There has been a lot of work on the relation between openness and economic growth, with results being ambiguous. A study done by Sachs and Warner (1995), using a sample of 135 countries, has shown that there is a positive correlation between openness and growth, e.g. that trade liberalisation fosters economic performance. The assumptions and country categorisations of this study have been criticised by Rodriguez and Rodrik (2000); they concluded that low tariff rates do not necessarily imply higher growth rates but that tariff protection exceeding a certain level stifles growth. Dollar and Kray (cited in Santos-Paulino and Thirlwall, 2004) compared different sets of countries with each other and found out that changes in growth rates are positively correlated with the share of trade and thus greater openness has accelerated economic growth. This essay compares the foreign trade policy of Mexico and Costa Rica. Even though both countries pursued the same policies, some differences can be found. Both implemented a strategy of import-substituting industrialisation until the serious crisis at the beginning of the 1980s, followed by a period of extensive trade liberalisation. This was due to pressure put on by the international institutions such as IMF or World Bank. While Mexico opened up its market, Costa Rica went further and lowered the import barriers. They put a strong emphasis on attracting foreign direct investment. With an average annual growth rate of 4.78 percent in Costa Rica and 4.43 percent in Mexico over the last four decades both countries achieved a strong economic growth exceeding the average of all other Latin American countries. However a positive interrelation between openness and growth could not be found in this study. This essay is structured in four main parts. Section II of this paper deals with the fundamental comparability of Mexico and Costa Rica. Section III portrays the foreign trade policies of both countries and illustrates the main similarities and differences. The development of growth is outlined in Section IV. Section V concludes the paper.
Table of Contents
I. INTRODUCTION
II. THE COMPARABILITY OF MEXICO AND COSTA RICA
III. ILLUSTRATION OF THE FOREIGN TRADE POLICIES IN MEXICO AND COSTA RICA
1. Mexico
1.1. The four decades of import-substituting industrialisation
1.2. The era of extensive trade liberalisation
1.3. NAFTA and the post-liberalisation era
2. Costa Rica
2.1. Implementation of a strategy of import-substitution
2.2. Import liberalisation and the export-led-growth strategy
2.3. Trade policy since the accession to GATT
3. Similarities and differences
IV. GROWTH
1. Mexico
2. Costa Rica
3. Comparison
V. CONCLUSION
Research Objectives and Themes
This paper aims to analyze and compare the foreign trade policies of Mexico and Costa Rica, specifically examining the transition from import-substituting industrialization to trade liberalization and the resulting impact on economic growth in both nations.
- Evolution of trade policies and state-led industrialization strategies.
- Impact of international institutional pressures (IMF, World Bank) on national policy reforms.
- Comparative analysis of economic openness versus GDP growth performance.
- Role of regional trade agreements and export promotion measures.
- The influence of external factors like global market crises and natural resource dependency.
Excerpt from the Book
1.1. The four decades of import-substituting industrialisation
The policy of import-substituting industrialisation was firstly applied by President Lázaro Cárdenas during his presidency 1934-1940 in order to obtain the loyalty of the business sector by providing state-supplied rents through import barriers and subsidies. Another motivation to reduce the dependency from foreign trade was the fear of economic dominance by the United States (Lusztig, 2004).
The aim of an ISI development strategy is to foster industrialisation by protecting domestic manufacturers through high import barriers which hamper or obviate the market access of foreign contractors. In this uncompetitive environment domestic manufacturers are able to survive even if they would not be able to do so in an open economy. Typical measures of an ISI policy are the levy of import tariffs and the quotation of imports in combination with subsidies for domestic producers (Yarbrough, Yarbrough, 2000). The implementation of an ISI development policy is very attractive for countries which are not industrialised to a large extent. For this reason all Latin American countries have applied this strategy which is rather successful in the short-term but implies severe limitations in the long run (Lusztig, 2004). One of the most important weaknesses is the problem that a once introduced ISI policy is not easily abolished without competition.
Summary of Chapters
I. INTRODUCTION: Outlines the scholarly debate on the correlation between trade openness and economic growth while introducing the comparative focus on Mexico and Costa Rica.
II. THE COMPARABILITY OF MEXICO AND COSTA RICA: Evaluates the shared historical and political contexts of both countries while highlighting significant structural differences in their domestic markets and resource endowments.
III. ILLUSTRATION OF THE FOREIGN TRADE POLICIES IN MEXICO AND COSTA RICA: Details the three-phase evolution of trade policy in both nations, spanning import-substitution, liberalisation, and contemporary integration strategies.
IV. GROWTH: Analyzes GDP performance in both countries, contrasting their specific economic trajectories and recovery paths after the crises of the early 1980s.
V. CONCLUSION: Synthesizes the findings, suggesting that while protectionist policies aided early industrialization, they were not sustainable in the long term and led to significant economic crises.
Keywords
Foreign Trade Policy, Economic Growth, Mexico, Costa Rica, Import-Substituting Industrialisation, ISI, Trade Liberalisation, GATT, NAFTA, Structural Adjustment Program, Export-led growth, Macroeconomic stabilisation, Latin America, Trade Barriers, Foreign Direct Investment.
Frequently Asked Questions
What is the core focus of this research?
The paper examines the relationship between foreign trade policy and economic growth by performing a comparative analysis of Mexico and Costa Rica across four decades.
What central themes are explored in the study?
Key themes include the shift from import-substitution strategies to liberalized trade, the influence of international financial institutions, and the role of trade openness in shaping GDP growth.
What is the main objective of this academic work?
The primary goal is to determine if trade liberalization and the reduction of import barriers directly foster economic performance as effectively as traditional theories suggest, using Mexico and Costa Rica as case studies.
Which scientific methodology is employed?
The study utilizes a comparative historical analysis, examining policy phases and macroeconomic indicators such as GDP growth rates, trade balances, and inflation, supported by statistical data from the World Bank.
What is covered in the main body of the paper?
The main body details the historical phases of trade policy in both countries, assesses their comparability, and presents a quantitative and qualitative look at their respective economic growth trajectories.
Which keywords best describe this research?
Essential keywords include Foreign Trade Policy, Import-Substituting Industrialisation, Trade Liberalisation, NAFTA, GATT, and Economic Growth.
Why did Mexico and Costa Rica decide to move away from ISI policies?
Both countries faced severe crises in the early 1980s characterized by unsustainable trade deficits, high external debt, and the inefficiency of protected domestic industries, necessitating intervention from international institutions.
How does the author characterize the impact of NAFTA on Mexico?
The author views NAFTA as a significant milestone that institutionalized trade reforms, helped stabilize the economy following the 1994 peso crisis, and promoted deeper integration into the global economy.
- Quote paper
- Fabian Barthel (Author), 2005, Foreign Trade Policy and Growth: A Comparison of Mexico and Costa Rica, Munich, GRIN Verlag, https://www.grin.com/document/46533
