Developing nations and trade

• Dependent on developed countries

– Export markets
– Source of imports
• Primary product exports
– Agricultural goods, raw materials
– Labor-intensive manufactures
• Ladder metaphor
• “Flying geese” pattern/export-led growth
– JAPAN
– Asian tigers: Hong Kong, S. Korea, Taiwan, Singapore
– Dragons: Thailand, Malaysia, Indonesia, Philippines
– CHINA, INDIA, Vietnam, Bangladesh
Developing nations: dependence on primary
products
Major export % of total exports
Country product 2002 2005
Nigeria Oil 96 88
Saudi Arabia Oil 86 91
Venezuela Oil 86 82
Burundi Coffee 79 76
Malawi Tobacco 51
Mauritania Iron ore 56 36
Zambia Copper 56 42
Ethiopia Coffee 54 41
Benin Cotton 41
Chad Cotton 40
Rwanda Coffee 31 46
 Developing nations’ concerns:
Trade barriers limit developing country exports
Tariff protection in agriculture is higher than in manufactures.

Average MFN
Tariffs in
1997–1999
(Unweighted
in Percent)

Developed countries often subsidize agricultural exports

Tariffs are relatively high on labor-intensive manufactures.
 Developing nations’ concerns
Are gains from trade fairly distributed ?
– Commodity exports  Competitive markets
– Manufactured imports  Monopoly power
Unstable export markets
Primary-product exports
 inelastic supply and inelastic demand
 violent price fluctuations
Worsening terms of trade as incomes grow(?)
Income elasiticities of demand
 Primary Goods Trap
• Primary products  income elasticity: inelastic
• Manufactures  income elasticity: elastic
 Developing nations’ concerns:
Export price instability for a developing nation
 Remedies for developing nation problems
• Stabilize commodity prices - international
commodity agreements
– Production and export controls
– Buffer stocks – Brazilian coffee
– Multilateral contracts – Min and Max Prices
– Cartels – OPEC
• Generalized system of preferences (GSP)
– Low tariffs in developed countries for selected
manufactures exported by LDCs
 Growth strategies

• Import substitution industrialization

(ISI)
– Trade barriers protect emerging industries
– Popular in 1950s and 1960s, particularly in LA
• Export-led growth
– Manufactured exports  engine of growth
– More common starting in 1970s
• Asian “miracle”
 Import substitution industrialization (ISI)
PROs
• Low risk: home market already exists for import substitutes
• Easier to protect their own markets than to force industrial
nations to open theirs
• Incentive for foreign firms to produce in developing country
 get in under tariff
CONs
• Shelter home industry from competition
– No incentive for efficiency/innovation
• Small size of home markets
– Can’t exploit economies of scale
• Protection of import-competing industries handicaps other
sectors, including potential exporters
 Export-led growth
PROs
• Encourages industries with comparative
advantage labor-intensive manufactures
• Large export markets  economies of scale
• Low level of trade restrictions  domestic
firms remain competitive
CONs
• Sensitive to economic cycles and
protectionist pressures in export markets
– HIGH barriers to labor–intensive exports
 Openness and economic growth

Average
Annual
Growth in
Real
Income per
Capita (%)

Source: David Dollar and Aart Kraay, Trade, Growth, and Poverty, World Bank Development Research Group, 2001.
Growth strategies: case studies

• Brazil - import substitution in computers

– Policy backfired, and was abandoned by 1991
• East Asian newly industrialized countries -
export-led growth
– Generally very successful, until 1997 crisis
• Success  imprudence  setback
– High rates of investment and building human capital
– Problems overlooked: pollution, income distribution
– Vulnerable to protectionist reactions elsewhere
• China - transformation from extreme import-
substitution to focus on exports
Sharp devaluation in 1994
+
Wage and price controls
Competitive Advantage  Dramatic Growth
 FDI inflow  Growth
reinforced
Heavy state role in economy (legacy of central planning)
 issues of fairness
Political issues:
• Don’t enforce some agreements (intellectual property)
• Respect for human rights http://falunhr.org/index.php?option=content&task=view&id=1644&Itemid=
• http://www.npr.org/templates/story/story.php?storyId=11141322

• Accession to the WTO  adherence to global trade rules 

coping with dislocations
Mantra of the 1990s:
Washington consensus – Market Fundamentalism:
1. Fiscal policy discipline;
2. Redirect public spending away from subsidies/toward pro-
growth, pro-poor services (education, health, infrastructure);
3. Tax reform: broaden tax base/ moderate marginal tax rates;
4. Market determined interest rates: positive (but moderate)
real rates;
5. Competitive exchange rates: neither fixed nor free-floating;
6. Liberalize trade;
7. Facilitate foreign direct investment;
8. Privatize state enterprises;
9. Deregulate… except oversight of financial institutions; and,
10. Assure legal security for property rights.
 The Santiago Consensus, 2007

1.1
Macro Economic 1.2 4 Efficient Taxes
Management 1.3
2.1 1 Education
The Role of the State and 2.2
2.3
the Private Sector 2.4
2.5

3.1
Financial Systems 3.2
3.3
3.4 Top 10
3.5
3.6

Infrastructure and Energy 4.1

4.2 5 Infrastructure Investment
4.3

Competitiveness 5.1
5.2

6.1
The Labour Market 6.2
6.3

Innovation 7.1 3 R&D Investment

7.2

International Trade 8
Environmental Sustainability 9 2 Environment