Growing, Mining, and Making Stuff: Primary Products and Industrialization

 

Primary Products Post-Independence

Why Did Countries opt for this?

•          Primary commodity trading meant staking well-being on interdependence instead of going alone

–       But being involved and trading meant being recognized and thought about

•          Even in 1960, remnants of colonial trade order remain

–       Most trade within first or second worlds

–       Third World almost exclusively with first

•          By 1992, Third World still mostly sold primary products to First World, but First World only imported 8.5% of its total imports in primary products from 3rd World

–       On the other hand from 68-88, 3rd world increased their spending on imports 12x, while non-fuel prices only increased .7x  (meaning same income, more spending)

–       This has changed post-1990, as geography of manufacturing shifted to middle/lower income countries

 

Primary Problems

•                    Engel’s Law – As people get wealthier, can only eat so much food, rest  of $ has to go to manufacturing and services

–                Thus food has relatively low elasticity of demand in that the demand stays more relatively constant regardless of price

•              So if price drops, people will not eat that much more

•                    Even though efficiency in manufacturing has improved greatly, most manufactured products have also become more complicated (thus expensive)

–                Harder to get big improvements in primary products, and if you do, it depresses prices

•                    Also, primary production levels are pretty static and take years to change – when demand is high, too few producers; when low, too many

–                Makes boom or bust

 

More Primary Problems

•                 Tend to specialize in primarily in three or less products

–             Also tend to send most to just a few customer countries (excepting SE, E Asia)

–             This means highly dependent on a few markets

•                 Primary Products also not as easy to make unique and add value

–             Because of strong competition in most commodities, if an individual producer raises prices a little, could drop their sales dramatically

–             Also, rich countries can build reserves to fight rising prices

–             Fair trade and organic are attempts to add value

•                 Primary production producers, b/c they depend on narrow types of trade, have relatively less power in trade negotiations

•                 Most also have labor surpluses, so wages don’t rise quickly

 

Trade & Tariffs

•          Types of Trade Agreements

–       Bilateral

•      Between countries

–       Regional

•      NAFTA, EU

–       Commodity

•      OPEC, Multi-Fiber Agreement

•          Tariffs

–       Ways to increase prices of goods/raise revenue

•      Exports rarely taxed – would make them less competitive

•          Non-Tariff Barriers

–       Quantitative: Import Quotas, Banning, States requiring domestic contractors

–       Regulatory: Import licensing, Limiting foreign % of domestic products, environmental, health & labor standards, subsidies to domestic producers

•      Regulatory NTB’s are especially hard to fight with limited resources; make it hard to increase share

 

South to South Trade

•          Only a major factor within the area of East/Southeast Asia

•          Problems:

–       Many Third World countries also have high tariffs

–       Neighbors usually dependent on similar, primary exports

•      Thus South South trade blocks don’t often add much

–     ASEAN now has relatively richer, and relatively poorer countries

 

 

Industrialization

•          Despite trade theories, 3rd world states and elites have always looked to industrialization

–       More specifically, manufacturing (making stuff)

–       So far, only a few NIC’s (Newly Industrialized Countries) went from poor, agriculture, to industrially quasi-wealthy

•      Malaysia, Thailand, Indonesia are current contenders

–     Taiwan, South Korea, Singapore, Hong Kong older NIC’s, more evenly distributed incomes
–     Vietnam, Philippines on some lists
–     Brazil, Mexico, Argentina, also manufacture

•      China (lesser extent India) is of course also rapidly industrializing, so large effects take longer to go through population

•          Ignores the small scale “local shop” (clothes, shoes, furniture, repair) manufacturing that goes on in most countries, that is part of “informal sector”

 

How did industrialization happen in West/Japan?

•          Japan, Germany, United States, the 20th century industrial powers, did it through tariffs to protect local industry until it is strong enough to trade freely

–       Japan still does, gets criticized

–       South Korea, Taiwan also adopted these policies

•          Post WWII, U.S. economy was “Fordist” mass production + high wages for workers to buy the mass produced goods

–       Government also subsidized creation of suburbs by building highways – this led to demand for construction, housing, furniture, appliances, etc.

–       Military spending also a huge

–       Sustainable as long as increasing efficiency made up for higher wages (afterwards debt is needed)

•          Europe used welfare states to insure a minimum level of consumption

 

Post-Fordism

•          Post-1973 Western Europe and U.S. saw decline of Fordist production

–        Oil shocks transferred a lot of wealth to oil producers

–       Japan, other producers increasingly more efficient at manufacturing

•      Also more cheap manufacturing overseas

•          Loss of industrial jobs, economic slowdown

–       Cost of oil, economic slowdown in West caused commodity profits to drop for primary product producers

•      Took out loans to make up for shortfall; projects never produced enough income to pay back loans

–     This is the debt crisis

–       Now a bifurcated service sector dominates economy (with two groups: well-paying with high skill; low paying with low skill)