Transcript Document

International Economics
By Robert J. Carbaugh
7th Edition
Chapter 8:
Trade policies for the
developing nations
Copyright ©2000, South-Western College Publishing
Developing nations and trade
Developing nations’ trade
 Very dependent on the developed industrial
countries as export markets and source of
imports
 Exports are heavily weighted toward primary
products (agricultural goods, raw materials) and
labor-intensive manufactures
 Share of manufactured exports is increasing, but
mainly in a small number of newly industrialized
nations (such as South Korea, Hong Kong)
Carbaugh, Chap. 8
2
Developing nations and trade
Developing nations: dependence on
primary products (1997)
Country
Nigeria
Saudi Arabia
Zambia
Burundi
Rwanda
Liberia
Mauritania
Bolivia
Carbaugh, Chap. 8
Major export
product
As % of
total exports
Oil
Oil
Copper
Coffee
Coffee
Iron ore
Iron ore
Metal ores
93
91
86
81
62
56
40
36
3
Developing nations and trade
Developing nations’ concerns
 Question whether gains from trade with industrial
countries have been fairly distributed
 Face problems of unstable export markets
 Concentration on one or a few primary-product exports
combined with inelastic supply and demand conditions
 Argue that they face worsening terms of trade as
relative value of primary products has fallen
compared to manufactured goods they import
Carbaugh, Chap. 8
4
Developing nations and trade
Export price instability for a developing nation
Price ($)
Price ($)
Elasticity of supply effect
9.00
8.00
S0
7.00
A
6.00
5.00
4.00
B
3.00
D0
2.00
D1
1.00
0.00
0
10
20
30
40
50
60
Coffee (pounds)
Carbaugh, Chap. 8
70
80
Elasticity of demand effect
6.50
6.00
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
S0
S1
D1
D0
0
10
20
30
40
50
60
70
80
Coffee (pounds)
5
Developing nations and trade
Remedies for developing nation problems
 Stabilizing commodity prices - international
commodity agreements
 Production and export controls
 Buffer stocks
 Multilateral contracts
 Generalized system of preferences (GSP)
Carbaugh, Chap. 8
6
Developing nations and trade
Price ($)
Production and export controls
S1
2
1.75
1.5
F
S0
1.25
1
E
0.75
0.5
0.25
D0
D1
0
0
10
20
30
40
50
60
70
80
90
100
Coffee (mill. pounds)
Carbaugh, Chap. 8
7
Developing nations and trade
Buffer stocks: price ceiling and price support
Offsetting a price increase
6.50
Offsetting a price decrease
4.50
S0
6.00
5.50
S0
5.00
4.00
S1
B
4.50
4.00
4.02
E
3.50
3.50
D1
A
3.00
3.27
3.00
2.50
F
D0
2.00
1.50
D0
2.50
0
20
40
60
80
100 120
Tin (thous. pounds)
Carbaugh, Chap. 8
0
20
40
60
80
100 120
Tin (thous. pounds)
8
Developing nations and trade
Cartels
 Attempt to restrict competition among producers
and support higher prices for their product
 Face obstacles:






Incentive to cheat
Number of sellers
Cost and demand differences
Potential competition
Economic downturns
Substitute goods
Carbaugh, Chap. 8
9
Developing nations and trade
Growth strategies
 Import substitution
 Trade barriers protect emerging domestic
industries
 Popular in 1950s and 1960s
 Export-led growth
 Focus on export of manufactures as engine of
growth
 Became more common starting in 1970s
Carbaugh, Chap. 8
10
Growth strategies
Import substitution: pros
 Risk of establishing home import-replacing
industry is low because home market
already exists
 Easier for developing nations to protect
their own markets than to force industrial
nations to open theirs
 Gives foreign firms an incentive to locate
production in developing country, providing
jobs
Carbaugh, Chap. 8
11
Growth strategies
Import substitution: cons
 Trade restrictions shelter home industry
from competition, giving no incentive for
efficiency
 Small size of most developing country
markets makes it difficult to benefit from
economies of scale
 Protection of import-competing industries
draws resources away from all other
sectors, including potential exporters
Carbaugh, Chap. 8
12
Growth strategies
Export-led growth: pros
 Encourages industries in which developing
countries are likely to have a comparative
advantage - such as labor-intensive
manufactures
 Export markets allow domestic producers to
utilize economies of scale
 Low level of trade restrictions forces
domestic firms to remain competitive
Carbaugh, Chap. 8
13
Growth strategies
Export-led growth: cons
 Main disadvantage to export-led growth is
that it depends on the ability and
willingness of industrial nations to absorb
large quantities of manufactures from
developing countries
 In other words, it is sensitive to economic
cycles and protectionist pressures in the
export markets
Carbaugh, Chap. 8
14
Growth strategies
Economic performance of 41 developing
nations by trade orientation, 1973-85
(World Bank, 1987)
Avg. annual % growth of manufactured exports
Strongly inward-oriented
Moderately inward-oriented
Moderately outwardoriented
Strongly outward-oriented
0
5
10
15
20
Percent
Carbaugh, Chap. 8
15
Growth strategies
Economic performance of 41 developing
nations by trade orientation, 1973-85
(World Bank, 1987)
Avg. annual incremental capital/output ratio
Strongly inward-oriented
Moderately inward-oriented
Moderately outwardoriented
Strongly outward-oriented
0
2
4
6
8
10
Ratio
Carbaugh, Chap. 8
16
Growth strategies
Economic performance of 41 developing
nations by trade orientation, 1973-85
(World Bank, 1987)
Avg. annual % growth of real Gross Domestic Product
Strongly inward-oriented
Moderately inward-oriented
Moderately outwardoriented
Strongly outward-oriented
0
2
4
6
8
10
Percent
Carbaugh, Chap. 8
17
Growth strategies
Growth strategies: case studies
 Brazil - import substitution in computers
 Policy backfired, and was abandoned by 1991
 East Asian newly industrialized countries - exportled 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
18
Growth strategies
Growth strategies: case studies
 China - transformation from extreme
import-substitution to focus on exports
 Dramatic change in China’s role in the world economy
has accompanied rapid growth in its domestic
economy
 Heavy state role in economy (legacy of central
planning) raises issues of fairness
 Political issues, lack of enforcement of some
agreements (intellectual property) complicate economic
relations
Carbaugh, Chap. 8
19