Chapter 7: Trade and Development II: Economic Reform

Multiple Choice Questions

1.A current account deficit means that a)a country is exporting more than it is importing. b)a country is importing more than it is exporting. c)a country is unable to pay off its loans. d)a country is making less money on its exports than on its imports. e)a government is spending more than it is receiving in revenues.

Answer: b

2.Import substitution industrialization (ISI) gave rise to trade deficits primarily because a) it generated considerable exports but did not generate sufficient imports. b) export revenues were adversely affected by negative terms of trade. c) import revenues were adversely affected by negative terms of trade. d) governments were unable to continue to subsidize state owned enterprises. e) it generated a considerable demand for imports but did not generate sufficient exports.

Answer: e

3.According to Oatley, government should maintain an exchange rate that a)equalizes the prices of goods in the domestic and foreign markets. b)creates economies of scale but not economies of experience. c)is sufficient to satisfy domestic consumption. d)subsidizes the prices of goods in the domestic markets. a)allows foreign markets to overprice exports.

Answer: a

4.According to Oatley, policies that government used to promote industrialization weakened agriculture to such an extent that a)heavy tax burdens caused massive rural protests. b)farmers left the rural areas for urban areas in massive numbers in search of new jobs. c)the fall in payments received by government marketing boards caused severe budget deficits. d)farmers had to smuggle their goods to foreign countries to avoid taxes. e)falling prices gave farmers little incentive to increase agricultural production.

Answer: e

5. Microeconomic inefficiencies created by ISI policies were aggravated by the tendency of developing country governments to a) maintain undervalued exchange rates. b) maintain overvalued exchange rates. c) depreciate currency under fixed rates of exchange. d) depreciate currency under floating rates of exchange. e) inflate the value of foreign currencies.

Answer: b

6. ISI policies in the long run constrained the ability of governments to implement reforms because a) they created too many veto players to block change. b) they raised consumer expectations to unreasonable levels. c) they raised producer profit expectations to unreasonable levels. d) state owned enterprises became too corrupt to manage. e) government subsidies were too popular with urban elites.

Answer: a

7. Rent-seeking is the term used to describe a) efforts by public officials to use the political system to achieve a higher-thanmarket return on an economic activity. b) efforts by public officials to use the economic system to achieve a higherthan-market return on a political activity. c) efforts by private actors to use the political system to achieve a higher-thanmarket return on an economic activity. d) efforts by public officials to pressure producers to pay a higher-than-average taxes on an economic activity. e) any corrupt practices associated with government interference in the market.

Answer: c

8. According to Oatley, governments promoted ISI policies so that a) they could require all citizens who wanted to import something to get special permits. b) import permits would make goods more available to consumers who paid bribes. c) importers could obtain rent on the sale of import permits. d) government officials could obtain rent on the sale of import permits. e) a maximum number of public officials could obtain rent through political bribes.

Answer: d

9.According to Oatley, governments in developing countries were unwilling to scale back their industrialization strategies because a)it was unclear what model they should shift to because of the myth of adverse terms of trade. b)market-oriented development strategies would reduce corruption. c)they preferred to obtain higher rents by borrowing from foreigners. d)they were unwilling to fight against the GATT system. e)foreign lenders would eventually expose their corruption.

Answer: a -

10.The East Asian model was praised by those opposed to ISI trade strategies because a)ISI trade deficits were declining in Latin America and sub-Saharan Africa. b)per capita income grew almost three times faster than in Latin America. c)the power of commodity exporters was reduced. d)it reduced current account deficits caused by excessive imports. e)it eliminated tariffs and non-tariff barriers.

Answer: b

11.According to Oatley, most East Asian development scholars agree a)about the relative unimportance of the state in creating export-oriented industries. b)that the success of export-oriented strategies is a superior work ethic by Asians. c)export-oriented strategies produced superior results compared to ISI. d)stable macroeconomic environments can only be produced by neoliberal approaches to development. e)East Asian success is due primarily to state-led industrial policies.

Answer: c

12.East Asian governments were more successful in their development strategies than those in Latin America and Africa because a)they shifted to export-oriented substitution once they had exhausted the gains from easy ISI. b)they shifted to export-oriented substitution without resorting to easy ISI. c)they shifted to export-oriented substitution once they had exhausted the gains from commodity exports in agriculture. d)they shifted to secondary ISI once they had exhausted the gains from easy ISI. e) they were not interested in rent seeking trade strategies.

Answer: a

13.According to the World Bank and the IMF, East Asia experienced greater economic development compared to Latin America because a)states played a large role and markets played a small role in allocating resources. b)markets played a large role and states played a small role in allocating resources. c)of cheap labor and borrowing in international financial markets rather than domestic savings. d)high inflation promoted high savings rates and investment. e)governments intervened in exchange markets to enhance domestic exports.

Answer: b

14.In what has come to be called the East Asian model of development, economic development is conceptualized as a series of distinct stages. In the first stage, a)currency exchange policy promotes consumer imports. b)industrial policy promotes capital-intensive heavy industry. c)industrial policy promotes labor-intensive heavy industry. d)industrial policy promotes capital-intensive light industry. e)industrial policy promotes labor-intensive light industry.

Answer: e

15.In what has come to be called the East Asian model of development, economic development is conceptualized as a series of distinct stages. In the second stage, a)industrial policy promotes capital-intensive heavy industry. b)industrial policy promotes labor-intensive light industry. c)industrial policy promotes capital-intensive light industry. d)industrial policy promotes high tech consumer durables and industrial machinery. e)industrial policy promotes computers, robotics, and biotechnology.

Answer: a

16.In what has come to be called the East Asian model of development, economic development is conceptualized as a series of distinct stages. In the third stage, a)industrial policy promotes labor-intensive light industry. b)industrial policy promotes capital-intensive heavy industry. c)industrial policy promotes high tech consumer durables and industrial machinery. d)industrial policy promotes labor-intensive heavy industry. e)industrial policy acquires high technology imports and foreign capital.

Answer: c

17.By the mid-1980s, in Taiwan and South Korea, a)textiles were still their largest exports. b)steel and petrochemicals were their largest exports. c)steel and ship building were their largest exports. d)electronics and automobiles were their largest imports. e)electronics and automobiles were their largest exports.

Answer: e

18.East Asian governments used industrial policies to a)increase the cost of investment in targeted industries. b)create incentives to export. c)reduce protection on infant industries. d)promote the export of skilled labor. e) use credit to assist importers’ input suppliers.

Answer: b

19. As China’s market economy grew during the last 40 years, a) a market economy gradually has emerged in place of the previous statecentered economy. b) the state centered economy has maintained its dominance. c) a market economy has been dominated by multinational foreign corporations. d) a market economy quickly has replaced the previous state-centered economy. e) a market economy has been aided by technological assistance from Russia.

Answer: a; Chap 7: Page 12; Understanding

20.In the 1980’s, China

a) experienced substantial rural-to-urban migration of about 50 million people each year.

b)e nterprises were increasingly required to sell at state-set prices through state agencies.

c)g overnment-maintained production subsidies but required enterprises to turn to banks for working capital.

d)a ttracted foreign investment by creating Special Economic Zones that allowed more market-based activity than was permitted in the rest of the economy.

e)e xpanded the number of companies allowed to conduct foreign trade from 12 to more than 20,000.

Answer: d

21.1973 and 1982 developing countries were also harmed by three international shocks which included a)increase in oil prices, increase in commodity imports and higher interest rates on the foreign debt. b)increase in oil prices, reduction in their terms of trade and lower profits on simple ISI products. c)increase in oil prices, improvement in their terms of trade and higher interest rates on the foreign debt. d)increase in oil prices, reduction in their terms of trade and lower interest rates on the foreign debt. e)increase in oil prices, reduction in their terms of trade and higher interest rates on the foreign debt.

Answer: d

22.According to Oatley, the international institutions of the IMF and the World Bank linked financial assistance to economic reforms that a)reduced the ability of governments to spend on education and health care. b)increased the role of the market in the economy. c)drastically reduced the wages of domestic workers. d)dramatically increased political instability. e)increased the interest rates on foreign debt to discourage government spending.

Answer: b

23.World Bank structural adjustment loans were largely dependent on developing countries changing policies to a)avoid the strategies at the core of the East Asian development model. b)privatize state-owned enterprises. c)refinance foreign debt with higher interest rates. d)raise taxes to reduce budget deficits. e)reduce dependence on oil exports.

Answer: b

24.According to Oatley, the economic consequences of World Bank imposed structural adjustment policies that a)were not very hard to implement because markets adjustments are easy. b)lead to the overthrow of governments that opposed ISI strategies. c)lead to huge profits by buyers of state-owned enterprises. d)hurt producers in export-competing sectors. e)lead to large job losses because of privatization and civil-service reforms.

Answer: e

25.The difference between the “Washington Consensus” and the “Beijing Consensus” is that a)There is virtually no difference between the policies. b) The “Washington Consensus” espoused decentralized market fundamentalism while the “Beijing Consensus” advocates a return to a market-led development strategy. c) The “Washington Consensus” espoused centralized market fundamentalism while the “Beijing Consensus” advocates a return to a state-led development strategy. d) The “Washington Consensus” espoused decentralized market fundamentalism while the “Beijing Consensus” advocates a return to a stateled development strategy. e) The “Washington Consensus” state-led development strategy while the “Beijing Consensus” advocates a return to an industrial substitution policy strategy.

Answer: d

26.The adoption of neoliberal reforms in the developing world has a)not altered the dynamics of global economic exchange. b)resulted in the capital-intensive aspects of production now shifting to developing societies. c)resulted in the labor-intensive aspects of production being shifted to developing societies. d)brought substantially higher incomes to almost all groups. e)resulted in larger incomes redistributed among structuralist groups.

Answer: c

True-False Questions

1. Domestic politics in support of urban residents aggravated the budget deficits generated by ISI.

Answer: True

2. ISI also generated an important imbalance in persistent current-account deficits.

Answer: True

3.The decline in agricultural production caused by government promotion of industrialization was most severe in sub-Saharan Africa.

Answer: False

4.According to Oatley, one of the worst features of ISI was the opportunities it created for government corruption.

Answer: True

5.According to Oatley, the main reason that the East Asian model was so successful was that the Taiwanese and South Korean governments eliminated most import tariffs and non-tariff barriers.

Answer: False

6.According to the World Bank and the IMF, East Asia succeeded because markets played a large role, and states played a small role in allocating resources.

Answer: True

7. As China’s market economy grew, the relative importance of the planned economy shrank.

Answer: True

8.In South Korea, the government nationalized the banks in the early 1960s and in the ensuing years fully controlled investment capital.

Answer: True

9.Where colonial mortality rates were high, colonists were more likely to establish permanent settlements and thus were more likely to create inclusive institutions that promoted economic development.

Answer: False

10.Inclusive institutions have political and economic characteristics that encourage individual initiative and sustained economic growth.

Answer: True

Essay/Discussion Questions

1. Explain why most developing countries reversed 35 years of post WW II structuralist development policies to adopt neo-liberalism and export-oriented industrialization.

2.How did the search for urban political support in the wake of the failure of exportoriented agriculture during the inter-war period lead to budget crises under ISI development policies?

3.How did ISI inefficiencies reinforce the tendency of most governments to maintain overvalued exchange rates?

4.Why was the East Asian export-oriented strategy so successful for the countries that adopted it? What effect did it have on the decline of manufacturing labor in advanced industrial states?

5.Explain how the administration of ISI had created opportunities for rent seeking and other corrupt practices.

6.Compare and contrast the strengths and weaknesses of the two different explanations for East Asian success.

7.Explain the role of World Bank/IMF structural adjustment mandates on large job losses through privatization and cut backs in government spending.

8. What are the costs and benefits of the “Washington Consensus” model of development policy versus the “Beijing Consensus” model?

9. Explain the success of the three pillars of China’s economic reforms in spite of the inefficient state-owned sector that still employs tens of millions of people.

10.How have Brazil, India and China (BICs) changed the direction of the WTO and greater trade liberalization talks in recent years?