International Trade & Economic Development Chapter 30

1. International Trade & Economic DevelopmentChapter 30 Presented by: MattayBotcheff

2. Overview • International barriers to development • Trade strategies for economic growth and economic development • Development strategies

3. International Barriers to Development • Over-specialization on a narrow range of products • Price volatility of primary products • Inability to access international markets • Long-term changes in the terms of trade

4. Narrow Over-Specialization • Significant dependence on primary commodity exports • Rising commodity prices could lead to economic growth and development • Drop in commodity prices would result in deteriorating TOT • Vulnerability and uncertainty

5. Price Volatility of Primary Products • PED & PES tend to be inelastic • Any changes in demand or supply would result in significant price volatility • Difficult for producers & the government to plan ahead • Results in lower investment, as well as growth and development (education, health care, infrastructure)

6. The World Market for Cotton

7. Inability to Access International Markets • Protectionism (tariffs, subsidies, quotas, non-tariff barriers) • Under-utilized comparative advantage and lower foreign exchange earnings • Primary product markets (cotton, dairy, maize, rice, sugar, cereal) • $3 billion in subsidies (to US cotton producers) • Over-production & dumping abroad • Tariff escalation – the more the goods are processed, the higher the rate of tariffs • Processing and manufacturing industries are protected • Discourages diversification of industries in developing countries • Agricultural markets – meat, sugar, fruit, coffee, cocoa, tobacco • Non-convertible currencies • Fixed exchange rate system • Often over-valued – damaging to local trade as well

8. Agricultural Subsidies

9. Long-Term Changes in the Terms of Trade • Trend of lower commodity prices (unfavorable shifts in demand and supply) • Developing countries dependent on commodity exports suffer

10. Trade Strategies for Economic Growth & Economic Development • Import substitution • Export promotion • Trade liberalization • Bilateral and regional preferential trade agreements • Diversification

11. Import Substitution • Import substitution industrialization (ISI) • Inward-oriented strategy • Produce goods domestically (not import them!) • As industries grow domestically, EOS would lower costs and help become competitive internationally in the future • Conditions needed: • Government should decide on which goods would be produced domestically (labor-intensive, low-skilled manufacturing, such as shoes and clothing) • Subsidies for domestic producers • Protectionist system (to keep imports out)

12. ISI • Advantages • Job protection (domestic firms dominate) • Local habits and culture are protected • Protection from MNC power and negative influence • Disadvantages • Short-run job protection only (economic growth may suffer in the long run and lead to fewer jobs) • No benefits from comparative advantage and specialization (inefficiency in production) • Lack of foreign competition may lead to inefficiency in domestic industries (no R & D) • Inflation might increase (due to supply constraints) • Trade retaliation from abroad • ISI was popular in the 1960’s & 1970’s • Adopted by Latin American countries and former colonies • ISI failed in the 1980’s • Government over-spending • Inability to repay foreign debt

13. Export Promotion • Export-led growth • Outward-oriented growth strategy • Openness • Increased international trade • Focus on producing and exporting products, in which the country has a comparative advantage • Policies: • Liberalized trade • Liberalized capital flows • Floating exchange rate • Investment in the provision of infrastructure • Deregulation and minimal government intervention

14. Export-Led Growth • Exports of primary products, manufactured products and services • Primary products (except oil and some metals) have declined in prices in the long term • Manufacturing products (best choice) • Japan, South Korea, Singapore, Hong Kong, Taiwan (a. k. a. the “Asian tigers”) • CA in low-cost labor • Switched from labor-intensive to capital-intensive production methods • Issues • Increased protectionism in developed world • Some economists argue that the role of the government is essential • MNC might become too powerful • Increased income inequality within the country

15. Trade Liberalization • Removal or reduction of trade barriers • Allows countries to benefit from CA • WTO promotes free trade • Washington Consensus • 10 market-based reforms identified by John Williamson in 1989 • Supported by World Bank, IMF & US Treasury Department • Latin American economies implemented those • Similar to market-based supply-side policies • Criticized by the anti-globalization movement • MNC access to cheap labor markets • MNC’s produce inexpensively and sell at high prices (local workers gain little) • No high economic growth, but economic crises and increased debt • Exploitation of workers • no economic development

16. Washington Consensus • Fiscal discipline* • Basic health and education (spending**) • Lower marginal tax rates (and increased tax base) • Interest rate liberalization • Competitive exchange rate • Trade liberalization • Liberalization of FDI inflows • Privatization • Deregulation • Secure property rights

17. Bilateral & Regional Preferential Trade Agreements • PTA’s reduce tariffs • Developing countries would be able to trade and grow through more such agreements

18. Diversification • Overdependence upon exporting a limited range of primary commodities • Replace such exports with manufactured and semi-manufactured products • To increase export revenue and employment • Tariff escalation is a major roadblock to the success of export diversification • More skilled workforce is needed

19. Development Strategies • Small-scale farmers cannot make a living income • Low commodity prices • high profits for middlemen • poor living conditions • Fairtrade organizations • Attempt to ensure fair prices for local producers • Increase public awareness and encourage consumption of fair-trade products only • FairtradeLabelling Organization International (FLO)

20. FairtradeLabelling Criteria • Product must reach trader with few intermediaries • Product must be purchased at Fairtrade minimum price (based on cost of sustainable production) • Some products are certified organic • Long-term contracts • Producers have access to credit from trader • Small farmers must demonstrate that producers are managed democratically

21. Questions & Answers

22. Summary • International barriers to development • Trade strategies for economic growth and economic development • Development strategies

23. Source: Economics by Jocelyn Blink & Ian Dorton More Resources: For current Economics issues related to our course, please visit: https://twitter.com/MattBotcheff/