Ch07 15e(2)

INTERNATIONAL ECONOMICS, 15E

Robert Carbaugh

Trade Policies for the Developing Nations

Chapter 7

Chapter Outline (1 of 2)

Developing Nation Trade Characteristics

Tensions Between Developing Nations and Advanced Nations

Trade Problems of the Developing Nations

Stabilizing Primary-Product PricesThe OPEC Oil CartelAiding the Developing NationsEconomic Growth Strategies:

Import Substitution Versus Export Led Growth

Chapter Outline (2 of 2)

East Asian EconomiesChina’s Great Leap ForwardIndia: Breaking Out of the Third

WorldBrazil Takes Off

Trade Policies for the Developing Nations (1 of 2)

Commonly accepted practice to array all nations according to real income, and draw line between advanced and developing nations◦Advanced nations are those of North

America Western Europe, plus Australia, New Zealand, and Japan

◦Developing nations are most of those in Africa, Asia, Latin America and the Middle East

Trade Policies for the Developing Nations (2 of 2)

Advanced nations◦High levels of gross domestic product

per capita◦Longer life expectancies◦Higher levels of adult literacy

Developing nations◦Low levels of GDP/Capita, ◦Shorter life expectancies ◦Lower levels of adult literacy

Table 7.1- Basic Economic & Social Indicators for Selected Nations, 2011

Developing-Nation Trade Characteristics (1 of 2)

Highly dependent on advanced nations

Imports originate in advanced nations

Exports mainly to advanced nations primarily in:◦Primary products

Agricultural goods, raw materials, and fuels◦Simple Manufactured goods

Textiles, Labor intensive, Low – TechnologyTrade among developing nations is

relatively minor

Developing-Nation Trade Characteristics (2 of 2)

Developing nations – moving into exports of manufactured products◦Investment in human capital and

technology Higher educational levels Higher capital stock per worker

◦Improvements in transport & communications

◦Trade Reforms◦Liberalization of trade barriers

Tensions Between Developing-Nations & Advanced Nations Poor nations◦Need to take advantage of

international trade◦Problem: advanced world – increased

barriers to imports from developing nations

◦Other problems: Structural weaknesses Nonexistent or inadequate institutions and

policies Law and order, sustainable macroeconomic management, and public services

Trade Problems of the Developing Nations (1 of 6)

Unstable Export Markets ◦Exports - concentrated in only one or a

few primary commodities◦Instability of prices and producer

revenues◦Low price elasticities of demand and

supply◦Changes in demand induce wide

fluctuations in price when supply is inelastic

◦Changes in supply induce wide fluctuations in price when demand is inelastic

Table 7.2- Developing Nation Dependence on Primary Products, 2012

Figure 7.1- Export Price Instability for a Developing Nation


Falling Commodity Prices Threaten Growth of Exporting Nations◦2000-2008- increasing commodity

prices benefited developing nations◦2008-09- recession, shrinking

economies, lower demand, falling prices

◦Economies of developing nations tied to primary products, exported to advanced nations

◦Advanced nation economic downturns passed on to developing nations


Worsening Terms of Trade◦Prices of exports relative to imports

have fallen Import – manufactured goods traded in

monopolistic markets. Gains in productivity translate into higher

earnings and as incomes rise in third world, people spend more on manufactured goods

Export - primary goods traded in competitive

◦markets and productivity gains result in lower prices


Limited Market Access◦Global protectionism

Agriculture Labor-intensive low – skill manufactured

products◦Higher tariffs

Major trading blocks: EU, NAFTA◦Tariff escalation

By developed and developing nations◦Quotas on imports

Table 7.3- Tariffs of Selected Developing Nations & Advanced Nations… 2012


Agricultural Export Subsidies of Advanced Nations◦Discourages agricultural imports◦Displaces developing-nation shipments

to advanced-nation markets◦Results in unwanted surpluses which:

Are often dumped on to the world markets Lead to decreasing prices for many

agricultural commodities sold by developing countries

Reduces the export revenues of developing nations


Bangladesh’s Sweatshop Reputation◦A sweatshop is a factory with poor &

unsafe working conditions, unreasonable hours, unfair wages, child labor, and a lack of benefits for workers.

◦Bangladesh provides the world’s clothing industry with millions of workers who quickly churn out huge amounts of well made clothing for the lowest wages in the world Expected to suffer the most from the expiration

of the MFA, but orders kept coming because of low wages

Producers rushed to expand capacity, often unsafely; several deadly clothing factory fires, collapse of 8-story building

Stabilizing Primary-Product Prices (1 of 6)

International Commodity Agreements (ICAs)◦Attempt to stabilize export prices and

revenues of primary products◦Agreements between leading

producing and consuming nations of commodities Stabilizing prices Assuring adequate supplies to consumers Promoting economic development of

producers


Production and Export Controls◦Affect the price - influence world

supply Based on a target price

◦Obstacles: Distribution of the limits among producing

nations Entrance of new producers Producers have the incentive to cheat on

output restrictions Enforcement is difficult


Buffer Stocks◦Establishment of a producers’

association (international agency) Prepared to buy and sell a commodity in

large amounts◦Supplies of a commodity

Financed and held by the producers’ association

◦Buffer stock manager Buys from the market when prices are

falling Sells from the buffer stock when prices are

high


Buffer Stocks (cont.)

◦Advantages Can promote economic efficiency Can moderate the price inflation of the

industrialized nations◦Problems

Agreeing on a target price High costs of holding the stocks Poor decisions

Figure 7.2- Buffer Stock:Price Ceiling and Price Support


Multilateral Contracts◦To hold the price within a target range

Minimum price at which importers will purchase guaranteed quantities

Maximum price at which producing nations will sell guaranteed amounts to the importers

◦Advantage Less distortion of the market mechanism

and the allocation of resources◦Tend to furnish only limited market

stability


Does the Fair Trade Movement Help Poor Coffee Farmers? ◦Object of fair trade coffee movement

to increase income to farmers by setting up system for them to bypass middlemen & sell directly to roasters & retailers Difference in price from $0.40/lb. to

$1.26/lb.◦Great success in Europe; fair trade

coffee sells in 35,000 stores with sales of $250 million/year

◦Slow to catch on in U.S.

The OPEC Oil Cartel (1 of 4)

Cartels are formed among exporting nations to increase price and realize “monopoly” profits

Organization of Petroleum Exporting Countries (OPEC) was formed to increase oil revenues of oil producing countries

Prior to OPEC, oil producing nations behaved like individual competitive sellers ($3/barrel)

OPEC – restricted output and competition resulting in high prices ($100/barrel)


Maximizing Cartel Profits◦Behaving like a profit-maximizing

monopolist Restricting output and raising prices

Problems with cartels: Incentive to cheat Large number of sellers Cost and demand differences Potential competition Economic downturn Substitute goods

Figure 7.3- Maximizing OPEC Profits


OPEC as a Cartel◦OPEC currently controls less than 40%

of world supply, insufficient to establish effective cartel Exception is Saudi Arabia, with large

reserves, ready to influence prices◦To offset market power of OPEC

Raising the fuel economy standards mandated by the federal government Resistance from auto producers

Increasing the federal excise tax on gasoline Harm low-income consumers


To offset market power (cont.)

◦Allow oil companies to drill on federal land designated as wilderness in Alaska What if the wilderness is destroyed?

◦Diversify oil imports Work more closely with unsavory regimes

(Angola, Indonesia, and Vietnam)◦Develop alternate sources of energy

such as biofuels and wind power Require governmental subsidies financed

by taxpayers

Aiding the Developing Nations (1 of 4)

The World Bank◦Provides loans & grants to developing

nations for poverty reduction & economic development Funds for specific development such as

hospitals, schools, highways, dams, Aids awareness, rebuilding

Corrupt government officials sometimes divert development dollars to their own use;

◦World Bank’s role diminishing; new competitors fund developing nations

◦BRICs funding infrastructure & industry for poor nations to lock in access to raw materials, more

Table 7.4- World Bank Lending by Sector


International Monetary Fund◦A bank for the central banks of

member nations◦Surplus nations channel funds to

nations with temporary deficits◦Two major sources of IMF funds

Quotas Subscriptions, pooled funds of member nations; generate most IMF funds; larger quota for wealthier nations

Loans Loans from member nations IMF has lines of credit with advanced nations, Saudi Arabia


Generalized System of Preferences◦Major advanced nations temporarily

reduce tariffs on designated manufactured imports from developing nations below the levels applied to imports from other advanced nations

◦Attempts to promote economic development through increased trade rather than foreign aid

◦Trade preferences granted by a nation are voluntary; granting nation sets eligibility, terms

◦A nation may “graduate” out of the program if successful


Does Aid Promote Growth of Developing Nations? ◦Critics contend aid prolongs bad

governments, favors the wealthy in poor nations, squandered

◦Proponents counter that although sometimes ineffective, has reduced poverty, spurred growth

◦Global Development distinguishes type of aid For infrastructure development, growth

oriented aid which has strong effect on economic growth

Disaster & humanitarian relief, food supply, water sanitation have less effect on economic growth

Economic Growth Strategies: Import Substitution Vs Export Led Growth(1 of 7)

Import substitution ◦Extensive use of trade barriers

To produce goods which were formerly imported by protecting domestic industries from import competition through trade barriers

◦Inward-oriented Trade and industrial incentives favor

production for the domestic market over the export market

Extension of Infant-industry argument

Economic Growth Strategies: Import Substitution Vs Export Led Growth(2 of 7)

Advantages of import substitution ◦Low risks of establishing a home

industry to replace imports ◦Easier to protect from foreign

competitors as compared with having advanced nations reduce their trade restrictions

◦Foreign firms have an incentive to locate manufacturing plants in a developing nation

Economic Growth Strategies: Import Substitution Vs Export Led Growth( 3of 7)

Disadvantages of import substitution ◦Domestic industries

No incentive to increase their efficiency◦Producers cannot avail of economies of

scale◦Discriminates against all other

producers Including potential exporting ones

◦Very difficult to remove the restrictions once placed

◦Breeds corruption

Economic Growth Strategies: Import Substitution Vs Export Led Growth( 4 of 7)

Export-led growth◦Export-oriented policy◦Outward oriented - links the domestic

economy to the world economy◦Promote growth through the export of

manufactured goods◦Trade controls - nonexistent or very

low◦Industrialization

Natural outcome of development


Advantages of export-oriented policies◦Encourage industries in which

developing nations are likely to have a comparative advantage

◦Allow domestic producers greater scope for exploiting economies of scale

◦Impose a competitive discipline on domestic firms that forces them to increase efficiency


Is Economic Growth Good for the Poor?◦Developing nations with continuing

growth Significant progress in decreasing poverty

◦Liberal economic policies Open markets and monetary and fiscal

stability Raise the incomes of the poor and everyone

else in society proportionately


Can All Developing Nations Achieve Export Led Growth?◦Although exporting can promote

growth, dependent on willingness of advanced nations to absorb many goods from developing nations

◦Pessimists argue that if all developing nations tried to export simultaneously, price of their exports would drop

◦But production of developing nations equals only 5% of world output

East Asian Economies ( 1 of 3)

Economic success◦Highly diverse in natural resources,

populations, cultures, and economic policies

◦High rates of investment◦High and increasing endowments of

human capital due to universal primary and secondary education


Foster competitiveness◦Invested in people◦Provided a favorable competitive

climate for private enterprise◦Economies - open to international

trade◦Actively sought foreign technology◦Discouraged the organization of trade

unions◦Free and competitive labor markets

No minimum wage legislation

Table 7.5- East Asian Economies’ Growth Rates of GDP per Capita…


Flying Geese Pattern of Growth◦Nations gradually move up in

technological development ◦By following in the pattern of nations

ahead of them in the development process

◦Result of market forces

China’s Great Leap Forward ( 1 of 4)

1970s -◦Value of exports and imports less than

$15 billion◦30th largest exporting nation◦Negligible participant in world financial

markets2005 -

◦World’s second largest economy◦National output over half that of U.S.

60% larger than Japan’s


Since 1970s, China’s “marketizing” its economy ◦Greater competition◦Open to foreign investment and joint

ventures◦Economic zones - firms could keep

foreign exchange earnings and hire and fire workers

◦Open to international trade


Challenges for China’s Economy◦Privatization of industry◦Rising labor costs◦Development of infrastructure◦Reliance on investment spending◦Environmental future◦Status in global finance◦Convertibility of the Yuan


China’s Export Boom Comes at a Cost: How to Make Factories Play Fair

U.S. demand for cheap goods creates issues◦Product safety

Dangerous, unsafe toys made in China and recalled because of lead paint, dangerous magnets, kerosene

◦Labor protections Pressure to cut costs leads to failure to pay

Chinese minimum wage, excessive hours, falsifying records

◦Quality of the environment China’s air, land and water all

contaminated

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India: Breaking Out of the Third World ( 1 of 3)

Rapidly improved economic performance ◦Freer trade policies

Economy of India◦Agriculture, handicrafts,

manufacturing, services◦Two-thirds of the Indian workforce –

agriculture◦Services - growing sector


Issues to sustain robust economic growth◦Improvement in infrastructure

Roads, electric power generation, rail freight, and ports

◦High rate of population growth Major advantage - almost limitless labor

supply and consumer demand Necessity of investing in education and

health care Creating adequate opportunities for

employment


Further efforts needed ◦Systematically deregulate sectors

Retailing, the news media, and banking◦Eliminate preferences for small-scale,

inefficient producers◦Repeal legislation blocking layoffs in

medium- and large-sized firms◦Reform its agriculture industry in order

to generate jobs in rural areas

Brazil Takes Off

By 2011, Brazil’s economy the largest in Latin America and world’s seventh largest

From the 1930’s to 1960’s, Brazil pursued import substitution policy with slower economic growth

1990’s – Brazil established pro-growth, open economy attracting FDI and privatization

Potential for Brazil to grow on a sustained basis with population and natural resources

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Ch07 15e(2)