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Lecture 10

IDSB01H3 Lecture Notes - Lecture 10: Special Drawing Rights, Free Trade, Quasi


Department
International Development Studies
Course Code
IDSB01H3
Professor
Ryan Isakson
Lecture
10

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IDSB01 Lecture 10 March 26, 2014
The Prebisch – Singer Hypothesis
Int’l terms of trade tend to move against the producers of primary products, resulting in
higher levels of development in the centre and persistent underdevelopment in the
periphery
oDualistic development
oConsumers and producers in the global south have continuously had to export
more produce to obtain the same income
o3rd World countries were heavily dependent on export of 1-2 commodities, mainly
primary products
Policy implication: import-substitution industrialization (ISI)
oRather than importing manufactured goods, periphery countries should
industrialize and produce them domestically
oGeneral Strategy:
Offer gov’t assistance to targeted industries: subsidies, etc (similar to
developmentalists’ suggestions)
Provide “infant industry” protection in the international market (from
industrial giants) through tariffs, quotas, import licenses on manufactured
imports.
Costs for gov’t– subsidies, tax breaks, research & development
assistance expenses
Costs for consumers – have to pay higher prices for domestically
manufactured goods, compromises in quality since the industry is newly
established
Not all industrialization strategies are identical!
Scholars have argued that every industrialized country had employed
some form of ISI incl. England and its textile industry, U.S.A and weapons
and ship craft industry (gov’t bought from their own producers to stimulate
growth in the sector)
oEasy ISI: countries should first focus on this strategy. Focus upon simple
consumer non-durables. For ex. processed foods, clothing, building materials
Advantages:
Technology can be borrowed easily (ex. sewing machine)
Does not required skilled labour – doesn’t require highly educated
population so may be more suitable for countries with developing
education systems
Production is labour intensive
Existing demand within country (hierarchy of needs, those
employed in new industries will spend additional income on
clothing, etc, as opposed to plasma TVs..)
Goal is to reduce dependency on imported manufactured goods
Some very successful countries with those strategies eventually went on
to export these products on the global markets
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IDSB01 Lecture 10 March 26, 2014
Challenges:
Removing “infant industry” protections in a timely manner
Government is targeting capitalists, who have close relations to
the state. Industrial elites put pressure on gov’t to maintain
restrictions and continue protecting them from international
pressures
Does not decrease dependence upon imports – if a country wants
to develop a textile sector it needs to import machines to produce
textile. Decreasing dependence on imported consumer goods but
increasing dependence on imported capital goods (need to keep
purchasing them if industry is to expand)
ISI is neither possible nor desirable as a long-term strategy
South Korea: import-substitution  export promotion  as going up
the technological ladder  import-substitution for capital goods 
export promotion
Countries become overcome with debt if they don’t phase out
“infant industry” like Korea and instead keep importing capital
goods
The Debt Crisis
Explosion in int’l debt owed by countries in the Global South
1980s burst of the debt-bubble – became so indebted they had to take loans from the
World Bank which lead to the restructuring of their economies
This debt impeded dev’t and contributed to the underdevelopment of the regions
Definitions:
Foreign Reserves / Foreign Exchange
oCurrency which allows a nation to pay for its imports and to pay its foreign debts
oHeld as gold or major currencies that are int’lly recognized
Also Special Drawing Rights
oHow does a country acquire foreign reserves?
Sell their exported goods
Could to a certain degree exchange currencies, but there’s not a lot of
demand and faith in small global south countries’ currencies
oHow does a country deplete its foreign reserves?
By importing goods and services or paying off debts in int’l markets
Types of Lenders and Borrowers
oLenders
Commercial Banks
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