1. Trade Policies for the Developing Nations Chapter 7 Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.

2. Developing Nations Characteristics o developing nations – relatively low per capita GDP, life expectancy and adult literacy o exports tend to focus on primary products such as agricultural goods, raw materials & fuels

3. Developing Nations Trade Problems o question on distribution of trade benefits o unstable export markets o concentration of exports particularly problematic o poor output or decreased demand will significantly decrease trade revenue

4. Developing Nations Problems (cont.) o inelastic supply and demand also problems o shift in either demand or supply could cause large decrease in prices and revenues

5. Developing Nations Problems (cont.) o declining terms of trade developing nations concern that terms of trade have deteriorated data does not support this conclusion o limited market access industrial countries impose higher tariffs on developing countries than on other industrial tariff escalation o agricultural export subsidies in advanced countries

6. International Commodity Agreements 1)production and export controls – target price determines total quantity o lowering production leads to an increase in price o raising production leads to a decrease in price 2)buffer stock – association maintains stock of exported good o buys additional stock to raise price o sells from existing stock to lower price 3)multilateral contracts – agreement stipulating minimum price at which importers will purchase and maximum price at which exporters will sell

7. Maximizing Cartel Profits o If individual suppliers compete with each other prices will fall to relatively low levels. o OPEC or any cartel colludes to reduce output levels which increase price and profits for individual firms. o Profits are maximized where MC=MR.

8. Obstacles to Collusion 1)number of sellers: greater number of sellers makes collusion more difficult 2)cost & demand differences: make it difficult to agree on price 3)potential competition: possibility of new firms entering market would cause agreement to break apart 4)economic downturn: falling profits make firms more likely to reduce prices 5)substitute goods: if consumers have alternatives available, higher cartel prices may cause consumers to shift purchases

9. Aiding Developing Countries World Bank o international organization that provides loans to developing countries o poverty reduction and economic development o UN specialized agency with 185 member nations

10. Aiding Developing Countries (cont.) International Monetary Fund (IMF) o finances balance-of-payments for member nations o lender of last resort o to obtain loan nation must agree to IMF fiscal and monetary policy stipulations Generalized System of Preferences o industrialized nations temporarily reduce tariffs on designated products from developing nations o trade preferences are voluntary

11. Does Aid Promote Growth? critics: o aid fosters bureaucracy o prolongs bad government o moral hazard problems proponents: o enhanced poverty reduction o prevented further decline in some nations o growth-oriented aid which improves and expands infrastructure has strong economic impact

12. Import Substitution o use of trade barriers to protect domestic industries o establishment of domestic industries to produce goods previously imported o based on rational that developing countries cannot compete with established producers of industrial goods – infant industry argument o advantages: low risk, easily accomplished, and provides incentive for others to relocate o disadvantages: inefficient production, lack of economies of scale, discriminated against other non-protected industries, and corruption

13. Export-Led Growth o trade controls limited or completely eliminated o industrialization as natural result of development o advantages: promotes production based on comparative advantage, larger world market, and promotes efficient production

14. Questions on Economic Growth Growth Good for the Poor? o critics: growth leads to increased income inequality o counter: higher growth rates decrease poverty o counter: World Bank study indicating incomes of poor rose in proportion to overall growth Export Led Growth & Developing Countries? o critics: increased exports lead to decreased prices in world markets o counter: developing countries as a group would not have a huge impact on world markets

15. East Asian Economies o substantial economic growth 1995-2005 o high rates of investment o increasing human capital - education o discouraged union formation o initially relied on import substitution then shifted to export-push strategies o flying-geese pattern of growth – nations advance technologically by following pattern set by more advanced nations

16. China’s Transformation to Capitalism o centrally planned economy from 1949-1970s o minimal international trade o 30 th largest exporting country o China “marketized” economy from 1970s forward o goods sold for market-determined prices o production based comparative advantage o labor intensive goods such as sporting goods, toys, footwear, garments & textiles o entered WTO in 2001 o world’s 2 nd largest economy by 2005

17. India’s Economic Development o 1947 independence brought socialism and import substitution o isolationist from 1950s to 1980s o 1991 saw large reduction in tariffs and removal of ban on foreign investment o multinational companies outsourced back office operations to India o competitive auto market with free trade improved efficiency in auto production o forecast to become most populous country by 2030 o however retail sector still regulated and inefficient due to closed markets