1. McGraw-Hill/Irwin © 2012 The McGraw-Hill Companies, All Rights Reserved Chapter 14: Trade Policies for Developing Countries

2. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 14-2 Figure 14.1 Growth Rates, 1990-2009, and Levels of Income per Capita, 2009

3. Trade Policy Alternatives for a Developing Country  Focus on exporting primary products –Slow deterioration in their terms of trade over time. Adverse effects: Engel’s Law and the development of synthetic substitutes –Biases in the data Positive effects: Declining transport costs and faster unmeasured quality improvements for manufactured goods (including new manufactured products).

4. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 14-4 Exports Plus Imports as a Percentage of GDP Figure 14.2 The Relative Price of Primary Products, 1900-2010

5. Trade Policy Alternatives for a Developing Country  Attempt to raise the world prices of primary products that are exported (for e.g., international cartel)  Protect and encourage new industries that produce products sold into the local market  Encourage new industries that produce products that are exported

6. Erosion of Cartel Power Declining demand as buyers respond by switching to substitutes Increasing responsiveness of competing supply from noncartel producers Declining share of the cartel ’ s production in the world market Cheating by the cartel members

7. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 14-7 Figure 14.3 A Cartel as a Profit- Maximizing Monopoly

8. Import-Substituting Industrialization Potential strengths: Infant industries can grow up Developing government can get much- needed revenue The country ’ s international terms of trade can improve Information on demand is acquired cheaply

9. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 14-9 Figure 2.2 The Market for Motorbikes: Demand and Supply Figure 14.4 The Changing Mix of Exports from Developing Countries, 1970-2009

10. The Special Challenges of Transition (Case Study) The evidence indicates that rapid liberalization, brings substantial gains in economic efficiency and a quicker return to positive growth rates of national output The Central and Southeastern European countries, and Estonia and Latvia have been more successful in reorienting exports. Many countries of the former Soviet Union seem to have been caught in a “partial reform trap.”