Session 3

Industrialization & Globalization:

Key Drivers of Rapid Economic Growth

COMM173
Introduction to International Business
MODULE 1 – GLOBAL ECONOMIC ENVIRONMENT
Prof. Nailin Bu
 2

From the Classical Economics: The Law of Comparative Advantage

Labour hours needed to produce: The Law of Comparative
Country iPhone (1 pc) Banana (1 kg) Advantage dictates that:
Apple Kingdom 30 10
Banana Republic 100 20

Opportunity Costs of producing iPhone & bananas

Country iPhone (1 pc) Banana (1 kg)

Apple Kingdom kg of Bananas of an iPhone
Banana Republic kg of Bananas of an iPhone

Which country has an Absolute Advantage in growing bananas?



Which country has a Comparative Advantage in growing bananas?

In Search of the “Secrets Ingredients” of Growth in 3

Developing Countries

From the Classical Economics From the Structuralist Economics

The Law of Comparative Advantage The Dependency Theory
Prescription for the Developing Countries: Prescription for the Developing Countries:
From The Structuralist Economics: Dependency Theory 4

Dependency Theory implies that, in a global economy with

free trade, the developing countries would be perpetually
confined to the production and export of primary products
and be forever dependent on the industrialized world for
manufactured goods. As a result, the gap between the
developed and the developing countries would never
close.
This ignited the 2nd Wave of industrial revolution after
WWII among many developing countries across Latin
America, Asia and some parts of Africa.
An Argentine Economist
Many developing countries believed that the only way The Executive Director, the
UN Economic Commission for
industrialization could succeed in their countries was to Latin America and the Caribbean
use tariffs to protect the new industry. in the 50s.
 Industrialization Strategies:
5

Latin America vs. East Asia

Latin America & Most Other LDCs East Asia
(1950-1970s) (1950-Present)
 Import Substitution Industrialization (ISI)  Import Substitution Industrialization (ISI), but
transitioned quickly to Export-Led
Industrialization (ELI)

 ELI strategy aims to speed up the

 ISI strategy aims to speed up the industrialization process of a country by
industrialization process of a country by exporting goods for which the nation has a
replacing foreign imports of industrial comparative advantage.
products with domestic production.
 ELI strategy requires a country to
 ISI strategy requires a country to
o Keep its market open to foreign
o Impose high tariffs on imports to protect competition after a brief period during
domestic infant industries. which domestic infant industries are
 6

Outcomes of ISI - Latin America Macroeconomic Crises

Beginning in the early 1980s, many Latin American 1982
countries reached a point where their foreign debt
exceeded their earning power and they were not able to
repay it.

IMF has overseen 21 bailouts to Argentina.

“…. [IMF] fears Argentina almost as

much as Argentina fears it.”
-- The Economist, 2018
 Outcomes of ELI: Japan’s Post War Rise
7

& American’s Reactions in the 1980s

Poisonous Rhetoric in the USA
Speaker of the House Tip O'Neill said in Detroit:
“Fix the Japanese like they've never been fixed before."
Democratic congressman Jack Brooks opined:
The U.S. should have dropped four nuclear bombs on
Japan, not just two.

Punitive Actions by the USA

 6 Hitachi executives were arrested in an FBI sting
relating to IBM technology.
 Fujitsu (a Japanese computer firm was blocked from
acquiring Fairchild Semiconductor on national
security grounds
In Search of the “Secrets Ingredients” of Growth in 8

Developing Countries

From the Classical Economics From the Structuralist Economics

The Law of Comparative Advantage The Dependency Theory
Prescription for the Developing Countries: Prescription for the Developing Countries:

The New Structural Economics Perspective

Prescription for the Developing Countries:

The Road to ELI Success: The East Asia Experience
Necessary Conditions for ELI
Success
Cost Advantage
Capital
(for infrastructure & capital goods)
Expertise
(for production technology /
foreign market access)
9
The East Asian Path to
ELI Success
Began with labor-intensive
sectors
Mobilize domestic sources of
capital (e.g.: encourage household
savings)
Welcome foreign capital (i.e.:
joining the “flying geese formation”
 The “Flying Geese” Paradigm: The East Asian Experience 10

Started on the Path of ELI

Japan 1950s
NIEs (Singapore, HK, Taiwan & S Korea) 1960s
ASEAN-4 (Malaysia, Thailand, Indonesia & Philippines) 1970s
China 1980s
Vietnam 1990s

Two Key Elements of the Flying

Geese Paradigm
Export 1950s 1960s 1970s 1980s 1990s 2000s -
Products:  Over time, more advanced
Level of
Sophistication countries’ export gradually
move upward in level of
High Japan + NIEs
sophistication through learning
Medium-High Japan and innovation.
Japan + NIEs China + ASEAN 4
Medium Japan NIEs ASEAN-4 China + ASEAN-4
 Meanwhile, factories for less
Low-Medium Japan NIEs ASEAN-4 China
sophisticated Chinaproducts
export + Vietnam
Low Japan NIEs ASEAN-4 China are gradually relocated
Vietnam to less
Late comers
advanced countries.
STRUCTURAL TRANSFORMATION in Developing Countries
The “Secret Ingredients” 11

Transforming from an agrarian to an industrial & urban economy

 12

The Case of De-icing Salt for Winter Roads

The States of Maryland and Virginia import most of
their rock salt for winter roads from Chile even
though the US is the world’s largest producer of rock
salt. Why?
 13

The Jones Act (1929)

It imposes 4 requirements on vessels carrying goods between U.S. ports.
They must be:
 14

The Economic Impact of the “Jones Act”

In 2012, the cost of
shipping a 20-ft container
of goods from the US East
Coast to:
Has Jones Act Protected the Industries it Intends to Protect? 15

Shipping Industry
Has Jones Act Protected the Industries it Intends to Protect? 16

Shipbuilding Industry