Title: Cat for Lesson 13 - Developing Countries and Globalization
Course: 383-303-FD-55-01 • International Economics

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Question

Countries used import substitution as a development strategy. Explain what this strategy was and when it was popular.

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Feedback: Import substitution consists of promoting a country's production of goods that were previously imported. This new local production is offered at a very competitive price and competes favourably with imports. This strategy was popular in the 1950s and early 1960s, but thereafter it was highly criticized, particularly because local production was not efficient. The goods thus produced were often subsidized and protected by tariff barriers, so the producers did not always aim to be efficient.
Feedback: Import substitution consists of promoting a country's production of goods that were previously imported. This new local production is offered at a very competitive price and competes favourably with imports. This strategy was popular in the 1950s and early 1960s, but thereafter it was highly criticized, particularly because local production was not efficient. The goods thus produced were often subsidized and protected by tariff barriers, so the producers did not always aim to be efficient.

Question

What were the characteristics of development at the beginning of the third millennium?

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Feedback: The leadership exercised by major international institutions to settle development problems was called into question. In addition, the marked influence of institutions and policies on the results of development assistance was acknowledged, and the need for an effective legal and financial system was expressed. Moreover, a coherent social environment, including clearly established standards and non-governmental organizations (NGOs) on the ground, was considered to be an important factor.
Feedback: The leadership exercised by major international institutions to settle development problems was called into question. In addition, the marked influence of institutions and policies on the results of development assistance was acknowledged, and the need for an effective legal and financial system was expressed. Moreover, a coherent social environment, including clearly established standards and non-governmental organizations (NGOs) on the ground, was considered to be an important factor.

Question

Describe how developing countries' increased trade had an impact on these countries.

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Feedback: Between 1985 and 1997, developing countries increased their share in total trade from 23% to 30%. Moreover, this increase was not related to raw materials but to exports of manufactured goods. Today, they account for about 25% of world exports of manufactured goods compared with less than 7% in the early 1970s. This share in world trade is not adequate, however, because the developing countries account for five-sixths of the world's population. About a dozen developing countries play an active role in world trade (Argentina, Brazil, Mexico, China, Hong Kong, South Korea, Singapore, Taiwan, Thailand, Indonesia, etc.), but Africa remains far behind, with a contribution of only 2%. Are the anticipated effects positive? What is the impact of this contribution? The answer is not clear-cut. The experience of the dynamic economies of East Asia seems to support the idea that active participation in various trade channels of the world economy has many positive effects. However, developing countries that adopt a foreign trade liberalization policy do not necessarily benefit from this initiative. For example, if the labour market is not very efficient, opening local trade to foreign competition will eliminate jobs. In most cases, the country cannot help those who lose their jobs, and the level of unemployment or disparity is high. Also, this liberalization can lead to the overexploitation of natural resources or cheap labour, often women and children.
Feedback: Between 1985 and 1997, developing countries increased their share in total trade from 23% to 30%. Moreover, this increase was not related to raw materials but to exports of manufactured goods. Today, they account for about 25% of world exports of manufactured goods compared with less than 7% in the early 1970s. This share in world trade is not adequate, however, because the developing countries account for five-sixths of the world's population. About a dozen developing countries play an active role in world trade (Argentina, Brazil, Mexico, China, Hong Kong, South Korea, Singapore, Taiwan, Thailand, Indonesia, etc.), but Africa remains far behind, with a contribution of only 2%. Are the anticipated effects positive? What is the impact of this contribution? The answer is not clear-cut. The experience of the dynamic economies of East Asia seems to support the idea that active participation in various trade channels of the world economy has many positive effects. However, developing countries that adopt a foreign trade liberalization policy do not necessarily benefit from this initiative. For example, if the labour market is not very efficient, opening local trade to foreign competition will eliminate jobs. In most cases, the country cannot help those who lose their jobs, and the level of unemployment or disparity is high. Also, this liberalization can lead to the overexploitation of natural resources or cheap labour, often women and children.

Question

Describe how the developing countries' involvement in increased capital movements had an impact on these countries.

Entrez votre réponse ci-dessous.
Feedback: There was a significant increase in capital movement to developing countries, from under US$35 billion in 1980 to $60 billion in 1990 and to nearly $200 billion in 1996. Private capital flow is clearly much greater now than official flow. Foreign direct investment had particularly high growth rates: in 1997, developing countries received nearly 37% of the world flow of foreign direct investment. Equity injections were unequally distributed: Africa's share in the total net capital flow continually decreased, from 27% in 1980 to 17% in 1990, to 8% in 1996. Certain countries, including newly industrialized countries, benefited, but the Asian crisis brought to light the risks of financial globalization. Thus, while capital inflow may be fast, the movement may also run in the opposite direction. The massive withdrawal of capital during the Asian crisis showed the potential negative impact that had previously been ignored. An increase in foreign direct investment in developing countries could allow access to new technology and greater knowledge, which would lead to greater production growth and wealth. But the positive impact is not guaranteed. Multinationals in industrialized countries are often reluctant to share their knowledge and tend to retain high-tech production within their own borders. Some people believe that developing countries depend on the goodwill of foreign leaders for their supplies and outlets and as such cannot achieve technological independence.
Feedback: There was a significant increase in capital movement to developing countries, from under US$35 billion in 1980 to $60 billion in 1990 and to nearly $200 billion in 1996. Private capital flow is clearly much greater now than official flow. Foreign direct investment had particularly high growth rates: in 1997, developing countries received nearly 37% of the world flow of foreign direct investment. Equity injections were unequally distributed: Africa's share in the total net capital flow continually decreased, from 27% in 1980 to 17% in 1990, to 8% in 1996. Certain countries, including newly industrialized countries, benefited, but the Asian crisis brought to light the risks of financial globalization. Thus, while capital inflow may be fast, the movement may also run in the opposite direction. The massive withdrawal of capital during the Asian crisis showed the potential negative impact that had previously been ignored. An increase in foreign direct investment in developing countries could allow access to new technology and greater knowledge, which would lead to greater production growth and wealth. But the positive impact is not guaranteed. Multinationals in industrialized countries are often reluctant to share their knowledge and tend to retain high-tech production within their own borders. Some people believe that developing countries depend on the goodwill of foreign leaders for their supplies and outlets and as such cannot achieve technological independence.

Question

How can developing countries benefit from the globalization movement specifically with regards to trade and capital movement?

Entrez votre réponse ci-dessous.
Feedback: The answer lies in the points put forward by the advocates and opponents of globalization. Those who are in favour of globalization claim that it opens new horizons through expanded trade, technology transfer, dissemination of know-how and access to new sources of financing. These factors bode well for an increase in productivity and standard of living. On the other hand, those who oppose the integration of developing countries into globalization fear and condemn it because they regard it as a source of instability and undesirable change. They also claim that developing countries' companies are subjected to a brutal shock from competition from industrialized countries' companies. Among other things, they cite the instability of financial flow, which can vary due to external factors, as well as the difficulty of adapting to modern techniques introduced by multinational firms. Developing countries need to be able to implement policies to mitigate the negative impact of globalization, such as: - Slow down capital movement and the instability of the financial markets by partially controlling capital movement. - Define standards and establish sectors open to foreign investments, focusing on sectors considered to be important for the developing country and not for the multinationals. - Outline a human resources and new technologies development plan by developing education in certain fields and acquiring knowledge of new technologies. It would be appropriate for these policies to be developed by the developing countries themselves.
Feedback: The answer lies in the points put forward by the advocates and opponents of globalization. Those who are in favour of globalization claim that it opens new horizons through expanded trade, technology transfer, dissemination of know-how and access to new sources of financing. These factors bode well for an increase in productivity and standard of living. On the other hand, those who oppose the integration of developing countries into globalization fear and condemn it because they regard it as a source of instability and undesirable change. They also claim that developing countries' companies are subjected to a brutal shock from competition from industrialized countries' companies. Among other things, they cite the instability of financial flow, which can vary due to external factors, as well as the difficulty of adapting to modern techniques introduced by multinational firms. Developing countries need to be able to implement policies to mitigate the negative impact of globalization, such as: - Slow down capital movement and the instability of the financial markets by partially controlling capital movement. - Define standards and establish sectors open to foreign investments, focusing on sectors considered to be important for the developing country and not for the multinationals. - Outline a human resources and new technologies development plan by developing education in certain fields and acquiring knowledge of new technologies. It would be appropriate for these policies to be developed by the developing countries themselves.