Trade Strategies and Development Fallacies
Whether countries pursue outward-looking trade strategies or seek domestic dominance over production and consumption, development works best when it’s not micromanaged by the government
When it comes to the world economy, outcomes rarely align with intentions, and policies often fall short of serving as a panacea for whatever it is that political officials think they can fix.
Yet these are lessons we need to learn time and time again. So, while a great deal of attention has rightly been paid to the Trump administration’s tariff tug-of-war, it is perhaps worth reviewing a bit of history related to policies that concern exports and imports directly, rather than just the taxes that can be applied to them.
Political officials have always had an interest in the manipulation of a country’s balance of trade, and interference ebbs and flows in relation to their specific aspirations and circumstances. For instance, during the 1970s, when the U.S. first began to run a trade deficit, the concept of trade-based growth garnered a stronghold in development studies. Around this time, concerns for the impoverished Third World were high, the impact of oil shocks was significant, and global economic integration was being positioned as a positive means for advancement.
At the same time, autarky—a self-imposed independence from the global economy—had proved problematic for parts of Latin America, and the advantages of export-led trade regimes seemed clear-cut for Asia. Accordingly, interest in outward-oriented development (OOD) policies gained traction, and efforts for increasing export initiatives supplanted preferences for strategies related to import-substitution industrialization (ISI). OOD emphasizes export opportunities as a means for growth, whereas ISI is oriented toward economic self-sufficiency within a country. Both approaches have pros and cons, and both tend to embolden governments to take the opportunity to establish top-down trade policies.
ISI Defined
Unlike OOD policies, which leverage a country’s areas of specialization to increase productive capacity for expanding exports to foreign markets, an ISI model aims for complete production and consumption within the domestic market. ISI has an inward-oriented focus, in which a government establishes protectionist measures (such as tariffs) and incentives for domestic-based transactions.
At its core, ISI aims to negate trade dependence for consumption needs or productive purposes, and while self-sufficiency might sound attractive, it is important to point out that an ISI model, for some countries, may be grossly inefficient. For one thing, ISI can result in the misallocation of resources, since domestic industries are beholden to government protection and assistance. Many companies within the country will devote time and money to competing for that government assistance rather than producing valuable goods and services.
Moreover, being devoid of global competition, some firms may lack incentives to improve or innovate over time. ISI can also prove problematic for countries that face steep operating costs; in these cases, it’s more costly to produce goods domestically than simply to import what is needed. This is particularly true for poorer countries, where it’s more difficult to establish large-scale manufacturing processes or create and diversify wholesaling and retailing sectors. Thus, under ISI, the reliance on external markets for sales or imports is replaced by a reliance on the state and whatever domestic firms can make.
OOD Applied
Around the 1930s, plans for ISI were being introduced throughout Latin America as a means to promote the region’s industrialization process. However, instead of prospering from ISI policies over the next several decades, Latin America experienced an economic downturn that ballooned into a debt crisis by the 1980s. Critics attributed the region’s dire situation to poor management of inward-oriented policies, which contrasted with the OOD strategies being employed throughout parts of Asia.
From the 1960s onward, Hong Kong, Singapore, South Korea and Taiwan, coined as the Four Asian Tigers, seemed to be flourishing after having leveraged exports as an “engine of growth.” Their impressive advancement gave empirical evidence for the efficacy of the OOD paradigm, and the International Monetary Fund and World Bank urged governments to implement an openness agenda to further development efforts.
The Washington Consensus, emphasizing trade liberalization, was being championed in the late 1980s and early ’90s, and American economist Anne Krueger’s work on trade relations and political economy effects further promoted OOD policies. In 1997 Krueger claimed, “It is now widely accepted that growth prospects for developing countries are greatly enhanced through an outer-oriented trade regime.”
Development Denied
As time went on, however, OOD policies began to lose their luster, and the 1980s were later labeled the “lost decade” because the growth strategies introduced at that time were fairly ineffective for the developing world. In fact, leaving out India and China, development was not as great as expected, and this realization challenged the efficacy of OOD trade policies. Particularly significant was that India and China, the two largest and fastest-growing economies in the region, were the least open regarding tariff levels and export-to-GDP ratios.
Upon greater scrutiny, however, it’s apparent that both East Asia’s rise and Latin America’s fall have been somewhat misconstrued. Many factors in addition to growth strategies affected these regions and their status levels. For example, in Latin America, ISI was just one part of the problem; in retrospect, inflation, financial fragility and rent-seeking all played a greater role in the region’s demise.
As for the Asian Tigers, state-led industrialization and technological advancements were contributing factors, but the greatest benefits were derived from the substantial investments made within the region by means of Japanese aid. Japan sought to strengthen trade relations throughout Asia to build up regional production and manufacturing capabilities that rivaled those of the West—and it succeeded at doing so.
Progress Can’t Be Standardized
The economic realities of the 1980s proved there was no one-size-fits-all development model, and critics of trade-based growth called attention to how the success of some countries seemed to rely too heavily on the success of others. Nevertheless, trade talks related to development efforts persisted, and in 2000 the Millennium Development Goals (MDGs), now known as the Sustainable Development Goals (SDGs), were established and signed by world leaders calling on capital markets to do their part.
Thomas Friedman’s assertion that “the world is flat” became a popular trope in the early aughts, and the effects of a globalized marketplace, along with the expansion of production networks, advanced the world economy in a variety of ways. Truly, trade plays a part in promoting prosperity, but its efficacy depends on whether it is being determined by those directly tied to the transaction or by political elites wishing to play the role of an economic puppet master. And, given these assertions, a slew of economist Thomas Sowell quotes come to mind, but two will suffice for driving the message home:
Those who cry out that the government should ‘do something’ never even ask for data on what has actually happened when the government did something, compared to what actually happened when the government did nothing.
It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.
Trade being used as a tool for growth is a tricky matter, and development can never be guaranteed. And while the Trump administration has yet to assert a direct interest in either ISI or OOD policies, the President’s interest in elements of both is apparent.
On the ISI side, Trump has been vocal about his desire for reshoring manufacturing and prioritizing U.S. sales only for American-based businesses. But on the OOD side, he also has made it known that he despises America’s trade deficit, which can only be remedied by increasing exports. Since ISI and OOD conflict with one another, and it is not clear what path Trump prefers, trade talks will continue to be a contentious matter.
There is one thing, though, that Trump clearly wants in relation to trade: control. And so, while there will always be risks and rewards when operating in the global marketplace, political interference will continue to be the biggest issue hampering the economic advancement of both producers and consumers.
Dr. Kimberlee Josephson is an associate professor of business at Lebanon Valley College, a research fellow with the Consumer Choice Center and part of the Heterodox Academy’s Speakers Bureau. Follow her on X @dr_josephson.
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