You have recently been appointed Special Economic Advisor to the government of XColonia, a small developing country in sub-Saharan Africa with an annual per-capita GDP of about $1000. XColonia has a large agricultural sector mostly consisting of small, family farms and a few large plantations. The distribution of land is very unequal. The country has a small manufacturing sector consisting of a large number of small firms with simple technology and a few big modern firms. For the past 10 years, XColonia has pursued an easy ISI policy, focusing on the development of consumer goods industry. Currently, XColonia's primary exports are coffee and cotton textiles, accounting for over 80% of its export revenue. XColonia's major imports are oil, pharmaceutical drugs, proprietary technology and heavy machinery.
1. XColonia has finished a round of easy ISI and has begun manufacturing its own consumer goods like clothing, shoes, cosmetics, toiletries etc. The Industry Minister is arguing that it is time to switch to difficult ISI to start reducing imports of heavy machinery. You instead want to argue for easy export substitution. How would you argue that your strategy is better than hers?
2. The Labor minister of XColonia also disapproves of the difficult ISI policies being pushed by the Industry Minister on the grounds that capital intensive industry will not be able to take advantage of XColonia's unlimited supplies of labor. Explain what the Labor Minister means by this term. Using the Lewis-Ranis-Fei model show how the industrial sector could face a horizontal labor supply curve as long as there is disguised unemployment in the agricultural sector.
3. As the Special Economic Advisor, you are also pushing for radical land reforms. Your argument is that if a country has experienced a successful land reform program, it is easier for that country to implement export substitution policies. Elaborate on this argument using the contrasting examples of East Asia and Latin America (discussed by Kay).
4. Europea, an advanced industrial country that also produces coffee for export, dumps huge amounts of subsidized coffee on the world market. Simultaneously, though un-relatedly, the international association of oil manufacturers hikes the price of oil on the world market. Explain the likely impact on XColonia's balance of payments accounts? How can XColonia cope with this situation if it has a fixed exchange rate regime? If instead it had a floating exchange rate regime how could the crisis resolve itself?
5. Recently XColonia joined the WTO and there is now pressure to undertake trade liberalization by reducing tariffs on imported manufactured goods that were put in place soon after independence to protect XColonia's infant industries. The Trade Minister is a strong proponent of reducing these tariffs and has already briefed the President of XColonia that since all major developed countries like the UK, USA, Germany etc. became industrialized following free trade policies we should do the same. How would you counter this argument?