1. International Trade and Economic Development
Dianna DaSilva- Glasgow

2. outline
11/11/2018
Introduction
The relationship between international trade and economic development
Terms of trade (different types) and their effects on economic development
The export instability in developing countries
Trade policies and the main problems confronting developing countries
International Trade Theory- ECN 4202, 2016/2017

3. INTRODUCTION
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Most of the world’s economies are developing countries characterized by low per capita income, high rates of population growth high rates of illiteracy etc.
There are approximately 155 developing countries globally based on the IMF World Economic Outlook Report (April 2012)
International trade has an impact on the development process.
Most developing countries produce and export primary agriculture commodities and raw materials; whereas developed countries mainly export manufactured products and services.
International Trade Theory- ECN 4202, 2016/2017

4. INTRODUCTION
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Opinions on the nature of the impact of international trade on the development process differs.
Dependency school of thought believed that international trade hindered development because the theory of comparative advantage kept developing countries exporting mainly primary products.
Endogenous growth theory argue that trade has a positive impact on the growth process.
International Trade Theory- ECN 4202, 2016/2017

5. The Importance of Trade to Development
International Trade Theory- ECN 4202, 2016/2017
Is international trade theory static and irrelevant to the development process of developing countries?
Traditional trade theory: comparative advantage would have a positive impact on development through increased production and consumption associated with specialization according to one’s factor endowments.
However, the concern of developing countries is that since this theory is based on factor endowments it would lead to a fixed pattern of production and export from developing countries based on raw materials, fuels, minerals and food.
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6. The Importance of Trade to Development
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Developing countries therefore will not reap the dynamic benefits of industrialization such as innovation, improved terms of trade, higher incomes etc…
Therefore developing nations would continue to dependent, poor and underdeveloped relative to developed countries.
Development can only proceed if the underlying existing conditions are allowed to change rather than remain static as could be inferred from trade theory.
International Trade Theory- ECN 4202, 2016/2017

7. The Importance of Trade to Development
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However, this is not entirely true as traditional trade theory incorporated with changes in factor supplies, technology, and tastes, would allow for the development pattern to be changed (comparative statics);
Therefore developing countries can change their export patterns where they can change their underlying factor conditions.
Developing countries’ export of manufactured products have increased to over 70%.
Developing countries such as Brazil, Korea, Taiwan and Mexico export manufactured products.
International Trade Theory- ECN 4202, 2016/2017

8. The Importance of Trade to Development
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The trade theory of comparative statics: shows relevance for developing nations and the development process.
International trade functioned as an engine of growth in the 19th century: UK;U.S.; Canada; New Zealand; Australia; Argentina, Uruguay, and South Africa
International Trade Theory- ECN 4202, 2016/2017

9. The contributions of trade to development
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Trade can lead to the full utilization of otherwise underemployed domestic resources (vent for surplus), e.g. South East Asia and Africa;
Trade makes possible division of labor and economies of scale (such as Taiwan, HK, Singapore);
International trade is the vehicle for the transmission of new ideas, technology, managerial and other skills;
Trade also stimulates and facilitates the international flow of capital from developed to developing countries;
International Trade Theory- ECN 4202, 2016/2017

10. The contributions of trade to development
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The importation of new manufactured products stimulates domestic demand until efficient domestic production of these goods become feasible (Brazil, India);
International trade is an excellent anti- monopoly weapon because it stimulates greater efficiency by domestic producers to meet foreign competition.
International Trade Theory- ECN 4202, 2016/2017

11. International trade and endogenous growth theory
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Romer (1986) and Lucas (1988): positive relationship between trade and long-run economic growth and development;
New theory of endogenous growth: lowering the trade barriers will speed up the economic growth and development in the long-run by:
Allowing developing nations to absorb the technology developed in advanced nations at a faster rate than with a lower degree of openness
Increasing the benefits that flow from research and development (R&D)
Promoting larger economies of scale in production
International Trade Theory- ECN 4202, 2016/2017

12. International trade and endogenous growth theory
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Reducing price distortions and leading to a more efficient use of domestic resources across sectors
Encouraging greater specialization and more efficiency in the production of intermediate inputs
Leading to the more rapid introduction of new products and services.
Please read Case Study 11- 1
International Trade Theory- ECN 4202, 2016/2017

13. The Terms of Trade and Economic Development
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Commodity of net barter terms of trade (N)
N=(PX/PM)100
Shows the change in the price of imported commodities relative to exports. Where export prices are declining the terms of trade will decline.
International Trade Theory- ECN 4202, 2016/2017

14. The Terms of Trade and Economic Development
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Income terms of trade (I)
I=(PX/PM)/QX
Qx is an index of the volume of exports. This index shows the nation’s capacity to import based on earnings from exported commodities.
International Trade Theory- ECN 4202, 2016/2017

15. The Terms of Trade and Economic Development
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Single factoral terms of trade (S)
S= (PX/PM)/ZX
Zx is a productivity index in the nation’s export sector. S measures the amount of imports the nations gets per unit of domestic factors of production embodied in its exports.
International Trade Theory- ECN 4202, 2016/2017

16. The Terms of Trade and Economic Development
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Double factoral terms of trade (D)
D= (PX/PM)/ (ZX/ ZM)100
Zm is an import productivity index. D measures how many units of domestic factors embodied in the nation’s exports are exchanged per unit of foreign factors embodied in its imports.
Among the 4 defined terms of trade, N,I,S are the most important，especially for developing countries.
International Trade Theory- ECN 4202, 2016/2017

17. International Trade Theory- ECN 4202, 2016/2017
Alleged reasons for deterioration in commodity terms of trade in developing countries
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Most or all of the productivity increases that take place in developed countries are passed on to their workers in form of higher wages and income, while most or all the productivity increases that take place in developing nations are reflected in lower prices;
The demand for the manufactured exports of developed nations tends to grow much faster than the demand for the agricultural and raw materials exports from developing nations.
International Trade Theory- ECN 4202, 2016/2017

18. Export Instability and Economic Development
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Cause and effects of instability: wild fluctuation in prices of the primary exports is due to both inelastic and unstable demand and supply.
The empirical study shows that export instability was not very large and that has not hampered development.
International commodity agreements (buffer stocks, export controls or purchasing agreements) are used to stabilize prices.
International Trade Theory- ECN 4202, 2016/2017

19. Import Substitution versus Export Orientation: trade policy of developing countries
Import substitution industrialization (ISI): the substitution of imports by domestic production
Export-oriented industrialization (EOI): based on comparative advantage
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International Trade Theory- ECN 4202, 2016/2017

20. Import Substitution versus Export Orientation: trade policy of developing countries
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Advantages of ISI
Market for the industrial product already exists as evident by imports so that risks in setting up an industry to displace imports are reduced.
It is easier for developing countries to protect their domestic markets against foreign competition than to force developed countries to remove import barriers against their manufactured exports
Foreign firms are induced to establish tariff factories to overcome the tariff wall of developing countries.
International Trade Theory- ECN 4202, 2016/2017

21. Import Substitution versus Export Orientation: trade policy of developing countries
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Disadvantages of ISI:
Domestic industries have no incentives to be efficient
Inefficient firms can arise because the domestic market in many developing countries does not offer scope for economies of scale.
ISI becomes more and more costly and difficult as the need to produce capital- intensive and technologically advanced commodities arise.
International Trade Theory- ECN 4202, 2016/2017

22. Import Substitution versus Export Orientation: trade policy of developing countries
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Advantages of EOI
Overcomes the smallness of the domestic market and allows for economies of scale.
Production of manufactured goods for exports requires and stimulates efficiency throughout the economy.
The expansion of manufactured exports is not limited by the growth of the domestic market.
International Trade Theory- ECN 4202, 2016/2017

23. Import Substitution versus Export Orientation: trade policy of developing countries
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Disadvantages of EOI:
Competition from other established industries in developed nations makes it difficult for developing countries to set up export industries.
Developed nations often a provide a high level of protection to import competing industries.
International Trade Theory- ECN 4202, 2016/2017

24. Import Substitution versus Export Orientation: trade policy of developing countries
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During the 1950s- 1970s developing countries pursued industrialization to:
Provide faster technological progress
Create high- paying jobs to address unemployment and underemployment
Higher multipliers and accelerators through greater backward and forward linkages in the production process
Rising terms of trade and more stable export prices
Relief from balance-of-payments difficulties
International Trade Theory- ECN 4202, 2016/2017

25. Import Substitution versus Export Orientation: trade policy of developing countries
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High tariffs were implemented ( %) in nations such as India, Pakistan, Argentina and Nigeria
Subsidies were provided.
Outcomes: inefficient industries, high consumer prices, high capital intensity and low labour absorption, worsened unemployment and under- employment problems, urbanization, declining in traditional primary sectors, importation of food (Brazil), balance of payments problems due to the need to import machinery and fuels etc., wastage of national income (up to 10%)
International Trade Theory- ECN 4202, 2016/2017

26. Import Substitution versus Export Orientation: trade policy of developing countries
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Empirical evidences show that EOI has better effects than ISI: HK and Singapore versus India and Pakistan. However, ISI is supported in the early stages of development.
The debt crisis in led to recent trade liberalization reforms in developing countries. for instance, Jamaica, Guyana, Argentina, Venezuela, Chile etc.
International Trade Theory- ECN 4202, 2016/2017

27. Current Problems Facing Developing Countries
Severe poverty in places such as Sub-saharan Africa.
Foreign debt ($1 trillion dollars was the debt accumulated by developing countries during the 1970s to 1980s.
Trade problems: trade frictions between developed and developing nations (mainly NICs)
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International Trade Theory- ECN 4202, 2016/2017

28. Current Problems Facing Developing Countries
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Call for a new international economic order by the General Assembly of the United Nations with the aim of:
Renegotiating the international debt of developing countries and reducing interest payments
Negotiating international commodity agreements
International Trade Theory- ECN 4202, 2016/2017

29. Current Problems Facing Developing Countries
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Establishing preferential access in developed nations’ markets to all the manufactured exports of developing nations
Increasing the transfer of technology to developing nations and regulating multinational corporations
Increasing the yearly flow of foreign aid to developing nations to 0.7% (0.25% of 2005; 0.16% for the US) of rich nation’s incomes.
Allowing developing nations a greater role in international decision-making.
International Trade Theory- ECN 4202, 2016/2017

30. Current Problems Facing Developing Countries
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NIEO died due to economic slowdown of the 1980s.
International Trade Theory- ECN 4202, 2016/2017

31. Further reading Salvatore (2007) , Chapter 11 11/11/2018
International Trade Theory- ECN 4202, 2016/2017