayaza, Schmidt-Hebbel and Serven draw on a large number of studies to provide policy recommendations to this effect. Even if factor accumulation is less important for overall economic growth than has previously been thought, it seems likely to provide a strong stimulus to a shift in the composition of exports towards manufactures and services.

Given the weakness of capital markets in financing intangible assets like human capital governments tend to play a much larger role in guiding the accumulation of human capital than of physical capital. Accumulation of human capital is likely to have both level and growth effects on output, and to facilitate the transformation of the economy into one that produces relatively more human-capital-intensive goods. As Dessus notes, the impact of human capital accumulation on both output and on poverty reduction depends a great deal on the emphasis of the education system, and on its effectiveness. As Leamer et al note, provision of education may need to be very proactive, attempting to take into account demands in the next cone of diversification associated with economic development, rather than in current activities. As Leamer et al note, this may imply training workers for a much more sophisticated activities than are undertaken in an initially very resource-dependent economy. 

Attracting foreign direct investment may help to augment the available capital stock, although this source of capital is typically small relative to total investment. However, it is possible that foreign direct investment, or sub-contracting relationships can help transfer the knowledge needed for rapid productivity growth. If attracting foreign investment leads to a focus on developing the institutions needed to improve the investment climate - for domestic as well as foreign investors - then it can play a particularly important role in development. Use of foreign investment implies a need for greater caution in the use of protection policies. Since foreign investors' returns are based on the private returns to their capital, investments in import-substituting industries are very likely to reduce national income. Second-best mechanisms such as export performance requirements have been used to, very imperfectly, reduce these problems in the past, but are likely to be largely unavailable in the future because of the Uruguay Round agreement on Trade-Related Investment Measures (TRIMs). 

There is a strong case for relying on an open trade regime as the best approach to development and economic restructuring. Activist trade policies can only work in a dynamic sense if they promote sufficiently rapid learning in the favored sectors to overcome their certain short-run efficiency costs. However, analyses such as that performed by Krueger and Tuncer have failed to find any significant stimulus to productivity from infant-industry protection, let alone enough to justify static inefficiencies. An open trade regime overcomes the discontinuities resulting from positive protection to import-competing sectors and negative protection to exporting activities. These sharp discontinuities threaten the viability of manufacturing and service sectors that may represent the next step in development as a resource dependent economy moves from one cone of diversification to the next. In the presence of such sharp discontinuities, import-competing industries are likely to be constrained to grow very slowly after they experience a positive shock to productivity - unless the boost to productivity is sufficiently large as to make the activity competitive in export markets even despite the negative impacts of protection on its input costs and the real exchange rate. Constraints on output growth in this situation can greatly reduce the welfare benefits from increases in productivity. 

If a very low and uniform protection regime cannot be achieved, a case can be made for the use of duty exemptions or duty drawback mechanisms to reduce the burden of protection on exporting activities. This type of second-best response remains fully legal under WTO rules, even though it effectively provides an export subsidy designed to offset the burden of import barriers. If implemented properly, such mechanisms can reduce the variance of effective rates of protection across importing and exporting activities by increasing the effective rate on exporting activities to zero. Duty exemption schemes have certainly been important in stimulating the development of manufacturing exports from East Asia. However, such schemes are costly to implement and frequently stimulate corrupt behavior. Even when they work well, as in China, tariff reduction analysis that takes into account the effects of these schemes finds that tariff reduction stimulates further expansion of exports of manufactures Further, they such schemes reduce the incentives for exporters to press for lower tariffs on their inputs and may, therefore, lead to higher protection than in their absence. 

Buffie makes a second-best case for an escalating tariff to provide high effective protection to domestically-oriented industry in the presence of an irremovable wage distortion in the import-competing manufacturing sector. However, this case is heavily dependent upon the unknown mechanism determining this wage differential. If the wage determination mechanism responds to greater protection to the import-competing sector by increasing the real wage in this sector, this mechanism could be extremely costly. Further, it is inferior to a duty exemption arrangement in providing the flexibility needed to allow the emergence of new export sectors. 

A key issue for policy is to stimulate technological advance in all sectors, but particularly in the manufacturing and services sectors that are likely to lie on the evolution of the country's comparative advantage. In this area, Navaretti and Tarr stress the importance of increasing the absorptive capacity, particularly through increasing education. Increasing export orientation of the manufacturing sector through trade reform and factor accumulation appears to help increase productivity in this sector - not by learning by doing, but more through the entry of higher productivity firms. Foreign direct investment may also help promote technical advance. Finally, of course, the provision of an appropriate level of protection of intellectual property rights can help stimulate innovation. 

Policy options for reducing transport and communications costs include both domestic, unilateral reform options, regional agreements, and multilateral reform options through the General Agreement on Trade in Services (GATS). Hummels feels that one possible explanation for the increase in shipping freight rates up to the mid-1980s, despite the introduction of cost-saving innovations such as open registries and improvements in shipping technology, was that containerization may have helped strengthen shipping cartels. In the shipping arena, Clark, Dollar and Micco conclude that improving port infrastructure and liberalizing restrictions on cargo handling and provision of port services could substantially reduce overall transport costs. Fink, Mattoo and Neagu agree that that government restrictions on entry into port services raise shipping costs substantially. However, they conclude that the policies that allow shipping conferences to collude in ways that raise rates are a much more important source of cost increases. They estimate that removing restrictions on trade in maritime services would result in a nine percent reduction in the average costs of liner shipping. Enacting policies that would eliminate the collusive practices that are endemic in the industry would have a much greater payoff, allowing a further 25 percent reduction in costs. They suggest the use of the GATS to challenge these restrictive practices, some of which cannot be tackled by governments acting unilaterally.