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Developing nations’ trade

Developing nations and trade. Developing nations’ trade. Dependent on developed countries Export markets Source of imports Primary product exports agricultural goods, raw materials labor-intensive manufactures Newly industrializing economies

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Developing nations’ trade

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  1. Developing nations and trade Developing nations’ trade • Dependent on developed countries • Export markets • Source of imports • Primary product exports • agricultural goods, raw materials • labor-intensive manufactures • Newly industrializing economies • Asian tigers: Hong Kong, S. Korea, Taiwan, Singapore • Dragons: Thailand, Malaysia, Indonesia, Philippines Carbaugh, Chap. 8

  2. Developing nations and trade Developing nations: dependence on primary products (2000) Major export As % of Country product total exports Nigeria Oil 98 Saudi Arabia Oil 86 Burundi Coffee 80 Ethiopia Coffee 70 Venezuela Oil 69 Mauritania Iron ore 59 Chad Cotton 54 Zambia Copper 51 Carbaugh, Chap. 8

  3. Developing nations and trade Developing nations’ concerns • Are gains from trade fairly distributed ? • Unstable export markets • Primary-product exports  inelastic supply and demand  violent price fluctuations • Worsening terms of trade as incomes grow Income elasiticities of demand • Primary products  inelastic • Manufactures  elastic Carbaugh, Chap. 8

  4. Developing nations and trade Export price instability for a developing nation Carbaugh, Chap. 8

  5. Developing nations and trade 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 Carbaugh, Chap. 8

  6. Developing nations and trade Buffer stocks: price ceiling and price support Carbaugh, Chap. 8

  7. Developing nations and trade Cartels • Restrict competition among producers • Support higher prices for their product • Allocate quotas to keep price up • Obstacles to cartels: • Incentive to cheat • Number of sellers – coordination/enforcement • Cost and demand differences • Substitute goods Carbaugh, Chap. 8

  8. Developing nations and trade 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” Carbaugh, Chap. 8

  9. Growth strategies Import substitution: 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 Carbaugh, Chap. 8

  10. Growth strategies Import substitution: 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 Carbaugh, Chap. 8

  11. Growth strategies 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 Export-led growth: cons • Sensitive to economic cycles and protectionist pressures in export markets Carbaugh, Chap. 8

  12. Growth strategies Economic performance of developing nations by trade orientation,1963-92 (World Bank, 1987; OECD, 1998) Carbaugh, Chap. 8

  13. Growth strategies Growth strategies: case studies • 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 • High rates of investment and building human capital • Problems overlooked: pollution, income distribution • Vulnerable to protectionist reactions elsewhere Carbaugh, Chap. 8

  14. Growth strategies Growth strategies: case studies • China - transformation from extreme import-substitution to focus on exports • Heavy state role in economy (legacy of central planning)  issues of fairness • Political issues: • Don’t enforce some agreements (intellectual property) Carbaugh, Chap. 8

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