International Trade and Economic Development

Chapter 30 IB Economics

International barriers to development Over-specialisation If a country is dependent on a narrow range of exports

they face great vulnerability and uncertainty If a tropical country that is reliant on tourism revenues

will be limited if the global tourist trade is damaged as a result of a global slowdown in economic growth

Countries that were dependent on the export of a small range of low-skill manufactured goods such as textiles were damaged when China joined the WTO and increased their supply of textiles on world markets driving down prices

Price volatility of primary products Many developed countries focus on exporting primary

commodities which are price inelastic (D&S) Any change in supply or demand can lead to large price

fluctuations This will have a marked impact on the export revenues This makes it difficult for producers and governments

to plan ahead This means investment is less likely Less investment means less growth Less growth may mean less development

International barriers to development Inability to access international markets Protectionism by developed countries to developing

countries means that they cannot use their comparative advantage and export to developed countries

They will have limited ability to earn foreign exchange This is especially the case in primary product markets The US pays over $3 billion in subsidies to American cotton

farmers They produce more and push the world price down They export their surplus to developing countries who

don’t benefit from subsidies This damages the developing country’s producers The US does the same with maize, rice and dairy products The same happens in the EU with the CAP where they

overproduce and export sugar, cereals and dairy produce Small scale farmers in developing countries are effectively

deprived of the ability to earn a living Developed countries also use tariff escalation whereby

they put higher tariffs on finished goods so that developed countries become trapped as suppliers of raw materials

International barriers to development Inability to access international market

continued… A final factor that prevents countries from

accessing international markets is non convertible currency

Any currency that is used primarily for domestic transactions and is not openly traded on a forex market.

This usually is a result of government restrictions, which prevent it from being exchanged for foreign currencies

Most operate a fixed exchange rate where the domestic currency is pegged to the US Dollar

Long term changes in the terms of trade Changes in the relative prices of exports and

imports have a marked effect upon the ability of developing countries to trade internationally

If commodity prices fall over time the revenues fall and so does their ability to buy imports

Trade Strategies for economic growth and development Import substitution Remember that growth is not development but

if it can generate income it may lead to development

Import substitution is a strategy to produce as many products domestically rather than import

This means less leakages from the economy To do this the government will need to

Decide what to produce domestically – probably labour intensive, low skill manufactured goods such as clothes and shoes

Subsidise domestic industries Implement a protectionist system with high

import tariffs This will protect jobs in the domestic industries,

protect the local culture and protect the economy from the power of multinational corporations.

Trade Strategies for economic growth and development Import substitution The disadvantages of import substitution are

It may only protect jobs in the short run; if there is little growth there will not be much job creation

The country does not enjoy the advantages of comparative advantage and specialisation and will produce inefficiently

The lack of competition may drive domestic industries to be inefficient and not invest in R&D

Domestic supply constraints may lead to inflation Other countries may take retaliatory protectionist

measures The main countries to adopt this strategy were in Latin

America Former colonies also gained their independence by

doing this The problem was that government overspending lead to

debt crisis and countries had to go to the IMF for help

Trade Strategies for economic growth and development Export promotion Often called export led growth Growth is achieved by concentrating on increasing

exports and export revenue The country will need to adopt some of the following

policies Liberalised trade – open up markets to foreign

competition Liberalised capital flows – reduce restrictions on FDI A floating exchange rate Investment in infrastructure that allows trade to take

place Minimal government intervention

Export growth based on primary products is unlikely due to falling commodity prices and protectionism from developed countries

It is usually focused on manufactured products The Asian tigers started by manufacturing labour

intensive products and eventually moved onto more sophisticated capital intensive products

Trade Strategies for economic growth and development Export promotion - evaluation There are a number of problems with export led growth With the success of the Asian Tigers developed

countries lobbied their governments to place tariffs on developing countries which removed their comparative advantage

Developed countries used tariff escalation to put higher tariffs on processed goods and assembled products pushing the developing countries back to primary products

In the assumptions required for export led growth it mentions ‘little government intervention’ however the Asian Tigers succeeded because their governments intervened arguing the infant industries needed protection

If countries attract MNCs they may become powerful and lead to problems (next chapter)

Export promotion could lead to more income inequality giving growth but not necessarily economic development

Trade Strategies for economic growth and development Trade Liberalisation The WTO attempts to promote trade liberalisation (removal of

protectionism) to try to help developing countries and allow them to benefit from their comparative advantage

The World Bank, the IMF and the US Treasury department, in return for financial help, insists that developing countries follow the Washington Consensus A balanced budget (fiscal) Spending priorities must be basic health and education Interest rate liberalisation A competitive exchange rate Trade liberalisation Liberalisation of FDI flows Privatisation Deregulation Secure property rights

There has been a lot of criticism of this and some argue that these conditions are only set so that MNCs can get access to low cost labour

Many Latin American countries have been successfully moving to an inward policy

Trade Strategies for economic growth and development Bilateral and regional trade agreements The more agreements that are made the

greater will be the ability of developing countries to trade and so gain growth and eventually development

Diversification Many developing countries are now pursuing

export diversification to gain growth The aim is to move away from just primary

products to manufactured and semi-manufactured goods

This helps to protect themselves from volatile price changes

There will also be increased use of technology and increased demand for skilled workers

The problem of tariff escalation still exists Plus a more highly qualified workforce is

required

Development Strategies Fair Trade Organisations Fair Trade organisations ensure that farmers in developing

countries get a fair price and earn a decent income Consumers will pay a higher price for goods that have the

fair trade mark because they want to contribute to better conditions for producers

A trading company wishing to qualify for the International Fairtrade Certification Mark must meet the following criteria Product must reach trader as directly as possible with

few, if any, intermediaries Product must be purchased at minimum price Producer receives a premium for goods that are

certified as organic The trader must be committed to a long term contract Producer has access to credit from trader Producers must be managed democratically – no use of

child labour Sustainable farming methods must be used The fairtrade premium must be used to aid local

community development

Watch Fair Trade VideoWatch Chocolate Slavery Video

Complete Q 1 and 2 on P377