Economic relationships with other countries by jijHMKV

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									    Rationales for Governmental Intervention


 Economic Rationales             Noneconomic Rationales

- Prevent unemployment
- Protect infant industries             - Maintain essential industries
- Promote industrialization             - Deal with unfriendly countries
- Improve position compared to          - Maintain spheres of influence
  other countries                       - Preserve national identity
      INFANT- INDUSTRY ARGUMENT

Government supports emerging (infant) industries:


 When there is a potential comparative advantage
  that cannot be realized in the short run due to
  foreign competition.
       INFANT- INDUSTRY ARGUMENT

In 1792, Alexander Hamilton presented first.
From World War II until the 1970s many developing countries attempted to
accelerate their development by limiting imports of manufactured goods to
foster a manufacturing sector serving the domestic market.
         INFANT- INDUSTRY ARGUMENT

                           Objective

Objective is to become more competitive over time with reduction in unit
cost by realizing:

- The economies of scale
- Learning by doing ( Greater worker efficiency )
         INFANT- INDUSTRY ARGUMENT
    How does government support emerging industries :

  First Option
   Using tariffs, import quotas to foreign companies
   Briefly, making entry barriers high.



Results
 Disincentive for managers to adopt innovation
 Consumers pay high prices

Examples
 The U.S. and Germany had high tariff rates on manufacturing
  in the 19th century,
 Japan had extensive import controls until the 1970s.
          INFANT- INDUSTRY ARGUMENT
   How does government support emerging industries :

 Second Option
  Subsidizing the infant industry



Result
 Consumers prices are not increased, but taxpayers pay
  for the subsidy
         INFANT- INDUSTRY ARGUMENT

                              Analysis

Problem with identifying right industries:
  Protecting manufacturing does no good unless the protection itself helps
  make industry competitive.



            Pakistan and India Examples

 Pakistan and India have protected
 their heavy manufacturing sectors
 for decades and have recently
 begun to develop significant exports of light
 manufactures like textiles.
          INFANT- INDUSTRY ARGUMENT

                               Analysis

Problem of Time Consistency:
When should the protection start and finish?




       South Korea Example:
In the 1980s South Korea became an exporter
of automobiles, whereas in the 1960s its capital
and skilled labor were still very scarce.
          INFANT- INDUSTRY ARGUMENT

Market Failure Justifications for Infant Industry Protection

1. Imperfect Capital (Financial) Market
   If a developing country does not have a set of financial
   institutions that would allow savings from traditional sectors
   (such as agriculture) to be used to finance investment in new
   sectors (such as manufacturing), then growth of new industries
   will be restricted.

2. Appropriability Argument
  Firms in a new industry generate social benefits for
   which they are not compensated (e.g. start-up costs
   of adapting technology).
             INDUSTRIALIZATION ARGUMENT


                        Country                                        GDP ($) Per Capita

                     United States                                           42,000
Developed            United Kingdom                                          38,624
Economies
                     Germany                                                 33,854
                     Russia                                                    5,349
Emerging             Turkey                                                   5,062
Economies
                     Brazil                                                    4,320




 Source: International Monetary Fund, World Economic Outlook Database, September 2006
INDUSTRIALIZATION ARGUMENT


          Emerging economies use protection to
      increase their level of industrialization because
of industrial countries’ economic success and experience


         Brings faster growth than agriculture

              Brings in investment funds

               Diversifies the economy

 Brings more price increases than primary products do
   INDUSTRIALIZATION ARGUMENT
        Shifting from Agriculture to Industry



Use of Surplus Workers

 Demand of workers and social issues

 Agricultural sector may be overlooked

 Government must decide which industry to protect
  when subsidizing

 Self-sufficiency problem in terms of agricultural
  production
    INDUSTRIALIZATION ARGUMENT
         Shifting from Agriculture to Industry




Promoting Investment Inflows

 If a country seems as a very attractive, profitable
 market, import restrictions may even increase foreign
 direct investment and employment.
    INDUSTRIALIZATION ARGUMENT
         Shifting from Agriculture to Industry




Diversification

 Shift the dependence from a few agricultural products
  to a few industrial products
    INDUSTRIALIZATION ARGUMENT
         Shifting from Agriculture to Industry



Greater Growth for Manufactured Products

 Prices of raw material and agricultural commodities do
  not rise as fast as prices of finished goods

Terms of Trade
         INDUSTRIALIZATION ARGUMENT
             Shifting from Agriculture to Industry


                         Terms of Trade

Objective
increase the ratio Px/Pm ( = to make imports cheaper)

Restrictive trade policy can improve country’s terms-of trade and thus
increase its welfare if country is developed.

            Terms of trade for emerging economies may deteriorate because:
                - demand for primary products grows more slowly
                - cost savings passed on to consumers
Import Substitution vs Export Promotion
The strategy of encouraging domestic industry by limiting imports of
manufactured goods.
       Rapid economic growth by promoting export industries, an
• Many approach known as export-led development.strategy. Latin
       less-developed countries have pursued this
American countries in 1950s and 1960s
       “Gang of Four”
       countries Hong Kong, Singapore and Taiwan have achieved
• Many S. Korea, that have pursued import substitution have not shown
       remarkable success by promoting export industries for which
any signs of catching up with the developed countries. India betweenexport
       markets should logically exist.
1950s and 1970s.

• Import-substituting industrialization generated:
   - High rates of effective protection
   - Inefficient scale of production
   - Higher income inequality and unemployment
                              Export Promotion
                      “Gang of Four”
                      S. Korea, Hong Kong, Singapore and Taiwan have achieved
                      remarkable success by promoting export industries for which export
                      markets should logically exist.




                                  List of Countries by Export

           Rank                                Country              Exports (Million $)

           1                                   Germany                 1,016,000
           2                                    U.S.A.                   927,500
           3                                    China                    752,200

           9                                  Hong Kong                  286,300
           10                                 South Korea                277,600
           14                                  Singapore                 212,400
           16                                   Taiwan                   185,100
Source: The World Factbook accessed in February 2006.
       Balance of Payments
           Adjustments
   Ticaret hesapları ülkelerin Ödemeler
    Dengesi açısından oldukça önemli
    olduğundan, hükümetler serbest
    piyasalardaki ihracat ve ithalat
    hareketlerini kontrol edebilmek için
    birçok girişimde bulunurlar.
Comparable Access or “Fairness”

   Karşılaştırılabilir Erişim’in bakış açısından;
    yüksek üretimin maliyetleri büyük ölçüde
    düşürdüğü (economies of scale ya da
    learning effect) endüstrilerde, rakip
    pazarlara eşit erişim hakkına sahip olmayan
    üreticiler, maliyet rekabeti açısından bir
    dezavantajla karşı karşıyalar.
    Price – Control Objectives




İhracat Kısıtlamaları   İthalat Kısıtlamaları
İhracat Kısıtlamaları
 Dünya fiyatlarını yüksek tutabilir
 Kaçakçılığı önlemek için daha fazla
  kontrol gerekebilir
 Kısıtlanan malların yerini tutabilecek
  mallara yönelme olabilir
 Yerli mal arzını yükselterek bu malların
  fiyatlarını düşürebilir
İhracat Kısıtlamaları... (devam)
 Üreticileri, ürettikleri malları arttırmaları
  için daha az teşvik edebilir
 Yabancı firmaların üretimini ve satışını
  ülkeden kaçırabilir
İthalat Kısıtlamaları
 Yerli üreticiyi fiyat düşürme (dumping)
  yoluyla sektör dışına bırakmayı
  önleyebilir
 Diğer ülkelerin kısıtlamalarını kaldırmak
  için güçlü bir anlaşma yolu sağlayabilir
 Yabancı üreticileri fiyatlarını düşürmeye
  zorlayabilir
Dumping
 Firmalar bazen Dumping adı altında
  maliyetin veya kendi ülkelerinin
  fiyatlarının altında ihraç yaparlar.
 Dumping yapılmasının nedeni, diğer
  türlü yurtdışında bir pazar
  yaratamamasıdır.
Optimum – Tariff theory
 Bir yabancı üretici, mallarını alan (ithal
  eden) ülkenin koyduğu vergiler
  yüzünden fiyatlarını düşürebilir.
 Böyle bir durumda kazançlar üreticiden
  malları alan ülkeye kayar.
Non – Economic Rationales
 Temel endüstrilerin korunması
 Dost olmayan ülkelere kargo/nakliyelerin
  önlenmesi
 Etki çevrelerinin idare edilmesi
 Ulusal kimliğin bozulmasını önleyecek
  aktivitelerin desteklenmesi
Temel endüstrileri korumak

Essential – Industry argument

   Bir ülke barış zamanında yerli,
    varolması zorunlu, esas endüstrilerini
    korumalıdır ki savaş sırasında yabancı
    kaynaklara bağımlı olmasın.
Temel – Endüstri’leri korumak

 Hangilerinin temel, zorunlu endüstri
  olduğunu belirlenmeli
 Altenatifler ve maliyetler incelenmeli
 Politik sonuçları göz önüne alınmalı

								
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