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Chapter 19

Political Science Chapter 19 Summary.docx

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McGill University
Political Science
POLI 243
Mark Brawley

Political Science Chapter 19 Summary South Korea Opts for Export-Oriented Industrialization - Low tariffs and expansion of trade beginning b/c of GATT members gave countries opportunity to exploit trade - Less developed countries began to use trade as part of their economic strategy - Exports played a key role in the rise of GDP for South Korea South Korea’s Initial Trade and Industrialization Strategy: Import-Substitution Industrialization (ISI) - Initially it blocked import of industrial goods so that domestic demand would stimulate domestic production—aka import-substitution industrialization or ISI - By blocking foreign competition, ISI ensures domestic manufacturers have a profit but means consumers are hurt by lack of competition; What happens w/o ISI: if you’re producing steel and there’s cheaper steel moving in from other countries, your steel manufacturers will dry up - Price shifts cause distortions in ability of other sectors to utilize inputs; for ex: if steel is an input to another’s product, but price of steel isn’t competitive, then neither will your product be competitive - Also, there is no guarantee that greater profits accruing to the firm will be reinvested in the same industry - Sometimes ISI meant blocking imports that couldn’t be fully replaced by domestic production in the short run - Disadvantage of ISI: There isn’t enough wealth distribution; so they produce a bunch of things but they can’t sell them to anyone - ISI could lead to bottle necks: if companies demand for steel exceeds the capacity for producers to produce steel, then the companies who use steel in their inputs have to slow their production as well - If technology is limited, ISI makes goods limited - ISI ultimately leads to slow-downs in the long run; it kicks off the economy but ultimately sustaining industrial growth through ISI is difficult - The larger the market the morel likely ISI will last longer and perform better - For a small country: level of domestic demand doesn’t met production level of an efficient plant (economies of scale) then it doesn’t make sense to build the plant in the first place - Individuals and groups will expend resources in the pursuit of the right to participate in ISI- protected sectors; individuals want special privileges accruing to protected firms will burn up country’s resources w/o adding to country’s ability to produce more AKA rent-seeking Export-Oriented Industrialization - Reverse of ISI is export-oriented industrialization (EOI) - EOI is targeted; they find niche markets that they think they can be internationally competitive - Good about EOI: it restores competition that was lost in ISI - EOI makes country build industrial plants for efficiency then produces for international demand; small and poor countries may also partake since demand is coming from richer countries - Countries utilizing EOI are basing future on forces beyond control; if world economy is growing, EOI is good; if not, they will face problems as they have the infrastructure but no demand - Entering a very competitive market system is too risky for EOI - Picking the right sector at the right time is important for EOI’s success - Strategic policy: gov’t policy which can tilt terms of oligopolistic competition to shift excess returns from foreign to domestic firms—this comes into play for EOI - State wants to develop certain sectors that do not yet have the ability to compete; or to create comparative advantage - The strategy of EOI assumes relatively free trade in international economy; but as trade increases more companies domestically ask for protection which leaves very big risks for EOI - ISI works w/ little capital; it is a way to raise capital (as demand rises) - EOI is not a way to raise capital domestically but can instead be a way to pay off foreign investments that have already been undertaken; capital is raised elsewhere, through forced savings domestically or borrowed internationally - Each has difficulty in achieving diversification; ISI leads to distortions and may direct resources out of protected industries and into others sectors and EOI does the same - Broader economic transformations are more likely to occur w/ EOI since it can improve industrial efficiency and build up certain sectors’ competitiveness; it is a good way of producing surplus for investment in the long run - ISI redistributes wealth, EOI creates it - For South Korea, the timing was right when they adopted EOI making them successful; world economy was booming and as one of the first countries to use EOI, international competition was fairly low - South Korea pursued EOI in some areas and ISI in others; so together they reinforced one another The Shift to EOI - Shift to EOI introduced new set of economic policy - 1: exchange rate was changed—process of maintaining a set of different exchange rate for different international economic transactions was replaced by a unified exchange rate - 2: currency wa
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