48 LINKS BETWEEN TRADE ANDDEVELOPMENT ＠
Corden, W.M. (1974). Trade Policy andEco/'lomic ｗ･ ｲ･Ｎ＠ London: Oxford
ｕ＠ ｶ･ｲｳｩｴｹ＠ Press.
3. COMPARATIVEADVANTAGE
Harris, JohflR‘ and Michael P. Todaro (1970). ‘Mîgration, Unemployment and Development: ATwo-Sector Analysis'. American Eco/'lomíc Revìew, vol‘ %
(March), ｰｰｾ＠ 126-42.
AND DEVELOPMENT POLICY
Herberg, Horst and Murray C. Kemp (1971). ‘Factor Market Distortîons, the Shape of the Locusof Competitive Outputs, and the Relation between
Prices and ｅｱｵｩｬｩ ｩｵｭ＠ Outputs' inJagdish N. Bhagwati et al., Trade , Ba1ance
TWENTY YEARS LATER
Of Payments and Growth. Amsterdam: North-HoIland.
Hufbauer, ｇ｡ｲ＠ C. and John G. Chilas (1974). ‘Specialization by lndustrial Countries: Extent and Consequences' in Herbert Giersch Ｈ･､ＮＩ ＠ The Irzternational Division of Labour Problems and Perspectives. Tübingen: Mohr;
Johnson, Harry-G. (1965). ‘Optîmal Trade Interventions in the Presence of
Domestic Distortions' in Robert E.Baldwin et al. , Trade, Growth and the 3.1 INTRODUcrION Balance of Payments. Amsterdam: North‘ Holland.
Jones , Ronald W. (1971a). ‘Distortions in Factor Markets and the General
Equilìbrium Model of Production’, Joumal of Political Economy., vol. 79 In most developing countries, the carly efforts of ｰｯｬｩｴｩ ｡ｮｳ＠ ＠ raise
(May/June), pp‘ 437-59. growth rates and living standards almost always ｩｮ､ｵ ･｣ｬ＠ high trade
Jones , Ronald W. (1971b) ‘A Three-Factor ｍｯｾ･ｬ＠ in Theory, ｔｲ｡､ ＠ and ｢｡ｲ ｲｳ＠ and a set ofｊｾＧ ｩ｣ｩ｣ｳ＠ to f
‘
)ster industrializatio t1 ｴｨｲ ｉｬ ｧ lt imporl History’ in Jagdish N. Bhagwati el al., Trade, ｂ｡ｬ｡ｬ ･＠ of ｰ ＠Ａｹｭ･ｮｴｳ＠ and substitution. These efforts were based largely 00 an ｩ ｴｩｮ｣ｴｩ Ｇ･＠ rejectioo Growth. Amsterdam: North-Holland ..K:rueger, Anne O. (1975). The ｂ･ｮ ｴｳ＠ and Costs of Import Substitution in of the doctrine of comparative advantage, which was understood to lndia: A Microeconomic Study. Minneapolis: University of Minnesota ･ｳｳ ＠ laíssez-faire ìn all matters ｰｲｴ｡ｩｮｩｮｧ＠ to the trarle regime ｡ｉ､＠
McKenzie, Lìonel (1955). ‘Equality of Factor Prices in World Trade’‘ domestic economic policies [n addition‘ , that rejcctíon was often associ- Eèonometrica, vol. 23 (July) , pp. 239-57‘ ated wìth the polìcy prescríption that developing countries sbould ｦ Ｍ･ ＠ ｉ＠
McKinnon, Ronald W. (1973). Money and Capital in Economic ｄ･ｶ･ｬｯｰｭ･ｮ ＠
Wash1ngton, DC: The Brookings Inst.Ïtution. specialìze in the productìon and cxport of primary ｣ ｯ､ｩｴｩ･ｳ＠ in
ｍ｡ｧ･ ＠ Stephen P. (1973). ‘Factor Market Distortions,'Production and Trade: excha:nge for manufactures. Because of these associations. attacks Cln the doctrine of free trade served as a focal point for the debate oyer tlJe A Sprvey’. Oxford Economic Papers , vol. 25 (March) , pp. 1-43‘
Rybczynski, T.M. (1955). ‘Factor Endowment and Relative Commodity applicability of principles of rational ｲｳｯｵｲ｣･＠ allocatìon 10 developm,g
Prices’ . Economica, vol. 35 (November), pp. ＳＳＶｾＴＱＮ＠ Reprinted in Richard countnes‘
E. Caves and G. Johnson (eds) , A. E.A. Reading ;/'1 lnternatwnlll p-
Economics. Homewood: Irwin, 1968, pp‘ 72-7J. over trade
Sen, Amartya (1975). Employment, Technoiogy and Development. London:
Oxford University Press. ｡ｲｧｵｭ ｮｴｳ＠ were
Todaro, Michael P. (1969)“ A Model of Labor Migration and Urban ｴｨ･ｲ･ｴ￮｣｡ｬ＠ ｳｳｵ･ｳ＠ and
Over almost four decadcs of research and experience with develo ment policies and their effects, the range of the deba
‘
epolìcìes has been greatly narrowed. Although initial more emotional than rational‘ analyses of the Unemployment in Less Developed Countries’‘ American Economic Review‘
vo159 (Marcb), pp. 138-48.
empiricaJ evidcnce gradually increased ｵｮ､ｲｳｴ｡ｮ､ｩｮｋ＠ ｦ＠ ‘b.e issues ìnvoJved and reduced the range of disagreement
Travis, W.P. (1969): The Theory of Trade and ProlecM/'I, Cambridg If one were to pinpoint the landmark contributÎon to this adva t1ce in understanding, Chcnery (1961) would stand OUt. His s. emlOal paper providcd a carefully ｲ･｡ｳｯｮ､＠ statement of lhe lensions ｢･ｬ･･ｮ＠ ｡Ｚ［＠
theory and development policy ‘ He advanced the djalogllc b) a quantum leap in his dispassionate and careful analysis of Ihe issues., anrl in his identification of thc many ｭｰｩｲｩ｣｡ｬ＠ question.s that reqwred First printed in 1984. This essay was written while thc ｉｮ､ｵｳ Ｑ｡Ｑ＠ Instilute for Economic and Social Research În Stockholm‘ for ｷ ｨＮ ｯｳ ＠ ｳｐ｛Ｉｯｲｴ＠ I am
J grateful. 1t ｡ｳ＠ published în a Festschrift in honorof Hollh ｃｨ･ ｊＱ ･ｲ ＠ ｃｯｭｭｮｴｳ＠
ｲｴ･ by Larry Westphal werc useful for revísÎon.
ｴｴｲｷｰ＠
50 LINKS BETWEEN TRADE AND DEVELOPMENT
investigation. His essay stood for well over a ､｣｡､･＠ as the definitive statement of the profession's understanding of the trade-policy and growth relatìonship .. On1y with additional research, prompted in part by hisanalysis, has the profession been able to move beyond it. Thus,
it seems àpþropriåte thattbe relationship between trade policy and development shouldbe re-examined ìn the light of ｴｨ＠ theoretical advances and empirícal evidence amassed since the 19608.
It is useful to start by ｲｾｶｩ･ｷｩｮｧ＠ the Ìssues as Chenery set them forth the early 19608. Thereafter, the experience of some developing countries is briefly reviewed to motÍvate the reassessment of ｴｲ｡､ ＠ policies and their impact which fol1ows.‘ Then, in the sectìon on Ìnner- andouter-oriented growth, the alternatÌve strategies are contrasted. Then follows anaIysis of factors that may have ､＠ for differences ìn gro
an
wth rates under alternatÌve strategies. A final s
｡｣｣ｯｵｮｴ
ection suinmarizes theprogress of the past two decades.
3.2TRADE POLICY VERSUS GROWTH, CIRCA 1960
Chenerysetforththe críteria for the optimality of free trade in terms of market structuresand pricing mechanisms, as was theo conventiona1. 1 He.then noted (Chenery, 1961, p. 21) that
Growth theory contains at least rour basìc assumptíons about underde- veloped economies that differ strongly from those undedying comparative advantage doctrines: (1) factor pricesdo not necessarily reftect opportuníty
ｳｴｳ＠ wíth ｡ｮｹ｡ ￩ｕ ｲ｡｣ｹ［＠ (2) the quality and quantity of factors of pro- duction may change substantially over time, in part as a result of the
ｰｲｯ､ｵ ｯｮ＠ plOceSS itself; (3) economies. of ｳ｣ ･＠ relative to the sì.ze of
･ ｳｴ￭ｮｧ＠ markets are important ìn a numþer of ｳ･ ｯｲｳ＠ of production; (4)
complementarity among commodities is dominant in both producer and consumer demanq:
Chenery then considered productivity changes úver time
,
‘dynamic external economies’, and ‘uncertainty and flexibilìty’ as considerations thatmight militate against the optimality ofthe free trade outcome even｣＠ a perfectly competitive market allocation.
Cbenely
‘,
vas careful to note thatmarket imperfectîons did not neces- sarily imply tbata ､･ｰ｡ｲｴｵｲ＠ from laissez-faire was clearly justified‘None the less
,
the bil.sic a.x:guments he evoJced. were widely usec,l by others as the reasòñs for departures from free trade, and espeè.1älîy for .thë encouragément of import -substitution ｩｮ､ｵｳｴｲｩ･ｳ ｯｮ the grounds that they possessed the dynamic characteristics that warrantéd ￍｮｴ･ｲｶ･ｮｴｪｾＺｭＮ＠'.'Theoretical1y, df course, there is no way to resolve the argument: there migbt in principle be dynamic external economies
,
various infant industry mechanisms, and other phenomena whose presence destroysCOMPARATIVE ADVA.f‘TAGE AND DEVE.LOPMENT POLlCY 51 the optimality of laissez-faire and free trade. At a ｴｨ･ｯｲ･ｴｩ｡ｬ＠ ｬ･ｶ ＠ it îs possîble ｦＡｲ＠ trade theorists to point out that many of thc stated bases for departures from free trade arc really the basis for alternative, and potentìally Pareto-superior, ioterventions. Thus‘ as Fishlow and Oavid (1961) noted, in the case of factor-market imperfectîons, policìes othcr than a trade intervcntion would lead to an outcome superior to that attainable with a trade interventíon: correction of the distortion at Îts source is first best.
For present purposes, it is important to note that advocates of relatively unfettered trade and 1iberal cconomy were essentìally on the
､ｦ･ｮｳｩｶ･＠ in 1960: they questioned the size of the presumed dynamic
factors and noted the static costs that were incurred. Essentially, 1he argument for protection, ｱｵ｡ｮｴｩｴ｡ｴｩｶ＠ controls, and economic planning
ìn ｧｮ･ｲ｡ｬ＠ was an argument of market failure io a laissez-faire economy
and a contrasting of that presumed failure with the performance of an ideal command economv (where it ｷ｡ ｳＮｬ｣ ｩｌ ｬｄＮＮＮｊｨ･ＮＮＮ･ ｄｬＱｩｬｬｮ ｩｳｴ＠ to decide how much detaHed intervention was ideal). Nowhere in the discussíon did the advocates of Iiberal trade ｰｯｬｩ｣ｩｳ＠ suggest that the dynamics of growth were in their on the contrary) there was a presumption that growth considerations ｷｲ･＠ in at least potentíal contlict with the efficìency of static resource allocation.
3.3 EXPERIENCE WITH EXPORT-LED GROwrn
While the debate over resource allocation and dynamic factors pro- ceeded, some developing countries were abandoning or substantial1y reducing their trade barriers and other controls on ｣ｯｮｯｭｩ｣＠ activity. The results were far more spectacular than even the most ardent of proponents of free ｴｲ｡､＠ would have forecast. Growth rates rose to heights that had previously been regarded as unattainable‘ South KOTca
｡ｨｩ･ｶ ､＠ a rate of growth of real GNP in excess of 10 per cent a year
over the entÍre decade from 1960 to 1970 and weathered the oil price increase of 1973 to 1974 better than aLmost any other oi1-importing country. Taiwan, Hong Kong, Singapore,-and Brazil also thrived on outer-oriented trade po1icies to an extent not ｰｲ｣ ｲｩｯｵｳｬｹ＠ deemed feasible‘ Although special ｩｲ｣ｵｭｳｴ｡ｮ｣･ｳ＠ were at first thought to have been responsìble for each 5uccess story, it 5000 became apparent that the
‘
)riented countries had enough in common so that there was somethìng ｭｯｲ＠ to their success than apparently lucky circumstances and specific factors. ‘This i5 not the place 10 review the circumstances of each successful export-orientedstrategy. Many cases ｨ｡ｶ＠ been intensÎvely scrutînized
･ｬｳｷｨ･ｲ･ Ｒ＠ and numerous analyses of \..íoss-scction and time-serÎes
52 LINKS BETWEEN TRADE AND DEVE.LOl'MENT Table 3.1 Expeñences of the successful exporters
Ra
‘
.e of growth (%) of:Dollar Ralio to GDP of:
ｒｾ｡ｬ＠ valueof
Country Period exports Exports Inveslment
Brazil 1960-67 4.1 3‘ 7 0.07 0.14
1968-73 11.5 16.5 0.08 0.23
HongKong 1963-78 8.2 9.2 0.99 0.28
Korea 1953-60 5.2 5.7 0.03 0.11
1960-78 9.6 28.4 0.29 0.35
Singapore 1955-78 8.6 8.7 1.87 0.39
Taiwan 1960-76 8.7 20‘ 9 0.47 0‘ 28
SQuræs: Uni
‘
ed Nations, Yearbook 0/ｎ｡ｴｩｯ ｬｯｬ＠ Accounts ｓｴ｡ ｴｩ｣ｳ ＠ 1966, Table 4A; 1975, Volume m , TabIes 2A ｡ｬ ＠ 4A; 1979, TabIe 6A; Wodd Bank, World Development RepOTt, 1978 (for Taiwan) and 1981.ｎｯｴ･ｾ＠ ｒＦ ｴｩｯｳ＠ æ:e from the last year in lhe interval indicatèd.
perf()rmances ｦ＠ groups of countries confirm the surprisingly strong relationsbip betwèen export growth and over-aU growth of real GNP.3 Table 3.1 gives a few pertinent data simply as a reminder of the success. Asèan be seen, Brazil and SouthKorea dramatically altered their growth rates and economic structures after their changes in strategy‘
Taiwan adopted unified exchange rates, a Iíberalized outer-oriented trade regime, and policies geared to improvìng resource aIlocation in the 1950s - ｳ＠ a cootrast between performance under alternative incentive struc1ures is not possible. Nor are data available for Singapore and Hoog ｋｯｮ ＠ to ｃ Ｑｴｲ｡ｳｴ＠ performaoce.
For present purposes
,
three points are ìmportant: (1) 00 observer of any of these cou01ries can doubt that the remarkable rates of ｨ＠were. somehow c10sely related to factors associated wÎth the rapid growth ＨＩｦｾ ｾｳ［＠ (2) for a11 countries where it was possible to contrast perf()nnance before and after policy changes
,
there could be little doubt that the growth ｲ｡ｴ＠ ｪｵｭｰ､＠ sharply after adoption of export-oriented strategies; and (3) ｴｨ＠ fact that the high growth rates of real GNP were sustained for a loog period suggests strongly that ｴｨ ｡｣｣･ｬ･ｲ｡ｴ･､＠ growthwas not due simply to static gains from improved, resource allocation. Iudeed, to attribute all the increase in the growth rate directly to íncreasecl exports would imply an implausibly large mu\tiplier. The unresolved question is this: What is it about an export-oriented strategy that ｢ｲ￬ｧｳ＠ about such a remarkable economic traosformation?
10 a sense, therefore, the tensioq between growth-theory and resource-allocation precepts of the early 19608 has been turned around.
COMPARATlVE ａｄｖａｎｬ ａｇｅ＠ AND DEVELOPMENT POLICY 53 Whereas theory ｳｵｧｧＧｳｴ･､＠ that there might be dynamîc ｦ｡ｴｯｲｳ＠ that
｣ｯｮｴｲ｡ｶｮ･､＠ the static optimizing resource-allocation prìnciples, the
empirh:al evidence suggests that there are dynamic factors at work along an ,e-Æport-oriented growth path. From a theory without any ･ ､･ｮ｣･ｩｮ＠
thè -.e arLy 1960s suggestÎng departures from free trade for dynamic reasons, the tabIes are turned: empirical evidence strongly suggests dynamic factors that may be associated with export-led growth. The rest of this chapter explores thc possible links between an export orientation and overa11 economic performance. As wiI1 be seen, there are ｮｬｩｭｲｯｵｳ＠
hypotheses, some of which may simultaneously be valid, some mutually contradìctory‘ To suggest that a number of mechanisms may generate dynamic factors is not to quantify theÎr importance. Indeed, the success of the export.‘oriented countries has raised a host of questions, especially about microeconomic bchavior,that require empiricaI invesli- gation to further understanding of the growth process.
3.4 INNER AND OUTERORIENTED STRATEGIES CONTRASTED
ｔｨ＠ terms ｯｵｴ･ｲＭｯｲｩ･ ＠ export promotion, export substïtt
‘
tion , andｴ･､ ＠export-led growth have all been used interchangeably to ､･ｳ｣ｲｩ｢＠ the polîcies adopted in the successfuL exporting countries. That practice Îs contìnued here. It should not, however, be interpreted to ｭ｡ｮ＠ that there is complete agreement as to what an exportoriented strategy is.4 3.4.1 What is Export-oriented Growtb?
A first question is whether an exportoriented set of policies is anythìng other than the absence of policies discriminating in favor of sales in the domestic market‘5 The criterion for optimal resource allocation, it will be recalled, is that the marginal ｲ｡ｴ＠ of transformation in production domes1icalIy should equaL the ratio of prices in the international market the international marginal rate of transformation) in the absence of monopoly power in trade‘ 6
In principle, government could protect some industries io the domestic market
a
while simultaneousLy providing sizeable export sub- sidies to other industries.7 In practice, however, the scope for ｾｵ｣ｨ＠ two- way protection îs limited; (1) protective devices or export subsìdies are meaningful only if they discriminate against some other activities; (2) protectiün of any sizeable number of activities is generaIly inconsistent with encouraging exports, because exporters require relatively easy access to international markets for their imports of raw materials and intermediate and capital goods; and (3) protection at the heights
54 UNIOl BÈTWEEN TRADE AND DEVELOPMENT
deerned necessarytoinduce importsubstitution activitics usuaUy requires adegree of control (to prevent smuggling, false ìnvoicing, and 80 on) that deters exports and makes the security of a protected dom.estic market ｳｵｦｦｩ ･ｮｴｬｹ＠ profitable to pull resoi.lrces into iIllPort- substitution activitiesat the expense of potential ･ｸｰｯｳ ＠
Thus, rnóst analystswould agree that an ｩｏｴｴＺ ｯＮ ｲｩ･ｮｴ･､＠ strategy is one in wbich there is no bias of the incentive structure toward favöring productionof import substitutes. Although some industries may be
･ｮ｣ｯｵｲ｡ｧ､＠ by special incentives
,
thòse incentives would be at least asgreat
,
if not greater,
to production for exports than to production for sale in ｴＱＱ＠ domestic markets. What ìs probably not agreed on is whether anexport-lcd growth strategy is one that has no bias of the trade regime (and other incentives) or whether itis one that has a bias making production for export even more profitable than it would be under free trade. As Ìs seen below, ｴｨｲ･＠ area
number of bases for believing that3D export‘ oriented . strategy generally entails less of a departure from f:ree trade ｡ｮ､･ｱｵ ｩｺ･､＠ incentives than does an ìnneroriented strategy. Indeed,in what follows, there are two interpretations of almost every aspect of the discussion. On one.h!ind
,
the factors that have apparently favoredþigher growth under exportoriented policies can be interpreted as having been precisely those that have resulted in theeconomy’s being closer to a static .optimal resource allocatìon. Alternatìvely, they can also be interpreted as havingbeen the result of encouragìng the dynamic factors previously thought to be assodated v.ith !protectionist polìcies and departures from .free trade. 83.4.2 Salient Characteristics
The essential characteristics of ￬ｭｰｯｲｴＭｳｵ｢ｾｴｩｴｵｴｩｯｮ＠ and exportoriented regimes have been examined elsewhere . Ｎ［Ｇｾ＠ As is well known, no two regimes are identìcal and each mustbe analyzed in the context of all prevailing conditions, especially those in factQr markets. None the less, some features are. fairly ｵｮｩ ｎｬｬ＠
.
and for present purposes what is requiredis to establish a few stylized facts that will be used in the discussion that follows.T'be following ､ｩｦｦ･ｲ･ｮ｣ｳ＠ will be assumed to exist between import-
l5 ubstitution and ･ｸｰｯｲｴｾｯｲｩ･ｮｴ･､＠ regimes: ＠
1. Importsubstitution regimes generally have licensing procedures for imports ofmanufactured producer goods, and importing is generaLly notpossible until an application for an import license has beën made and 2.C ted on. This process inevitably entails delays and paperwork. By contrast,exportoriented regimes permit‘ready access to imports of intermediate and capital goods, at least tò exporters.
COMPARATlVE ａｄｖａｎａｇｅ＠ AND DEVELOPMENl' PO LlCY 55
2. Importsubstitution regímes ｡ｲ＠ characterized, inter ｡ｬ ｪ＠ by over- valued exchange rates so that there .is excess demand for foreil!n exchange (demand held ìn check by the licensing already discussed) ‘
One ìmportant consequence is that domestic producers of ímport
ｳｵ｢ｳｴｩｴｵｴ･ ＠ would receìve a substantially lower prìce for ｴｨｬｲ＠
product in the world market than ｴｨｹ＠ do behìnd ｴｨ＠ ｲ｡ｬｬ＠ of tarìff and quantitatìverestrictìon protcctíon that is the hallmark of ìmportsubstitutìon regimes‘ Because of this, it rarely pays an ìmportsubstìtution firm to expand its production beyond that wbich can be sold in the domestic markct. By contrast, exportoriented regimes have fairly realistìc ･ｸ｣ｨｮｧ･＠ rates and provìde at least as much incentive to sell abroad as to sel1 domestically, if 1J 0t more, wÍth the consequence that most firms base theír capacity on expected domestíc and foreign salcs.
3‘ Generally, it requires virtual prohíbìtion of imports 10 ｩｮ､ｵ｣ ＠
continuing import substitution‘ Either imports are prohibited bythe lìcensing system once domestic production capacity ìs in place, or a tariff is ìmposed at a level sufticiently high to make the import alternative uneconomic. Thís resuIts in widely differing tariffs and tariff equivalcnts (nominal and effective) for different ｩｭｰｯ ﾷ＠
substitution industries. Under export promotion, by contrast, most incentives are couched in such a way that they apply to all exporters and are based on eìther the dolLar value of export sales or the value added ín ･ｸｰｯ＠ sales. This results in a considerably greater degree of uniformity in the incentives confrontìng ｰｲｯ､ｵ｣ｲｳ＠ of different products, at least in the ｸｰｯｲｴ＠ markets‘
4. Whereas importsubstitution regimes arc characterized by quanti- tative restrictions or prohibìtive taríffs for many commodìtìes
,
exportoriented policies generally entail the avoidance of quanti‘ tative restríctíons and the use of (generally low) tariffs with
ｲ･ｬ｡ｴｩｶｬｹ＠ simple procedures to permit ｸｰｯｲｴ･ｲｳ＠ access to the ‘
ìnternational market at international prices for their inputs.
3.4.3 Relationship to IndustriaIization
One way in which importsubstitution and exportoriented trade strategies do not greatly differ is that the rate of industrial growth exceeds that of the rest of the economy under either ｳｴｲ｡ｴｧｹＮ＠ In output of primary commodítíes scems to grow more rapidly under export promotion than under import substitution, but the industrial growth rate is also higher. [n some instances (notably Brazil),the switch to an export orientatioll has witnessed the emergence of major new primary commodities as ･ ｯｲｴＸ ＠ as well as the rapíd expansion
56 LINl<S ,BETWEENTRADEANDDEVELOPMENT
manufactured exports. But the chief reason for import substitution in many developing countries iscto stimulate industrial growth, and it is, for thè industrial sector thatargumentsover the alternatíve strategiesare set forth here.
3.4.4 Disadvantageous Import Substitutiòn or Advantageous ExportPromotion?
An unresolved question concerns the degree to whichexportoriented trade arrd growth strate gies led to superior performance because of their advantages or because of the drawbacks of anirnportsubstitution policy. Itis possibleto defend eíther view, and in a sense the two propositions are opposite sides of thecoin. One can, for example, argue that import-
ｳｵ｢ｳｾｩｴｵｴｩｾ ｬＡ＠ policies very quickly resu1ted in the exhaustion of eäsy
ｩｭｰｯｲｴＭｳｵ｢ｳｮｴｵ ｯｮ òppÖrt1inities and thatgrowth was retarded as saving
rates did nOt increase as rapidly as the capital intensity of additional importsubstitution ventures. Thus, irnport substitutiofl slows down. Alternatively, one can argue that exporting permits concentration in 10wcQst activities and becornes easier ￥Ｚｾ＠ entrepreneurs gaìn experience in international rnarkets. Either way, what ìs really ìrnportant is....the contrast between the two. In what ｦｯｬｬｯｷｾ ＠ the focus is on the difference between alternative strategies.
There, are some appa;rent paradoxes, however. Irnport substitution,
ｷｨ￬｣ｨ ｷ｡ｳ Ｎｦ ＿ｴＡｑｑ｡ｬｩｺ･､＠ ìn manycountries as a ｲｮ ｡ｮｳ＠ of reducing depen-
dence on the international econorny, seerns to increase that depenrlence becauseimportsubstitution activities are irnportintensive and reqiîire imports of interrnediateand capital , goods to sustaìn production , and growth. Thus, the econorriy becornes vulnerable to dec1ines in foreign exchange. By contrast, export prornotion'seems to reduce dependence in the sense thatforeign exchange earnings grow rapidly,markets becorne increasingly diversífied, and the economy becornes inoreasingly f1exible. Similarly, import substitution is relatively xasy
m
lappet1, because 8uch initiaIly sirnple and adrninistratíve,
y ｳｴｲ｡ｩｧｨｴｦｯｲｮ ､＠ measures as protection or irnport prohibitions províde adequate incentives for initial ventures. It becornes increasingly difficult and costly over ti!J1 e, however. By contrast, starting an. exportùriented growth strategy is difficult ｬ､ requires a combination of policìes and a determinationhy the govemment that is difficult politically to achieve. Once started" however, an exportoriented growth.strategy seems to have a nurnber of･ｬｦＭ ｦ ｑｲ ｩｮｧ＠ fèatures. For exarnple, under import substitutiort the
profitability of producing for the domestic market, cornbined with. the ìmport in
COMPARATIVE ADVANTAGE AND DEVELOPMENT POUCY 57 Currency overvaluation in turn encourages intensification of import restrictions and further foreign exchange shortage; further import substitution requires increased supplies of foreign exchange to maintaìn flows of ìrnported interrnediate goods and raw rnaterials and to permit new investrnents. Convers'ely, successful export prornotion implies an upward shift in the supply of foreign exchange, thus permittìng additional liberalizatìon of the irnport regime and thus furthering the bias of the regirne toward exports
3‘ 5 WHY IS PERFORMANCE DIFFERENT?
Three constellations of ｦ｡ｴｯｲｳ＠ bear on performance dìfferences. Their relative and absolute irnportance probably varies considerably between countries, because of their different circurnstances (such as s1ze and resource endowrnent) and because of political and cultural ､ｩｦｦ･ｲ･ｮ｣ｳ＠
that under eìther set of ìncentives affect both the ways in which poLitìcians and bureaucrats behave and also the relations between government and husÎness.
The three .sets are technological factors , determinants of economic behavior, and politicaleconornic Înteractions. By technological factors are‘ rneant such considerations asthe nature of production functions , including the ･ｸｴｮｴ＠ of ｩｮ､ｩ ＠ isibjlíties and economies of scale, the presence of infantindustry consideratÎons‘ and ｴｨ＠ spread in factor intensìties across‘ activities‘ Economic factors ｲ･ｦｲ＠ to such phenomena as people’s responses to incentives and direct controls, the ｩｲｮｰ｡ｴ＠ of industry structure on behavìor, and the flcxibility of the economy. Political‘ economic interactions relate to the determÎnants of policy, the factors that ínfluence decisionrnakers to altcr their course, and the prcssures which bear llpon policyrnakers.
3.5.1 Technological Fadors
Severa! properties of prodllctíon functions rnay be important in leading to different payoffs between export promotion and import substítution as strategìes for industrialization and growth. Thesc include ｴｨ＠ possi- bilities of exploiting scale economies and indívísibilities under aJternative strategles‘ the differences in factor íntensity between dìfferent produc- tion processes, infantindustry considerations, and possibly even the
ｩｮｴ･ｲ､･ｰ･ｮ､ｮ｣･＠ among indllstrial activities.
Small size 011he domestic market
Casual inspection of population statistics can give a mislcading im- pression of the size of domestic markets for rnanufactured products in
58 LI.NKSBE1WEEN TRADEAND DEVELOPMEr:<T
TàbJe'3.l ｮｴｵｳｴｲｾｴｩｶ･＠ calculation .of relativ.e size of markets, 1979
Ｑ｡ｬｵ･＠ of
Countl)' P(mopinuiloantiso)n GNP ($ millions)
Nonagricultura1
ｩｮ￨ ｮ･＠
($ miIIions)
industrial o($ut11p1dulltions) Tanzanià
ｅ｢ｅｂｒｩｭ｡ｵ､ｬｶｩｯ｡ ｩｰｩｴ｡､ｳ｡ｐｩ｡｡ｧ ｬ＠
SoutbKòrea
ｔｉｮｵｩ､ｧｲｩ･ｫ｡ｲ･ｩｹ｡＠
ｬｪ･､･ｮ＠Brazíl Canada United ｊｻ ｩｮｧ､ｯｭ＠ Gèrmany JUanpiatned States
- -
18‘0 30.9 88.9 38.9 46.7 142.9 37.8 44.2 82.6 659.2 8.3 116.5 23.7 55.9 6p 115.7 223.6
4,680 4,017 8,001 18,672 28,020 52,873 55,944 58,786 76,322 125,248 115..536 207,370 228,468 353,288 717,816 1,019,317 2,376,868
2,152 2;169 3,520 14,377 21,295 37,011 44,755 45,265 59,531 77;653 112,‘056599 184, 219,329 346,222 703,518 968,351 2,305,571
608 1,040 603 6,535 9,807 17,448 21,818 17,048 34;345 20,966 36,972 78,801 75,394 127,183 351,759 425,113 808,135
ｓｏｕＱ ･Ｚ＠ Worid Bank, World Del.'elopmentReport, 1981.
developing countries.Since many of the technoJogical and economic factors cønsidered below are essentially based on the proposition that
ｭｾｲｫ･ｴｳ＠ in developing countries are usually toO, small to make ìmport
substitution policies an econonùcally viable alternative (for various reasons to be. consìdered beJow)
,
it is' useful to start with some ca1cruations to showhow small those markets are‘ Table 3‘ 2 contains some ＠ computations. Thethird and fourth coJumns are inteoded toｰｲｯ ､･＠ some indication of the size of themarket for various industrial proðucts. To bè sure, no indicatorof ‘size of market' is perlect for a11 industrial products. For.some (e.g. fertiJizers)
,
the size of agricultural output may be preferable. But for many coJ;llmodities either the sìze of ßon-agrÍculturaJ GNP (possibJy as a measure of ｰｯｴ ｴｩ｡ｬ＠ consumer demanð taking ioto account Engels' Law) or the sÍZe of the industrial. sector Ｈ�ｯｳ ｢ｬｹ｡ｳ＠ an jndícator. of the size of market for investment goods and intermediate goods) may be crude proxies. Oruy for some coosumer non-durabJes, such as matches, candles, clothing, andｦｯｯｾ･｡ｲ ＠ can population size aJone pJay a significant ｾｯｬ･Ｎ＠
As can be seen
,
even some popùlous developiog countries havel1lark:ets
,
however measured,
that are smaJl in contrast wÎth the､･ｶ･ｬｯｰ､＠ countries. Bangl!!:.desh.., for example
,
is estimated to have aßon-agriculturaJ ｩｮ｣ｯｭ･ ｰｰｲｯｸￍ ｭＺ ｡ｴ･ｬｹ＠ 3 percent of that of Sweden and Jess than 2 per cent of that of Canada, neither of which is regarded as
COMPARATIVE ADVANTAGE AND DEVELOPMENT POUCY 59
an economy large enough to forego the benefits of specìalization and ínternational trade. Even Brazìl, which has a large populatìon and is in the mîddle-income country group, has a market apparentJ y sìmilar in size to that of Canada. Despíte a large populatíon, the Indían market is estimated to be just over a quarter that of Brazil, based on the value of industrîal output. Obvíously, for low-íncome counlries with ｳｭ｡ｬｬ ＠
populatíons, the size of the domestic market îs even smaller than that índicated for those included here.
The ímportant consideration here is that import-substitution poLicies inherent1 y tend to encourage expansion of any ìndustry only up to the size of the domestic market (which may be smaller when commodities are higher-priced)‘ Because of the properties of ímport-substìtution regimes (as outlined above), .expansion of an activíty beyond the amount sold in the domestic market ìs seldom profitable‘ Many of the technological, economic, and politicaJ-economic ｣ｯｮｳ￭､･ｲ｡ｴｩＱＸ＠ di8‘
cussed below hinge crucially on this proposition. It is of intercst that one of the four features of growth theory that Chenery noted was the small-size-of-domestic-market proposition ‘
How important are indivisibilities and scale ecollomies?
For processes and activities that are highly divisible and have constant returns to scale, the size of production run does not matter. [0 And there are industries, especially among consumer non-durables, in which there do not appear to be significant indivisibilities and in which small size öf production may not be a barrier to economic viability.
There are other processes, however, where one or more ìndivisibìlities are ímportant, or where there are sizeable scale economies. There ｡ｲ＠
often essentiaJ pieces of capital equipment (e.g. heavy presses) for which a substantial volume of production is required before they are fully utilized‘ Likewise, there are many processes for whìch there is a mìnimum efficient size of plant (e.g. fertilizer, tires) or for which there are significant indivisibílities. In most metal casting, pressing, and shaping activities
,
for example,
the die or mold must be changed when‘ ever a new shape or form is to be produced. The longer the ｬ･ｮ ｨ＠ ofthe productìon run for a metal product, the smaller the tìxed oost8 relative to variable costs. Obviously, the importance of this ｣ ｬｳｩ､･ｲ｡ｴ￬ｯｮ＠díminìshes with the length of the production run, but , gìven modem technology, the variety of shapes and forms is almost uniimited. Wìth smaIl sizes of domestic markets, the lengths of production runs can fre- quently be 80 small that the time changing dies and molds ｣･･､ｳｴｨ･＠
time they are in operation before another change mustbe made. Pro. ducers naturally offer a smaller variety of specialty shapes and sizes than would be profitable with larger markets‘
60 UNKSBETWEEN TRADE AND DBVEi.OPMENT
ｉｭｰｲｴｾｳｵ｢ｳｴｩｴｵｴｩｯｮ＠ policiesgenerally. entail relíance on sales ín the
domestìc market for most output and thus le.ad to short production runs andhigh average variablecosts. But an exportoriented strategy permits a developingcountry
,
regardless of the sÍZeof its domestic market,
to･ｳｴｾ ｊｩ ｳｨ＠ economìcalIy efficient sÍzes of plants and to maíntain long pro-
ductí()n runs. Thus, the limitations of a sniall domestic market can be largely overcome
,
atleast for traded goods,
in an export-oriented econ- omy. And under an export-oriented strategy,producers in a small devel- pping country can obtaín specialized products that are not produced domestically at internationally competítive prices. By contrast,
under import':substitutíonregímes, either delays are substantíal in obtainingｩｴｭｳ＠ .not domestically produced or producers must obtain theír Ïtems
(possiblyof less thanoptimal specification) .. from high-cost (possibly monopolistic) ､ｯｭ･ｳ ｣＠ sources.
Ðiffering factòr intensities
It is widely recognized that developing countrÎ@s are usuallyrelatively well endowed WÌth unskilled labor and that the (ate of human and physi-
ｃ ＠ capital formation (broadlydefineð) is the constraint on expanding the índustrial sector. .If most industrial activities. had faírly símilar factor proportíons
,
this'‘constraint would act .equally to limít índustríal growth under both trade strategíes unless one resulted in more rapid factoraccumulation than the other. But when factor proportions differ significantly amongindustríal sectors, export prOJ,notion permits a more rapid growth of vahie. added and employment of unskilled labor in indusfry for the same rate of human andphysical capital formation. In particular,
if there isa wide range of factor intensities for industrial pro- cesses,
countries whose economies are oriented toward the international market will witness fairly rapid expansion of the relatively unskilled- labor.using industríes. Under importsubstitution the limits of expansion of th0se. ｩｮ､ｵｳｩ･ｳ＠ will be largely determined by the rate of growth of domestic demand once production has expanded sufficiently to ｲ･ｰｬ｡｣＠imports. Thereafter the growth ofoutput can proceed only at the rate 6f growthof real income times the income ･ｬ｡ｳｴｩ ｴｹ＠ of demand for the commodity ín question (unless CQsts and prices are falling).
The wíde variation ÍÌl incremental capital-output ratios (IÇORs) across countries suggests that there may be significant differences in either Jactor proportions or efficiency underalternative trade regimes‘
For ｴｨ＠ 1960-73 period
,
ICORs ranged from 1:7 to 2.5 for Korea,
Singapore
,
and Taiwan,
to 5.5 and 5.7 for Chile and lndia (see Balassa,
1978b, for details). When Brazil switched trade strategies,the ICOR fell from 3_8 for 1960-6 to 2.1 for 1966-73. Although there are many ｰｯｳｳｾ＠
ibÍe reasons for these differences,l1 significant differences in factor pro-
COMPARATIVE ADVANTAGE AND DEVELOPMENT pOUCY 61 portìons and exporters' ｡｢ｩｬｩｴｩｳ＠ to expand production of items ｾ ｩｴｨ＠
appropriate factor intensíties are undoubtedly important.
ｬｮｦ｡ｮｴＮｩｮ､ ｾｴｲｹ＠ considerations
The infant-industry argument has a long history in economic thought and is ｷｉｉ＠ known. It rests on the proposition that new ,or infant,indus- tries may generate externalities and exhibit ､･ｲ･｡ｳｩｮｧ＠ costs over tÌme in such a way that (1) it will not pay any indivìdual firm to undertake the
‘learnìng ìnvestment' and incur the ìnitiallosses under laissez-faire con- ditions, but (2) the early losses in these activities will be
r.
epaid to society wíth an adequate rate of return if they are undertaken. Thus, whereas the factors considered earlier in this section are consistent wìth static optimization, the infant‘ ìndustry argument poînts 10 dynamic factors.The ínfant-industry argument, ìn one form or another, has been ex- tensìvely used as a basis for defending ìntervention, and especially pro- tection, in develQpîng countries, on dynamic grounds. Trade theorists long ago pointed out that protectìon was an inefficient ínstrument, even in relation to infant-ìndustry considerations. But they based their case on the proposition that production ｯｵｬ､＠ be encouraged through the use of a production subsidy (or a tax on non-ìnfant industríes) with the same benefits and without the consumptîon costs necessarily ｩｮｭ･Ｎ､＠ wíth protection. Given the experíence of the ･ｸｰｯｲｴＭｯｲｩ･ｮｴ､＠ developing countries, there are important grounds for believing that infant indns- trìes, once developed i can be èxpanded well beyond the size of the domestic market‘ Indeed, if the infant-îndustry argument were vaiid, expansion of the infants well beyond the size of the domestic market would generally be crucial to realizîng the available retums from the infants‘
Stated another way ,if there were infant industríes whose develop-’ ment could result in large-scale cost reductions, restriction of their output to the quantíties demanded in the domestíc market would re- duce the dynamic gains from development of the indus1ry to far smal1er magnitudes than would be possible if the industry could be induced to export‘ Viewed in this light, there is nothìng in the infant-industry argu- ment that indicates that import substitution, or more generally pro-
ｴ｣ｴｩｯｮ ＠ is preferable to an unbiased or ･ｸｰｯｲｴＭｯｲｩ･ｮｴ､＠ strategy for
trade and growth.
The experience of successful exporting countries suggests that ｴｨｲ･＠
were gains,well beyond the sÍze ofthe domestic market, from expandî
62 LINKSBE1WEEN TRADEAND.DEVELOPMENT
additional output in industries. alreadystartedcould have achieved
ｦ ｨ･ｲ＠ sca1eeconomies.orexploîted further îndivisibilities in the pro- ductìon process. To be sure
,
if the source of dynamic gains lay in the learnìl1gprocess, the ‘ ar:gument would apply with less force. But one woutd then expect tohave observed smallerdifferences in growth per- for:mance between export-oriented and import-substitution ｲ･ｧｩｭｳＮ＠lnterdependence and ｱｵ｡ ｬｩＮ ＠
Efficient production of most manufàctured. goods entails the use of a wide :variety 'of inputs. For all but the simplest processing activities, pro- duction dependson inputs with exact specifications, and gradations in qualityor deviationsfrom specifications raise producers’ costs in imporh ant ways. Countries adopting inner-oriented trade strategies have gener- ally ｾ｢･｣｡ｵｳ･＠ of foreignexchange shortage and toenforce protectìon) required producers to obtain their intermediate inputs from domestic
ｰｲｯ､ｵ｣ｲｳ if at all possible. The mechanisrtl to ascertain whether domestic
sources w:ere available has usually been suffi
‘
iently testrictive to cause long delays in .obtaining import licenses .. The. consequence has been that dömestic producers have general1y ｢･･ｮ＠ restricted under irnport-sub-ｳｴｩｴｵｴｩｯｮ ｲ･ｧｩｭ･ｳ＠ to obtaining many oftheir inputs domestically. This in
turn hasled to a negative sort of interdependence: in so far as individual producers bave notachieved satisfactory standards of quality control, their products have raised costs in usingfirms and ｬｯｷ ･ＱＧ＠ the quality of other producers'" output.
The fact that the demands for Întermediate inpúts are generally fairly specialized has in turn implied that there were few domestic producers of any particular item. So, the interdependence of the economy has resulted in a situation .where productíon stoppages (or even inadequate qualíty of inputs) ｾ one sector veryquickly affectothet firms and industries. These phenomenà
,
in turn,
lead to hígh costsÆor users of the intermediate goods.Under a liberal trade regime, exporters have ｡｣｣ｳｳ＠ to. international markets for their intermedíate inputs. Their freèdom of choice permits thein accéss. to the cheapest source (including lX)nsidetations of quality, reIiability
,
and delivery date),
thusreducing their own production costs. Tha t this may be iìnportant Îs suggested by the fact that in South Korea, even with Îts relatively labor-intensive consumér-goods exportsin the 1960s, abo.ut 50per cent of the value of exports represented ìnputs of imported intermediate goods and raw materials (see Krueger, 1979). 3.5.2 EcoßomicBehaviorIf the tecbnological factors just discussed were of sufficíently Iarge màgnitude, they alone could explain differences in performance under
COMPARATTVE ADVANTAGE AND DEVELOPMENT POLJCY 63 alternative polícies. ｌｩｴｴｉ＠ evidence ís avaílable about theìr relative Îm- portance, however. The same can be said for the influences on economic behavior ､￭ｳ｣ｵｳｳ､＠ here.
The point of departure is once again the relatively small size of most domestic markets. That size implies that, ｷｨｮ industries axe ｮ｣ｯｵｲ｡ｧ･､＠
by protection , there will either be few firms producing a gíven product lîne or that firms will be smal!. Any policy encouraging competitìon by increasing the number of firms in a ｬｩｮ＠ of actívity will result in reduced size of each firm andhence loss of scale economies. 13 Moreover, many import-restrícting mechanisms preclude entry and reduce the possibility of competition among fìrms , regardless of the number in the industry. To cite one example, a ｦｲｱｵ･ｮｴｬｹ＠ encountered ｬｩ｣ｮｳｩｮｧ＠ mechanism al1o- cates imports of intermediate goods and raw materials to firms in pro- portion to their sharc of industrial capacity or output‘ To the extent that outputs and inputs are in more or less fixcd proportions and the resale of inputs is either costly or ｰｲｯｨ￬｢ｩｴ､ ＠ these mechanisms tend to render market shares faìrly rigid , thus inducing a lack of competition amonl!;
firms. That, together with the small ｭ｡ｲｫｴ＠ and the limitation of ･ｸｰ｡ｉＱ ＠
sion of industries to the rate of growth of the domestic market, generally implies fairly uniform growth rates for most fìrms and ìndustries: chang- ing shares come about morc slowly than they would în a more competitive envlronment.
The absence of competition probably cuts down the concern of entre- preneurs about engineering and economic efficiency: some part of their mohopoly rents may be taken in the ‘quiet life’. Moreover, to the extent that ｣ｯｭｰｴｩｴｩｶ･＠ mechanisms are ｷ･｡ｫ･ｮ､ ＠ relatívely high-cost finns wiII lose their market share more slowly than they would under alternative market structures while low-cost firms will expand more slowly. And , in so far as each índustry’s growth Îs linked to the growth of the ｣ｯｮｯｭｹ＠ and differs only when income elasticities of demand differ, there is little scope for changing the shares of indivídual índus- tries in overaU output.
By contrast, ｷｨｮ＠ industrial growth is based on the internaríonal
ｭ｡ｲｫｴ ＠ competîtion Îs provided in that. market, and firms can be of
optimal economíc size whatever the ｳｩｺ＠ ｯｦ､ｯｭｳｴｩ｣＠ market. 1.ow-cost firms can expand at their desired rate unconstrained by raw-materi
64 L1NKS BETWEEN TRADE AND DEVBLOPMENT
activities ＠ ｭｳ ＠ an ｰｯｲｴＭｯｲｩ･ｮｴ･､＠ trade strategy will presumably jnduce greater economic and engineering efficiency. For any given dìstribufion of costs within an industry, the possibility of exporting permits more rapidly changing market shares. Finally, changing the shares .of industries in industriäl õütput can further accelerate the average rate of increase of factor productivity and of the industrial sector.
Acquiring evidence ｾ｢ｯｵｴ＠ the quantìtative importance of these components of industrial growth will be difficult and timeconsuming. Nóne the less, in seeking to understand the reasons why outeroriented trade stràtegies have resulted in more rapid growth of output, it seems dear that ｴｨ･ｹｷ｡ｲｲ ｴ＠ further investigation.
3.5.3 Polîcy Formulation
It is widely recognized that government policy instruments that seek to regulate and control through negative means.are less likely to achieve the intended results than thosethat create incentives for individuals to carry out desired courses of activity. NoÌie the less, there seems to be a universat temptatìon for politìcians to want to ｲ･ｧｵｬ｡ｴ＠ economìc activity and to pass laws rather than to create incentives‘
There are
,
however,
a number ofobvious limits to the ･ｸｴ ｮｴ＠ to whichｱｪ｡ｮ ｴ｡ｴｩｶ･＠ controls can be imposed in the coÍ1text ｦ･ ｸＺ ｰ￬ｴＭｯｲｩ･ｮｴ･､＠
policies. Moreovei,' the feedback to policymakers signaling that mistakes may be beîng made is almost certaînly much stronger ｵｮ､ｾｲ＠ an exportoriented polîcy stance than it is under împort substitutìon.
For ｸ｡ｭｰｬ･ ＠ if theexchange rate is permîtted to become overvalued‘
lagging expons are far more visible under export promotion than are rising premiums by import licenses under import substitution. It is possibte. thatthe constraints on the policiès
,
and the quicker feedback to po1icy-makers about the effects of their policies, are at least as .im- p(mant in explaining the success of outer-oriented 'regîmes as ｡ｲ＠ the economic and technûlogical factors considered above‘ But quantifying their role would provide a much greater research challenge.About tbe limitsof quaotitative r:estrictions, it was already stated that
ｸｰｯｲｴ･ｲｳｭｵｳｴ .have ready access to the intemational market for their
purchased inputs. Provision of that access substantially teduces the ‘ sccípe for qu ｡ ｉＩＮ ｴ｡ｴￎ ＠ restrìctions 00 any category ＠ ＱＱ ｅ ｯｲｴｳＺ＠ ＠
quãntitative restrictions ｡ｲ￩Ｍ￬ｩ ｉｩｔ ｹＧｲ･ｳｴｲｩ｣ｴｩｶ･ ＠ thè reward for evading them will be substantial. When the r6ward is substaotial
,
enforcement is possible only with fairly detailed scrutiny of a11 incoming goods. That scrutiny, in turn, Îs. incoosistent with the ready access required for exporters. Thus, the fact that some imports are intermediate goods usedCOMPARATIVE ADVANTAGE AND DEVELOPMENT POLlCY 65 by exporters imposes a limit on the amount of protection ｡ｯｲ､･､＠ to any productîve activity.14
Moreover, an export-oriented set of policies by its naturc rewards those who export and ìs non-dìscriminatory among exportables. 10 3nd of itself, that feature ímplies that there will be considerably less variation in the protective or subsídy equivaleots of export incentives than usual1y arises from the incentives for import substítution. Since rewards are inherently ｢｡ｳ､＠ 00 performance, which in turn is highly correlated wÎth the social profitability of the activity, there is a ｧｲ･｡ｴｲ＠
built-in tendency toward less variability in incentives under export promotion than under import substitution.
In addition to the addcd constraiots 00 the size of mistakes under ＠
export-oriented strategy, there is also a greater lìkelíhood that mistakes wiU be rectífied sooner. Thc reason is that there is lìkely to be quicker and more self-evídent feedback. Since ｶ･ｮ＠ the most unrealistic policy- maker rccognizes that foreigners cannot be forced to accept domestical\y produced goods, any decìsion to encourage a line of exports that happens to be uneconomic wiU be accompanied by large losses, either to the exporter, who will theo contract productiol1, or to the government, if it is inducing exports by subsidies. Either way the costs ｡ｲ＠ highly visible and provide feedback that policy is inappropriate, feedback that is far stronger than an implicit or expJicit tariff of comparable magnitude under import-substitution regimes, where firms have captive markets.
These consideratioos ｰｲｴ｡￭ｮ＠ to broader classes of policy as ｾ･ｬｬＮ＠ 10
particular, the maintenance of an unrealistic exchange rate is possible under an outer-oriented regÎme only íf export subsidies continue to make exporting profitable. But if overvaluation of the currency incrcases, the cost of the subsidies also grows. As with other measures, these self-evident costs provide feedback and incentives for some government officials (those in the treasury and those attempting to expand their expenditures on other items) to support moves toward ír realistic exchange rate‘
One other potentially important, but probably, unmeasurable , aspect of feedback should be noted: under import substitution and ､ｩｲ･ｴ＠
controls over imports, firms have built-in Íncentives to misrepresent their ｡｣ ｶｩｴｩ･ｳ＠ in ways that will induce the receipt of mo
66 LINKS BETWEEN TRADEANDDEVELOPMENT
, since most developing countrìes are relatively performance.Moreo'ller
smaIl.in" the wotld market
‘
.there is a smaller tendency for government and induSíry toview each other with-suspicion,
and a greater tendency to view theìr joint.efforts as a positivesum game vis-à-vis the rest of the world, This, in .aiId of .itself,. togenerate relatively more straightforwardrelations between goverseems
nment and business. in export- oriented economies.
3..6 SUMMARY ANDCONCLUSIONS
Ironically
,
the same dynamicfactors thought earlier to be the basis for a 'growth theory'prescribing divergences from free trade appear on inspection to be factors that; if they exist at all‘,
favor reliance on the international market in the process of economic growth.Whether-there are dynamic factors , and how important each of them may be, is .still an open question. The growthrates of the outer-oriented countries suggest that something more than the direct impact of exports wasat workinaccounting for the supèrior growthperformance. When examines critical1y of. the bases on which that superior perf
one
orniance may have rested some
, most of the factors earlier thought to havejustified protectionistregimes are argumehts, if for intervention at all, for a bias toward exporting as contrasted with production for a protected domestic. market.
Whetherthat ‘something more' emerges because export-oriented regimes are de facto closer to a free‘ trade resource àllocation optimum, or whether their superior performance is instead the result of their ability to capture the dynamicgains associated with an export-oriented strategy, is still unresolved. Its investigation wi1l require careful empirical analysis of the hypotheses sketched out above. What seems certain is that the existence of dynamic factors in no way creates.a presumption that growth induced by protecting the domestic market wi1l be in any way superior to growth under neutral or ｯｵｴ･ｲＭｯｲｩ･ｮｴ､＠ trade strategæs.
In so far as thesuperior results achieved under an export orientation have been the result of the behavioral differences sketched out in the pnwious sections, rather than the technological ｦ｡｣ｴｦｳ ＠ openness itself, rather thanexport growth , is a critìcal ingredient for rapid increases in oiJtput andproductivity. This consideration is sigriifica
n.
t in evaluating the proS:pects for future growth of .developing countries in the context of a potential1y slower expansion of world trade: if openness conveys benefi:ts due to competition and thenature of policy instruments used, thegains from an export orientation will be almost as great (if the worldCOMPARATIVE ADVANTAGE AND DEVELOPMENT POLICY 67
economy remains open) with slower growth of world trade as wíth more rapid growth. To be sure, the growth potential of developing countries will inevitably be even greater with morc rapid growth of the intcr- national economy. None the less , if the major gains from an outer- oriented trade strategy come about because of the effccts of that strategy on the domestic economic structure, the costs to developing countrìes of a deceleration in the growth of world tradc will be far smaller than if the technologîcal hypotheses explaining the difference in growth per- formance under alternative strategîcs arc correct.
Obvìously, the techllological and bchavioral hypotheses (as well as those about economîc polícy) have relevance , and ｴｨ＠ important Questions center on their quantîtative magnitude. Although much remains to be Icarncd, the intcrrelationships of an export-oricnted trade strategy with the entire structure of domestic ecol1omic activity warrant the conclusion that far more is at work in bringing about rapid growth under an outer-oriented trade strategy than simply the increased share of eXDorts in GNP.
In the light of twenty years of experience, how do the four factors enumerated by Chenery now stand? Distortions in factor prices remain a focal poil1t of concern, though they are more likely to be regarded as the result of government policîes than as a constraint on governments. That the quantity and qualìty of productive factors increases still plays a central role in developmcnt thinking. Economies of scale may be important, but cannot be vicwed as a source of tension between growth and trade theory. Complementarities may exist, but do not take center staj:(e ìn most analyses. If something has been added to our ｵ ＱＱＱ ､･ ｲｳ ｴ｡ｮ､
-
’.’in ; iht ･ｉｮｭＱｮｴ･ｲ ｳ＠ on ccono
failure o｣ f economic polícy likely to ｡ ･＠ when that behavior ìs not taken into account ‘
NOTES
1. Trade theory has proceeded ín three stages. 1n the first the gains from free trade were demonstrated almost without qualìfication‘ 1n the second stage , theorists derived the ｣ｯｮ､ｩｴｩｯｮｾ＠ ín ter
