Strategy: structuralism, dependency and the East Asian experience

Structuralism. Raúl Prebisch, working for the United Nations Economic Commission for Latin America, and Hans Singer argued in 1950 that developing countries that export primary products and import manufactures face a falling relative price for what they sell. Productivity gains in manufactures go to workers and firms in the rich countries as higher wages and profits, while productivity gains in primary products go to buyers as lower prices. The world is divided into a centre and a periphery, and trade as it stands keeps the periphery behind. The remedy was to industrialise, with state support (the full discussion of the thesis and the terms of trade is in the trade module).

Dependency theory went further. Andre Gunder Frank (1966) argued that underdevelopment is not an original condition that development will cure, but a product of the same history of trade and investment that developed the centre: the “development of underdevelopment”. Arghiri Emmanuel (Unequal Exchange) said that trade between countries with different wages involves an unequal exchange of labour, because wages differ more than productivity. Fernando Henrique Cardoso and Enzo Faletto (Dependency and Development in Latin America) took a more historical view in which some dependent countries still grow, though on terms set by outside interests. The exam match (UGC NET 2023): unequal exchange, Emmanuel; the development of underdevelopment, Frank; backward and forward linkages, Hirschman; backwash effect, Myrdal.

Import substitution industrialisation (ISI) put the structuralist argument into practice. A country starts by importing consumer goods and then makes them at home, behind tariffs and quotas, import licensing and an overvalued exchange rate that makes imported machinery cheap for favoured industries. It spread through Latin America from the 1930s and 1940s and, in India, from the early 1950s, with the Second Five-Year Plan’s emphasis on heavy industry. The case for it is the infant-industry argument: protect new industries until they can compete.

The costs were found in studies of the 1970s. Little, Scitovsky and Scott (1970) compared the trade regimes of several developing countries and found that high and uneven protection led to inefficient industries and a bias against exporting. Bhagwati and Srinivasan (1975) studied India’s regime of licences and controls. Anne Krueger (1974) added the political economy: licences create rents, and people spend resources competing for them, so the cost of protection includes the waste of rent-seeking.

Protection can be larger than it looks. The effective rate of protection (Corden, 1966) is the percentage increase in value added made possible by the whole tariff structure. If the tariff on the final good is t, the tariff on inputs is t_i and inputs are a share a of the output’s value at world prices, then ERP = (t − a t_i)/(1 − a). With t = 30%, t_i = 10% and a = 0.5, ERP = (0.30 − 0.05)/0.5 = 50%: the headline rate of 30% understates the protection of the producer. Raising the tariff on inputs reduces the protection of the users of those inputs.

South Korea, Taiwan, Hong Kong and Singapore, and later Malaysia, Thailand and China, industrialised by exporting manufactures. Their governments gave exporters a competitive exchange rate and access to inputs at world prices, and set export targets, and in Korea and Taiwan they also used credit, tariffs on some sectors and other tools to steer investment. The distinction students need is that these economies did not rely on import substitution as their main strategy (GATE 2026, in the growth module’s lesson on practice).

The scholarly dispute is about the role of the state. Alice Amsden (1989) and Robert Wade (1990) argued that the state in Korea and Taiwan guided investment and disciplined firms, giving subsidies in return for performance, so that these were not free-market success stories. The World Bank’s The East Asian Miracle (1993) gave more credit to macroeconomic stability, investment in schooling and openness to exports, and treated selective intervention as having limited and uncertain value. Whether the miracle was accumulation or innovation is taken up in the growth module.

The panel shows two World Bank series for India, Korea, China, Brazil, Mexico and Indonesia. Exports as a share of GDP: Korea’s rose from 2.6% in 1960 to 11.3% in 1970 and 27.7% in 1980, then to 45.3% in 2010; India’s was 4.5% in 1960 and 6.1% in 1980 (Brazil’s 6.3% and 9.0%), and rose to 22.4% in 2010 after liberalisation. Manufactures as a share of merchandise exports: Korea’s went from 18.2% in 1962 to 76.5% in 1970 and 89.6% in 1980, while Brazil’s was 13.2% in 1970 and 37.2% in 1980. Try Mexico, whose exports and manufactures share jump after 1990. A rise in the export share is not proof that a strategy is right, since other things were happening, but the timing of Korea’s rise ahead of the others fits the account above.

By the 1980s the debt crisis and the poor record of many inward-looking economies had moved the argument. The World Bank made its first structural adjustment loan in 1980 (to Turkey), lending against policy reforms, and the IMF attached conditions to its loans. In 1989 John Williamson listed the policies he thought Washington institutions agreed that Latin America should adopt, and called it, in a paper published in 1990, the “Washington consensus”. His ten areas: fiscal discipline; reordering public expenditure priorities; tax reform; market-determined interest rates; a competitive exchange rate; trade liberalisation; openness to foreign direct investment; privatisation; deregulation; and secure property rights. The exam answer (UOH 2012): the policy based on it is liberalisation, not import substitution or welfare measures. UOH 2012 also asks what structural adjustment means: fiscal and money supply adjustment, exchange rate adjustment and the rationalisation of subsidies, all of them.

Criticism came from several directions. Joseph Stiglitz (1998) argued for a “post-Washington consensus” with broader goals than growth and more instruments than the market, including attention to institutions, competition and the role of the state. Dani Rodrik (2006) reviewed the record of the 1990s reforms and found that growth was disappointing where the standard package was applied, and that the successes, such as China and India, had not followed it closely: he called what had replaced it “Washington confusion”. His own lesson was that reforms must be tailored to the binding constraint in each country, the approach described in the growth module as growth diagnostics.

India’s shift. India’s economic reforms from 1991 included deregulation, fiscal consolidation and the reduction of subsidies, and removed quantitative restrictions on trade, which is why the odd one out in the exam question (JAM 2022) is the retention of quantitative restrictions. The reforms and plans themselves are part of the Indian economy pages.

Questions on strategy, dependency and the Washington Consensus. Questions on the Prebisch–Singer thesis are in the trade module, and those on the infant-industry argument and import substitution in the protection lesson.