HIST 151

Political Economy of Modern Asian Development

Game Theory example in the news
Week 7 Main Topic

Trade as a development Strategy

Major Development Strategies (post WWII until today)
(These are known as Industrial Policy or Industrial Strategy)
Import Substitution Industrialization (ISI) - is an economic theory adhered
which was used by developing countries to decrease their dependence on
developed countries. The theory does NOT utilize comparative advantage and has
not been popular with countries since the 1960s,1970s, and 80s. It was good in
the short term to produce jobs but inefficient in the long run.
Export Led Development (ELD) - is a strategy that seeks to find a niche in the
world economy for a certain type of export. Industries producing this export may
receive governmental subsidies and better access to the local markets. By
implementing this strategy, countries hope to gain enough hard currency to import
commodities manufactured more cheaply elsewhere.
Key Terms for the week
Balance of Trade - the difference in value between a country's imports and
exports. [ Formula: x-m = BoT ]
Balance of Payments (BoP) - is a statement of all transactions made between
entities in one country and the rest of the world over a defined period of time, such
as a quarter or a year. Source
Tariff - is a tax imposed by a government of a country or of a supranational union
on imports or exports of goods.
Quota - a government-imposed trade restriction that limits the number or
monetary value of goods that a country can import or export.
 Source

Check out this link for a great

summary of the topic.

Variables- B=BoP A=Growth Capacity C=Current Capacity
(i) yB=yA=yC: balance-of-payments equilibrium and full employment
(ii) yB=yA<yC: balance-of-payments equilibrium and growing unemployment
(iii)yB<yA=yC: increasing balance-of-payments deficit and full employment
(iv) yB<yA<yC: increasing balance-of-payments deficit and growing
unemployment
(v) yB>yA=yC: increasing balance-of-payments surplus and full employment
(vi) yB>yA<yC: increasing balance-of-payments surplus and growing
unemployment
When Free trade causes pain
Countries use protectionism for: anti-dumping, infant industries, sunset industries,
non-renewable resources, and strategic industries.
Trade Protectionism - is the deliberate attempt to limit imports or promote
exports by putting up barriers to trade.
Infant Industry - is a new industry in a country, which in its early stages
experiences relative difficulty or is absolutely incapable of competing with
established competitors abroad.
Dumping - is when goods are exported at a price less than their normal value,
generally meaning they are exported for less than they are sold in the domestic
market or third-country markets, or at less than production cost.
Case Study: Japan
The Ministry of International Trade and Industry (MITI) - was a ministry of the
Government of Japan from 1949 to 2001. The MITI was one of the most powerful
government agencies in Japan and, at the height of its influence, effectively ran
much of Japanese industrial policy, funding research and directing investment.

This model was used in South Korea and now Malaysia has a MITI pursuing ELD.
Gravity Model of Trade (1954)

F = trade flows

D = distance

M = size of the economy or GDP (can be written as Y)

G = constant

(This determines the cost of trade)

Costs of trade
These are the 6 biggest contributors to the cost of trading. Trading costs are often
2x higher in developing countries when compared to developed countries.
Transportation
Policy
Language
Currency
Information Costs
Security
Free Trade Agreements
A free trade agreement (FTA) or treaty is an agreement according to international
law to form reduce trade protectionism. There are two types of trade agreements -
bilateral and multilateral.

Bilateral trade agreements occur when two countries agree to loosen trade
restrictions between the two of them, generally to expand business opportunities.

Multilateral trade agreements are agreements among three or more countries,

and are the more difficult to negotiate and agree.
Findings from the readings (Baier, 2001)
Breakout Group
Identify the following:

1) Does your country use protectionist policies? If so, what are they and why do
they use them?
2) Is the BoP and BoT growing in your country?
3) What are potential areas of gain for exports?
4) Identify 3 potential trading partners keeping in mind the gravity theory and
what goods you are already export/import. Fill in the form (Be sure you are on
the right tab for your class)
Noodle Bowl Effect
Bhagwati (1995) explained how multiple FTAs in Asia are overlapping.

This causes concerns for

- Smaller economies lack leverage

- Rules of Origin (RoO) complexities
- MFN clause loophole
- High admin costs hurt smaller firms
- Negative list approach only
Noodle Bowl Effect (II)
Post-WWII Asia supported the multilateral GATT/WTO model for trade
liberalization

In 2000, there were only 3 FTAs - including the ASEAN FTA (AFTA)

In 2009, 37 FTAs were active and 72 more were being negotiated

By 2012, 70+ FTAs were active in Asia and more are being negotiated.