Dependent on developed countries –Export markets –Source of imports Primary product exports –Agricultural goods, raw materials –Labor-intensive manufactures Ladder metaphor “Flying geese” pattern/export-led growth –JAPAN –Asian tigers: Hong Kong, S. Korea, Taiwan, Singapore –Dragons: Thailand, Malaysia, Indonesia, Philippines –CHINA, INDIA, Vietnam, Bangladesh Developing nations and trade

Developing nations: dependence on primary products Major export % of total exports Countryproduct NigeriaOil9688 Saudi ArabiaOil8691 VenezuelaOil8682 BurundiCoffee7976 MalawiTobacco51 Mauritania Iron ore5636 ZambiaCopper5642 EthiopiaCoffee5441 BeninCotton41 ChadCotton40 RwandaCoffee3146

Developing nations’ concerns: Trade barriers limit developing country exports Average MFN Tariffs in 1997–1999 (Unweighted in Percent) Tariff protection in agriculture is higher than in manufactures. Tariffs are relatively high on labor-intensive manufactures. Developed countries often subsidize agricultural exports

Developing nations’ concerns Are gains from trade fairly distributed ? –Commodity exports  Competitive markets –Manufactured imports  Monopoly power Unstable export markets Primary-product exports  inelastic supply and inelastic demand  violent price fluctuations Worsening terms of trade as incomes grow(?) Income elasiticities of demand  Primary Goods Trap Primary products  income elasticity: inelastic Manufactures  income elasticity: elastic

Developing nations’ concerns: Export price instability for a developing nation

Remedies for developing nation problems Stabilize commodity prices - international commodity agreements –Production and export controls –Buffer stocks – Brazilian coffee –Multilateral contracts – Min and Max Prices –Cartels – OPEC Generalized system of preferences (GSP) –Low tariffs in developed countries for selected manufactures exported by LDCs

Growth strategies Import substitution industrialization (ISI) –Trade barriers protect emerging industries –Popular in 1950s and 1960s, particularly in LA Export-led growth –Manufactured exports  engine of growth –More common starting in 1970s Asian “miracle”

Import substitution industrialization (ISI) PROs Low risk: home market already exists for import substitutes Easier to protect their own markets than to force industrial nations to open theirs Incentive for foreign firms to produce in developing country  get in under tariff CONs Shelter home industry from competition –No incentive for efficiency/innovation Small size of home markets –Can’t exploit economies of scale Protection of import-competing industries handicaps other sectors, including potential exporters

Export-led growth PROs Encourages industries with comparative advantage  labor-intensive manufactures Large export markets  economies of scale Low level of trade restrictions  domestic firms remain competitive CONs Sensitive to economic cycles and protectionist pressures in export markets –HIGH barriers to labor–intensive exports

Openness and economic growth Average Annual Growth in Real Income per Capita (%) Source: David Dollar and Aart Kraay, Trade, Growth, and Poverty, World Bank Development Research Group, 2001.

Brazil - import substitution in computers –Policy backfired, and was abandoned by 1991 East Asian newly industrialized countries - export-led growth –Generally very successful, until 1997 crisis Success  imprudence  setback –High rates of investment and building human capital –Problems overlooked: pollution, income distribution –Vulnerable to protectionist reactions elsewhere Growth strategies: case studies

China - transformation from extreme import- substitution to focus on exports Sharp devaluation in Wage and price controls Competitive Advantage  Dramatic Growth  FDI inflow  Growth reinforced Heavy state role in economy (legacy of central planning)  issues of fairness Political issues: Don’t enforce some agreements (intellectual property) Respect for human rights Accession to the WTO  adherence to global trade rules  coping with dislocations

Mantra of the 1990s: Washington consensus – Market Fundamentalism: 1. Fiscal policy discipline;Fiscal policy 2. Redirect public spending away from subsidies/toward pro- growth, pro-poor services (education, health, infrastructure);public spendingeducationhealthinfrastructure 3. Tax reform: broaden tax base/ moderate marginal tax rates;Tax reform 4. Market determined interest rates: positive (but moderate) real rates; interest rates 5. Competitive exchange rates: neither fixed nor free-floating;exchange rates 6. Liberalize trade;Liberalizetrade 7. Facilitate foreign direct investment;foreign direct investment 8. Privatize state enterprises;Privatizestate enterprises 9. Deregulate… except oversight of financial institutions; and,Deregulatefinancial institutions 10. Assure legal security for property rights.property rights

Macro Economic Management Financial Systems The Role of the State and the Private Sector Infrastructure and Energy Competitiveness The Labour Market Innovation International Trade Environmental Sustainability 1 Education 2 Environment 3 R&D Investment 4 Efficient Taxes 5 Infrastructure Investment The Santiago Consensus, 2007 Top 10