A second development strategy is export oriented industrialization. This has been a common strategy.

A second development strategy is export oriented industrialization. This has been a common strategy.

A second development strategy is export oriented industrialization. This has been a common strategy in two of the newly industrialized countries (NICs) in Southeast Asia; Hong Kong and Singapore. These are countries that have few primary products. Production in these countries is strictly oriented to make the most of comparative advantages. An interventionist state is a common feature of export-oriented development. The state provides infrastructure, low levels of taxation and subsidies to industries. A subsidy is regarded as less harmful than a tariff since it is too expensive for the state to provide a subsidy over a long period of time, whereas tariffs are often easy to retain for many years. The NICs are often accused of keeping the exchange rates undervalued in order to create even better opportunities and profits for export industries. Exportoriented policies are encouraged by both the IMF and the World Bank. Such a policy is often a prerequisite for getting a loan.21 The consequences of the two strategies are mixed. Import substitution based on primary products often leads to a dead-end. Domestic markets tend to be to small to encourage industrial development and protected domestic industries often produce products that are not attractive on the world markets. In the 1960s and 1970s, many policy makers in Africa and Latin America promoted the idea of linking regional markets. This was seen as a way of bolstering the import substitution strategies that were failing at the national level. The economic literature more often promotes export oriented policies as the best way to promote development, not least because the results of import substitution are discouraging.22 Export oriented policies demands a nation-wide commitment to exploiting the comparative advantages of domestic industries and active state support in identifying these advantages. Asian countries have been the most successful export oriented developers. Brazil has tried the export approach without success probably because of its big domestic market. Production for this home market competes with the production for export. Two other elements that might explain Brazil’s lack of success are badly distributed profits and the relics of the old import substitution strategy. The attractiveness of domestic markets in Southeast Asia was small in the 1950s. Thus industry did not have the same incentive to produce for domestic consumers as did firms in big Latin American markets. Moreover, they lacked natural assets. Alternatives to export orientation were hard to find.23 Export orientation is not necessarily the best solution for other LDCs. It requires a disciplined work-force, management know-how, efficient public administration and perhaps a regime that can insulate itself from political pressure. Broad political support and patience is essential because countries may have to wait some time before realizing substantial success and increasing wealth.24 3.2.2 Customs Union Theory The other important part of the theoretical framework that created the foundation for regionalism in its early days was the Viners work on customs union theory. Viner discovered that customs unions and the liberalizing of intra-regional trade produce two important effects. First is the replacement of higher-cost domestic production by lower-cost imports from partner countries (trade creation), and the second is the replacement of lower-cost imports from third countries by higher-cost imports from partners (trade diversion). Viner saw trade creation as welfare increasing for the union and the whole world. If trade between partners increases without changing its trade with the rest of the world, then the world moves closer to free trade. Trade diversion, by contrast, is welfare reducing from the point of view of world trade. National protection is extended to the regional level which is a movement away from free trade. Those who claim that regionalism is a positive force associate it with trade creation while those who 21Blomqvist, 1992a, p.150 ff 22Blomqvist, 1992a, p.153 23Blomqvist, 1992a, p.153 f 24ibid, p.155 f ————— Theory ————— 12 think the opposite often relate it to trade diversion. Trade diversion and trade creation are the static effects of trade liberalization. The balance between trade creation and trade diversion determines whether economic integration is profitable or not. Modifications of Viner’s work, such as a distinction between production and consumption effects, shows that the static effects account for only a small part of the effects of economic integration.25 The issue of regionalism has become more complex and regional arrangements cannot be considered in isolation as Viner assumed they could. With blocs forming almost simultaneously throughout the world, the interaction effect as well as the strategic behavior of nations cannot be neglected. It is therefore more fruitful to study the dynamic effects of economic integration. These are the consequences of free trade agreements on economies of scale, efficiency and competition, intra-industry specialization, investment growth rates and political decisions. The theory of preconditions and barriers deals with these dynamic effects. 3.2.3 The Theory of Preconditions and Barriers There is an interesting parallel between the relationship between a supranational organization and a member country and the relationship between state and individual. The basic politicaleconomic reason for the existence of the supranational organization as well as for the state is that they produce goods that the member country or the individual cannot or does not want to produce itself. Goods for all members to enjoy are produced by the regional organization in areas because joint production is sometimes profitable for all: for example defense, research, education and physical infrastructure projects. The security incentive for integration will be discussed in 3.2.4. Joint production can produce large cost savings for individual countries compared with parallel production in protected domestic markets. The examples listed above are high-capital products, long-term projects and products with decreasing marginal costs. Products with these characteristics are often only available if supranational initiatives are undertaken.26 Unfortunately, the productivity of the organization tends to decrease as the bureaucracy of the organization grows. One reason for this is that those employed in the bureaucratic machinery have a career interest in seeing it grow.27 The distribution of the net profits and costs of cooperative ventures often gives rise to problems. For political reasons, it is difficult for the countries that are better off to make income transfers and compensations. The distribution of production costs, national interest and lack of incentives can lead countries to stay outside of agreements. The factor that determines a country’s position in favor of or against a regional commitment is how national welfare is affected. The welfare effects for the organization as a whole might be beneficial but that is not decisive for an individual country’s decision to join or not to.28 Related to this is the free rider problem, which is a common phenomenon in international organizations. The problem arises because there is no incentive for a member to pay for a good if the payment does not determine how much of the good the member is able to consume. Governments may highly value regional cooperation because of the benefits such as, e.g. increased foreign aid and enhanced security, and at the same time they may be unwilling to bear the costs of liberalizing their own markets. Still, it is often difficult to exclude the non-paying member from consuming the public good.29 The priorities of members of an organization do not necessarily coincide and this makes it difficult to agree upon the goals of the regional organization. The regional organization may seek to liberalize internal trade, promote collective bargaining with non-members and/or 25Blomqvist, 1992b, p.3 f and Langhammer & Hiemenz, 1990 p.5 26Langhammer & Hiemenz, 1990 p.7 f 27B
lomqvist, 1992d, p.547 28ibid, p.547 29ibid, p.547