C/ VICTORIA BALFÉ 25 BURGOS
C) EN RELACIÓN CON LOS OBJETIVOS DEL EQUIPO DIRECTIVO:
Thus, economic theory seems to point to free trade as a superior policy to enhance welfare when there is: no market failures; or, even with knowledge externalities if this knowledge spillovers across borders. On the other hand, the theoretical literature basically points to the existence of market failures (unemployment, externalities etc) as the situations where some protection against imports could be welfare-enhancing.
However, structures of protection that undermine the overall scale and competitiveness of other sectors can be counterproductive. Thus, it is not only a matter of identifying and assessing the existence of externalities and other market failures, but also of how to proper design an eventual structure of protection, if this is indeed needed. As market failures are the norm in the real world, the question is how to design the structure of protection to reduce distortions, minimize government failures, and promote, instead of damage, overall competitiveness.
2.3 The evolution of trade theories and industrial policies
As stated by Krugman et al (2014), the trade literature still reckons that international borders and distance have important effects on trade patterns and production location.
The most important difference between what is accepted now and what was the mainstream in the international trade literature before the 1980s is that now internal economies of scale complement the relative comparative advantages37 as
37 The relative comparative advantage Ricardian model is based on the relative productivity of labour: a country would specialize and then export the goods in where it has relatively more labour productivity on it. On the other hand, the Hecksher-Ohlin model predicts a country would specialize and export the good that uses more intensively the resource or the production factor that is abundant in that country, given the available technologies (combinations of labour and capital).
54 explanations for international trade38. Arguably, scale would better explain interindustry trade between developed countries, each one specialized in a variety of the good, while relative comparative advantages would still be the predominant explanation for trade with developing nations. However, as industrialization is not confined to developed countries anymore, especially in some industries that have strong economies of scale, the literature seems to be treating both explanations – scale and comparative advantages – as potentially reinforcing each other.
It is important to note that an industry can be capital-intensive at the same time it uses low-skilled labour, and that higher labour productivity can allow a workforce that is more expensive to still be more competitive in producing labour-intensive goods. Thus, potential multiple interactions regarding factor productivity can be in place to determine the relative comparative advantage of a country in a specific industry (Krugman et al, 2014 and Feenstra, 2015).
The comparative advantage explanations for trade assume constant returns to scale.
The assumption of externalities (external economies of scale) was a next step, still assuming perfect competition. As we noted earlier in this chapter, the idea of external economies of scale can be traced back to Marshall, who argued that firms clustering around a geographical area would be more efficient than isolated ones because they would benefit from more availability of specialized suppliers, more availability of labour, and from knowledge spillovers among the firms in the cluster39. Although the intention to promote clusters and external economies of scale can be used as a reason for trade protection40, it would also be possible to argue that trade liberalization allows more access to specialised suppliers in the form of imported inputs, as discussed in the previous section. Labour pooling would be indeed more likely in case of clusters, given the fact labour is usually less mobile. Finally, technology spillovers could be higher in either structure, depending on the assumption if technology spillover across
38 Only after assuming imperfect competition did the trade models formally incorporate internal economies of scale, following the seminal monopolistic competition modelling of Dixit and Stiglitz (1977).
39 A combination of initial comparative advantages and historical “by chance” events could have led to “first mover advantages” and then the consolidation of external economies of scale in that location.
40 Free trade and concentration in worldwide single locations would be more efficient from the world point of view, but if the positive externalities do not perfectly transpose international borders, individual countries could have incentives to promote location within its own borders.
55 borders or are geographically concentrated41. Either way, since the understanding of the potentialities of externalities, industrial and trade policies focus on how to promote sectors with more potential external economies of scale.
Structuralist or evolutionist views emphasize the need to defy comparative advantages in order to promote development, and the underlying coordination role of governments.
This view traditionally advocates for import-substitution policies and different types of the infant-industry framework. The objective of such policies is to create new dynamic comparative advantages, in sectors that could generate more technological spillovers and hence productivity gains to the economy, or to generate backward and forward linkages through the economy (Chang, 2009; Lin, 2009; Robinson, 2009; Rodrik, 2008; Warwik, 2013; Schapiro, 2013; and Astorga, Cimoli and Porcile, 2014). In other words, positive externalities.
The main criticism of the sectoral/structuralist approach is that the choice of targeted sectors is often based on weak economic considerations, subject to rent seeking behaviour, and lacks clear and enforceable conditionalities. A corollary of this would be that losing sectors would lobby harder and thus keep a status quo that is no longer efficient for the economy (Warwick, 2013; Baldwin and Robert-Nicoud, 2007). This view explains the condemnation of industrial policies from the 70’s until the 90’s, when the government failures were more highlighted and thus industrial policies in general were not recommended
The evolutionary economics focus less on productive linkages and more on technological spillovers than the structuralists, but both share a view that government support is needed to create comparative advantages in sectors with more potential to generate growth. However, as trade is a potential source of technology, the evolutionary view tends to be less prone to protection against foreign competition than the structuralists. According to Salazar-Xirinachs,Nübler,and Kozul-Wright (2014), evolutionary economics emphasizes the need for supporting institutions that enable
41 The literature lists various ways for firms to acquire technologies: in-house R&D; state-led R&D; adoption of technologies embebbed in imported goods and machinery; copy of a competitor`s technology; and learning-by-doing externalities are among the most cited. However, a crucial aspect in the technology upgrading is absorptive capacity - a function of the education level of the workforce and the conducive business environment and institutional conditions.
56 firms to learn, in sectors where the learning process could generate positive spillovers and then allowing the economy to acquire comparative advantages in upgraded sectors (Reinert, 2009; Cimoli, Dosi and Stiglitz, 2009a; Greenwald and Stiglitz (2013).
Chang (2013), for example, argue that better capabilities and better learning dynamics can explain the success of Japan and South Korea in their process of industrial upgrading and development.
On the other hand, the neoclassical approach defends that a country should specialize in sectors where it has comparative advantages, not defying it. The basic assumption is that markets are efficient in channelling resources to its more productive ends, and, thus, any industrial policy should be done only in the presence of market failures, and after a careful examination of the potential government failures.
More recently there has been a convergence between these apparently antagonist visions. This hybrid framework combines features of neoclassical economics and structuralism, having Justin Yifu Lin, Joseph Stiglitz and Dani Rodrik, among other economists, among its main proponents (Salazar-Xirinachs,Nübler,and Kozul-Wright, 2014b). As an example of this type of hybrid models, there is Lin and Treichel (2014), who suggests a cost-benefit analysis to evaluate if it is worthwhile to try to defy existing comparative advantages. Their main point is that some sectors present growth potentials that can justify the risk of state intervention. This renewed approach keeps the belief that market failures can deter the technological transfer required to upgrade the economic structure and thus relying solely on existing comparative advantages would be pointless. On the other hand, they recognize the risks and costs of departing too much from the existing comparative advantages, thus suggesting that governmental interventions should be somehow market friendly (Lo and Mei, 2014).
Part of the recently converging literature see market and government failures as equal problems, resulting in recommendations more concerning the design of such policies and advocating an emphasis on innovation policies (Naude, 2010).
Summarizing the recommendations, Rodrik (2008) argues that to improve the quality of industrial policies it is necessary to have: (i) a better information flow between the private sector and the government; (ii) the imposition of conditionalities and a clear timeframe for benefits; and (iii) accountability. Other
57 authors suggest a closer look at competition, as the protection of old firms could prevent its replacement by new – and more productive – ones (Owen, 2012; Acemoglu et al, 2013).
ISI was advocated since mercantilist times and arguably adopted by virtually all industrialized countries, including the United States, in its industrialization process. In the 20th century it was widespread in the developing world (Salazar-Xirinachs, J., Nübler, I. and Kozul-Wright, R. (2014); Chang, Ha-Joon (2002)). Nonetheless, ISI lost appeal after the 80s, among other reasons, because it appears that more export-oriented strategies had more success. This helped to shift the mainstream view towards an agenda with more pro-trade policies, including the adjustment programs negotiated by international organizations such as the World Bank and the IMF. The example of South Korea, by instance, was taken by both sides of the debate as a proof of their validity: it would be viewed by some as an example of successful ISI strategy, conjugated with export targets; or an example of successful export-oriented approach, and a negation of the principles of ISI. A third view focus on the special characteristics of the south Korean economy, that would be not present in other developing countries, such as, for example, the availability of funds from the United States after the Korean war42.