Chapter 6: Trade and Development I: Import Substitution Industrialization

Multiple Choice Questions

1.Trade and development policies in developing countries after WW I have been strongly shaped by political competition between a)export and import oriented agricultural interests. b)export and import oriented manufacturing interests. c)rural-based agriculture and urban-based manufacturing. d)former colonial and nationalist agriculture. e)former colonial agriculture and nationalist manufacturing.

Answer: c a)20% and 30% b) 25% and 35 % c) 33% and 50% d) 40% and 60 % e) 60% and 70%

2.With a few exceptions (particularly in Latin America), between of all economic activity in developing countries in 1960 was based in agriculture.

Answer: c Page

3.Agriculture in East Asia & the Pacific (as a percent of GDP) has a)increased from 2% in 1960 to 18% in 1995. b)increased from 8% in 1960 to 56% in 1995. c)decreased from 56% in 1980 to 17% in 1995. d)increased from 20% in 1980 to 66% in 1995. e)decreased from 46% in 1960 to 18% in 1995.

Answer: e Table -

4.In 1960 agriculture (as a percent of GDP) in advanced industrial economies was a)25%. b)20%. c)15%. d)10%. e)5%.

Answer: e

5.In Asia and in Africa, export-oriented agricultural interests dominated local politics through a)colonial structures. b)enclave structures c) conclave structures d)indigenous structures e)convex structures

Answer: a

6.According to structuralists in the post WWII era, markets in developing countries would not naturally reallocate sufficient resources from agriculture to manufacturing because a)they were still dominated by export-oriented agricultural interests. b)they were still dominated by export-oriented manufacturing interests in advanced industrial states. c)they were too poor because of having been prone to monoexportism. d)they were too inflexible. e)they did not have a coherent economic development strategy.

Answer: d

7.The problem of complementary demand means that in subsistence agricultural economy, trying to establish a manufacturing economy meant a)no manufacturing firm would be willing to invest unless a large number of manufacturing industries were started simultaneously. b)no manufacturing firm would be willing to invest unless it was given infant industry protection. c)no manufacturing firm would be willing to invest unless the government agreed to purchase a minimum amount of its product. d)no manufacturing firm would be willing to invest unless wages were increased enough in agriculture to allow farmers to buy their product. e)unless there was sufficient interdependencies among the manufacturing firms.

Answer: a

8.The structuralist critique of the market provided a compelling justification for state-led strategies of industrialization primarily because of a) the problem of the “big push”. b)start-up manufacturing coordination problems. c)the problem of pecuniary internal economies. d)the problem of complementary supply. e)threats of domestic violence by the urban unemployed.

Answer: b

9.According to the Singer-Prebisch theory developing countries trying to industrialize would find it much easier by participating in a GATT-based trade system a)because they would have better access to critical resources. b)because they would have better terms of trade. c)because they would have less access to critical resources. d)because they could take advantage of infant industry protections. e)because their consumers would have lower prices through comparative advantage benefits.

Answer: c

10. Improvement in a country’s terms of trade means that a)the price of its imports is rising relative to the price of its exports. b)the price of its exports is falling relative to the price of its imports. c)the price of its exports is rising relative to the costs of its exports. d)the price of its imports is rising relative to the costs of its imports. e)the price of its exports is rising relative to the price of its imports.

Answer: e

11.The Singer-Prebisch theory argues that developing countries’ terms of trade deteriorate steadily over time because of a)greater demand for primary commodities versus industrial goods. b)higher costs of primary commodities versus industrial goods. c)less demand for industrial goods versus primary commodities d)greater government protection for primary commodities versus industrial goods. e)less demand for primary commodities versus industrial goods.

Answer: e

12.The income elasticity of demand is the degree to which a)a change in demand alters the cost for a particular product. b)rising import prices relative to export prices yields deteriorating terms of trade. c)a change in income alters the demand for a particular product. d)rising export prices relative to import prices yields deteriorating terms of trade. e)rising export prices relative to import prices yields improving terms of trade.

Answer: c

13.The claim that developing countries face a continuous decline in their terms of trade a)has been confirmed by most recent research according to Oatley. b)has been disputed by most recent research according to Oatley. c)was not really believed by governments in developing countries according to Oatley. d)cannot be tested because the hypothesis is too generalized according to Oatley. e)did not influence trade and development policies of developing countries according to Oatley.

Answer: b

14.Confidence that the state could achieve what markets would not was based in part on evidence of the dramatic industrialization achieved by a)China between 1980 and 2000. b)Soviet Union between 1950 and 1970. c)Soviet Union between 1930 and 1950. d)Germany between 1920 and 1940. e)United States between 1930 and 1950.

Answer: c

15.Import substitution industrialization (ISI) was based on the strategy of a)substituting previously imported simple consumer goods with newly domestically produced ones. b)substituting previously exported simple consumer goods with newly domestically produced ones. c)substituting previously imported advanced consumer goods with newly domestically produced simple ones. d)substituting previously exported advanced consumer goods with newly domestically produced advanced agricultural ones. e)substituting previously imported agricultural goods with newly domestically produced manufacturing ones.

Answer: a

16.Export substitution strategy is one a)in which manufactured goods industries developed in secondary ISI began to export rather than continue to produce for the domestic market. b)which was adopted by most governments outside of East Asia. c)in which manufactured goods industries developed in easy ISI began to export rather than continue to produce for the domestic market. d)in which manufactured goods industries developed in easy ISI began to be imported rather than exported for the international market. e)in which manufactured goods industries developed in easy ISI began to be imported rather than continue to produce for the domestic market.

Answer: c

17.In secondary ISI, emphasis shifts from a)the manufacture of simple consumer goods to consumer durable goods and intermediate inputs. b)the manufacture of consumer durable goods to intermediate exports. c)was adopted by most governments of East Asia. d)the manufacture of consumer durable goods and intermediate inputs to capital goods needed to produce simple consumer goods. e)the manufacture of simple consumer goods for exports and the import of cheaper consumer durable goods.

Answer: a

18.According to Oatley, the costs of ISI were borne by a)export-oriented commodities. b)agriculture. c)private owned producers. d)foreign manufacturing exporters. e)urban consumers

Answer: b

19.Backward linkages arise when a)the production of one good decreases demand in industries that supply components for that good. b)the production of one good increases the profits in industries that supply components for that good. c)the production of goods for export increases demand in industries that supply components for that good. d)the production of goods that were previously imported increases demand in consumers for that good. e)the production of one good increases demand in industries that supply components for that good.

Answer: e

20.To ensure that such foreign investments were not simple assembly operations the Brazilian government instituted local rules that required the foreign automakers operating in the country a)to purchase 90 percent of their parts from Brazilian firms. b)to purchase 80 percent of their parts from Brazilian firms. c)to purchase 70 percent of their parts from Brazilian firms. d)to purchase 60 percent of their parts from Brazilian firms. e)to purchase 50 percent of their parts from Brazilian firms.

Answer: c

21. United Nations Conference on Trade and Development (UNCTAD) was established in 1964 as a a) international institution dedicated to eliminating protectionism in developing countries in the world trade system. b) international institution dedicated to promoting protectionism in developing countries in the world trade system. c) international institution dedicated to promoting the interests of developing countries in the world trade system. d) international institution dedicated to replacing colonialism in the world trade system. e) international institution dedicated to promoting the interests of advanced industrial countries in the world trade system.

Answer: c

22. The Group of 77 was a trade alliance of developing country governments that a) tried to use GATT rather than UNCTAD to pursue international rules that would increase their share of the gains from trade. b) tried to use UNCTAD rather than GATT to pursue international rules that would increase their share of the gains from trade. c) pressured advanced industrial countries to decrease trade barriers to protect their commodity export interests from competition. d) pressured other developed countries to improve the terms of trade with each other. e) created a finance mechanism, funded largely by the advanced industrialized countries, to purchase their commodities when their prices reached above a ceiling.

Answer: b

23. The New International Economic Order (NIEO), according to Oatley, represented a new attempt by developing countries a) to gain acceptance of a set of radical demands to alter the operation of the international economy. b) which was largely successful because the establishment and maintenance of a cohesive coalition. c) which was largely unsuccessful in spite of OPEC governments’ willingness to use their oil power to reform the trade system for their greater benefit. d) which was largely successful because of debt assistance by the IMF and World Bank. e)which only disappeared from the international agenda when it was replaced in 2000 by the Millennium Development Goals.

Answer: a

24.According to Oatley, the failure of the NIEO has NOT been attributed to the fact that a)developing countries were unable to establish and maintain a cohesive coalition. b)advanced industrialized countries were able to divide the Group of 77 by offering limited concessions to a small number of governments in exchange for defection from the broader group. c)OPEC governments were not willing to use their oil power to help other developing countries. d)many developing countries were facing serious balance-of-payments problems. e)LDCs got greater control over multinational corporations operating in their countries

Answer: a

25. Members of the UN agreed in 2015 that for the next 15 years they would focus their development policies on Sustainable Development Goals (SDGs). The SDGs place greater emphasis a) on industrial development b) on attaching lesser importance to protection of human rights. c) on cutting the numbers living in poverty in half by 2040. d) on cutting the numbers living in poverty in half by 2050. e) on sustainable development

Answer: e

True-False Questions

1. Trade and development policies in developing countries after WW I have been strongly shaped by political competition between former colonial and nationalist agriculture.

Answer: False

2. According to structuralists in the post WWII era, markets in developing countries would not naturally reallocate sufficient resources from agriculture to manufacturing because they were still dominated by export-oriented agricultural interests.

Answer: False

3.The push toward decolonialization in Africa in the 1950s was led by a coalition of indigenous professionals who had acquired positions in the administration of colonial economic and political rule.

Answer: True

4.Most governments of developing countries after World War II believed that higher standards of living were not possible with most people living on subsistence agriculture.

Answer: True

5. The structuralists’ assertion that coordination problems would prevent investment in manufacturing was not a serious problem for governments intent on industrialization.

Answer: False

6. People employed in the agricultural sector, who consumed these manufactured goods, paid more for them than they would have in the absence of tariffs and quantitative restrictions.

Answer: True

7. Brazil’s ISI strategy helped transform the country’s economy in a short time.

Answer: True

8. Developing governments’ belief that industrialization would not occur in their countries if they participated in the GATT-based system played an important role in shaping their trade and development policies.

Answer: True

9.The GSP agreements agreed to by advanced industrial countries in the late 1960s were of limited importance because they used limited quotas of goods that could enter under preferential tariff rates.

Answer: True

10. Structuralism claimed that trade based on GATT rules would only make industrialization harder to achieve.

Answer: True

Essay/Discussion Questions

1. Explain how the collapse of agriculture during the Great Depression brought to power governments supported by import-competing interests.

2.Explain how landowner dominated politics prior to WW II differed considerably across regions in the developing world.

3.Explain how and why structuralism became the dominant theory of development economics.

4. Explain the coordination problems identified by structuralist theory and the suggested remedies for government intervention.

5.Explain the importance of terms of trade in Singer-Prebisch theory. Has research confirmed these hypotheses?

6.Explain the costs and benefits of secondary ISI. Illustrate your answer with examples from different countries.

7.Explain how and why governments transferred the costs of import substitution industrialization to agriculture in developing countries.

8.Discuss how trade relations between the advanced industrial countries and the developing world revolved around competing conceptions of international trade rules embodied in the GATT and UNCTAD systems.

9.Discuss the successes and failures of the NIEO reforms suggested by the Group of 77 in the 1970s.

10.Discuss the goals and problems of Sustainable Development Goals. Is it reasonable to think policies based on these plans will be supported by foreign aid offered by the international community? Why/why not?