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 Video Watch Chocolate Slavery Video Complete Q 1 and 2 on P377