Showing posts with label Import Substitution Industrialization. Show all posts
Showing posts with label Import Substitution Industrialization. Show all posts

Monday, March 4, 2013

The Soviet economy: lessons for developing countries

I highly recommend the following paper by Mazat and Serrano on the Soviet Economy, from 1950 to 1991, which shows the relevance of the surplus approach tradition to deal with real economic problems. The paper suggests that the limitations of the Soviet system, that eventually led to its collapse were associated to the exhaustion of the regime of extensive accumulation of capital in the late 1960s early 1970s.

Growth was very rapid at the beginning. The graph (from Kotz and Weir's Russia’s Path from Gorbachev to Putin, 2007) shows the rates of growth of the Soviet Union and the US from 1928 to 1975, and a few sub-periods. With the exception of World-War II the Soviet Union was catching up with the US.


Following Kalecki, they show that there was no problem of effective demand, and that USSR was characterized by resource mobilization towards rapid industrialization. Further, "the extensive Soviet growth model relied on the increase of the surplus thanks to the mobilization of additional resources." As noted by Kotz and Weir (2007, p. 36): "the rapid employment shift from agriculture to industry contributed to GNP growth, since output per worker is much higher in industry than in agriculture." Cheap labor and available resources implied that growth involved incorporating workers into the growing industrial sector, and that implied huge investments in infrastructure and heavy industries.

However, by the 1970s the extensive model of growth had reached its limits. The graph shows the slowdown of Soviet growth.

Note that while it is true that the slowdown in the Soviet economy was parallel with the post-Bretton Woods slowdown in the West, it was more marked. This was, as noted by Mazat and Serrano, the result of the vanishing labor surplus, and the exhaustion of cheap sources of new natural resources. It is worth noticing that:
"The sudden worsening of Soviet economic performance in the 1970s was not limited to economic growth. There is also evidence that the rate of technological innovation slowed down around the 1970s ... Most noticeably, the Soviet Union largely failed to absorb the revolution in communication and information processing brought by electronics and computers, which was rapidly altering Western capitalist economies from the 1970s" (Kotz and Weir, 2007, p. 45).
This inability to keep pace with technological innovation in the West, associated with increasing imports of grain, linked to the severe difficulties of increasing agricultural productivity, and the higher demands for consumer goods that come with higher income per capita, implied increasing external problems for the Soviet economy. In their words:
"The Soviet population also wanted more consumption goods and consumer durables of better quality. But the cold war continued to require massive expenditure of resources in the military sector. At this stage several attempts to reorder priorities and reform the planning system to enable to increase the quantity and the quality of consumer goods, but they all failed. As local production was unable to fulfill entirely this demand, imports of these categories of product were necessary, especially from the West."
Note that these problems are typical of developing countries in the so-called hard phase of Import Substitution Industrialization (ISI). The increase in agricultural, capital and consumer goods imports, was financed with oil and gas exports (in the 1970s positively impacted by the oil shocks, but negatively in the 1980s, with the collapse of terms of trade), which also made the Soviet Union look more like a typical middle income developing country.

In sum, "from the 1970s, the structural external vulnerability became a permanent feature of the USSR, and the very low price of oil from the mid 1980s had an important impact on the final collapse of the Soviet system in the following decade." In other words, an external crisis, not very different than the one that caused the Latin American debt crisis and that led to the imposition of the Washington Consensus was behind the Soviet collapase and the imposition of the disastrous shock therapy. The difficulties of moving from the extensive model of growth to the intensive growth model, discussed in this paper, are very similar to the difficulties faced by industrializing nations in the periphery and are a cautionary tale for all developing countries.

Tuesday, December 11, 2012

What is new about the IMF's views on capital controls?

I wanted to write about this topic for a while, but didn't have enough time. The IMF has adopted a new institutional view on capital controls, which will inform their policy advice and surveillance of member countries, which they suggest reflects "a very broad consensus" [I'm always a little bit wary of broad consensuses]. Note that the Fund is still in favor of capital account liberalization, as noted in the second key feature of their institutional view, which says that "capital flow liberalization is generally more beneficial and less risky if countries have reached certain levels or 'thresholds' of financial and institutional development."

The question is how to get beyond the threshold, but there is no doubt that liberalization should be ultimately pursued, at least to some degree. They do add a cautionary note that full liberalization might be an impossible goal for many countries. In their words: "countries with extensive and long-standing measures to limit capital flows are likely to benefit from further liberalization in an orderly manner. There is, however, no presumption that full liberalization is an appropriate goal for all countries at all times."

The new institutional view is based on the notion that capital flows will continue to move away from the center, and that developing countries will be faced with a persistent pressure for the appreciation of their currencies. Blanchard says in his post that "looking at the relevant set of investors suggests higher flows to emerging markets are here to stay." He also suggests that the biggest threat from those inflows, the so-called Dutch Disease that New Developmentalist authors like Bresser-Pereira (here, for example) have emphasized, is not that dangerous and the empirical evidence about it is not well established [by the way, I tend to agree with Blanchard on this one, and believe that fears of a Dutch Disease are exaggerated].

My concerns with the new institutional view are twofold. On the one hand, I would rather not accept a general rule in which the IMF has a say on when and why a member country should use capital controls. Right now countries have a right to do it. So this new institutional view actually reduces policy space for developing countries. Note that the IMF, in spite of all the talk about the new macroeconomics is enforcing austerity in the European periphery. So the orderly manner that would lead to benefits from capital account liberalization are basically fiscal asuterity and inflation targets (slightly higher, 4% and not 2%).

Second, the view of the relevance of capital controls is limited to its effects on exchange rates, its volatility, the risk of appreciation, and last the possibilities of depreciations with disruptive outflows (or sudden stops). I tend to see capital controls as an essential tool not just for exchange rate management, but also for industrial policy, since the availability of dollars is often essential for determining which sectors can be promoted by allowing imports of essential goods (e.g. capital and intermediary goods), and which ones would be forced to rely on domestic substitutes. Import substitution and alternative development policies, of course, remain an anathema at the IMF.

Further, exchange rates are connected and do affect income distribution. It is far from clear that the only thing a country wants to do is avoid 'excessive' appreciation and loss of external competitiveness. Higher wages, associated with appreciated exchange rates, might be relevant for demand expansion too. At any rate, the point is that a great deal of discretionary power by domestic authorities should be the norm when it comes to capital controls. The less power the IMF has in this respect, the better.

Thursday, March 8, 2012

Is Import Substitution Industrialization (ISI) still possible?

For a very long time Import Substitution Industrialization (ISI) was seen as a four-letter word. The notion was that ISI had led to extensive inefficiencies and that the debt crisis of the 1980s was its last breath. The old ideas about comparative advantage were back with a vengeance, and the prescription was for trade liberalization, encapsulated in the Washington Consensus. Export orientation was promoted, since it was widely believed that an emphasis on exports would force integration into world markets, more efficient allocation of resources, and that external markets would impose discipline by eliminating uncompetitive firms.

The problem with the conventional wisdom is that the ISI period corresponds to a high growth phase for most developing countries, one in which they caught up with the developed world despite the fast growth in the latter, which would not have been possible if ISI-driven growth did produce tremendous inefficiencies on an economy wide scale.

Read the rest here

Sunday, October 23, 2011

Commercial Policy in Latin America


Last week I taught my Raúl Prebisch class, in my Latin American Economic History and Development course, dealing with Import Substitution Industrialization (an annual thing now). The classic paper in English was published in the American Economic Review of 1959. The masters' students have to read the original paper. This follows my two previous posts (here and here) on trade. A few things that are important to notice.

Prebisch clearly says that industrialization (and hence the expansion of domestic production) is an inevitable part of the process of development, something that has been often forgotten as if strategies based on services or intensive agriculture are alternatives to industrialization. We still live in industrial societies (not post-industrial ones), and industry remains the main source for productivity growth (something that was referred to as Kaldor's Second Law of development).

Second, even if there is strong growth of productivity in the primary sector, these tend to be passed to prices and benefit the consumers, mostly in developed countries, whereas at least part of the increases in productivity in the other two sectors are retained by workers in the form of higher wages. So the problem of industrialization is associated to the ability to keep in the developing countries the fruits of technological progress, and not with protectionism for the sake of domestic special interests. Further, the workers expelled from the primary sector (if productivity is to grow there) must be incorporated in the other sectors, and as a result a preoccupation with what he calls (following Lewis) 'surplus manpower' (p. 255).

Last but not least, it's worth again emphasizing on the question of protection (since Prebisch is seen often as the Devil by Free Traders*), that Prebisch (p. 259) notes clearly that: "protection by itself does not increase productivity."

* The typical attitude is I did not read it, and I did not like it. The aversion of the mainstream to Prebisch is so strong that Dani Rodrik confesses in his Prebisch Lecture (see the irony?!) that a month before he had not read any of his works. Basically he found out that Prebisch: "did not favour indiscriminate protection. He anticipated his later critics by recognizing that trade protection on its own would not lead to increased productivity in manufactures, and that it might even resuit in the opposite."