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Economic Development of Central America Econ. 4200 - Spring 2004 – Dr. Taylor - page 27 / 153

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Conditions for Success:

(1) Maintain an exchange rate that helps make it profitable for domestic producers to sell their crops, manufactures, and services on world markets. The lower the exchange rates, the more desirable the nations products will be to foreigners.

- As exchange rate decreases => exports rise while imports fall => goal: to get nation to run a balance of payments surplus => give them foreign currency to service and reduce external debt.

(2) It may be necessary to subsidize some exports to induce manufacturers and farmers to invest in capacity for the export market (infant industry argument again).

(3) If governments want producers to turn towards world markets, they must reduce the relative attractiveness of production for the domestic markets => reduce high protective tariffs for favored industries, eliminate quotas on imports (hard to do).

(4) Often means primary-export-led growth or manufacturing goods with a low import content (drawbacks: vulnerability due to volatile price swings).

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