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Developing nations and trade. 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

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Developing nations and trade

  • 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


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Developing nations: dependence on primary products

Major export % of total exports

Country product 2002 2005

Nigeria Oil 96 88

Saudi Arabia Oil 86 91

Venezuela Oil 86 82

Burundi Coffee 79 76

Malawi Tobacco 51

Mauritania Iron ore 56 36

Zambia Copper 56 42

Ethiopia Coffee 54 41

Benin Cotton 41

Chad Cotton 40

Rwanda Coffee 31 46


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Developing nations’ concerns:Trade barriers limit developing country exports

Tariff protection in agriculture is higher than in manufactures.

Average MFN Tariffs in 1997–1999 (Unweighted in Percent)

Developed countries often subsidize agricultural exports

Tariffs are relatively high on labor-intensive manufactures.


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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


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


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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


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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”


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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


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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


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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.


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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

      • Success  imprudence  setback

    • High rates of investment and building human capital

    • Problems overlooked: pollution, income distribution

    • Vulnerable to protectionist reactions elsewhere


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  • China - transformation from extreme import-substitution to focus on exports

    Sharp devaluation in 1994

    +

    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 http://falunhr.org/index.php?option=content&task=view&id=1644&Itemid=

    • http://www.npr.org/templates/story/story.php?storyId=11141322

    • Accession to the WTO  adherence to global trade rules  coping with dislocations


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Mantra of the 1990s: focus on exports

Washington consensus – Market Fundamentalism:

1. Fiscal policy discipline;

2. Redirect public spending away from subsidies/toward pro-growth, pro-poor services (education, health, infrastructure);

3. Tax reform: broaden tax base/ moderate marginal tax rates;

4. Market determinedinterest rates: positive (but moderate) real rates;

5. Competitive exchange rates: neither fixed nor free-floating;

6. Liberalizetrade;

7. Facilitate foreign direct investment;

8. Privatizestate enterprises;

9. Deregulate… except oversight of financial institutions; and,

10. Assure legal security for property rights.


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The Santiago Consensus, 2007 focus on exports

4 Efficient Taxes

Macro Economic Management

1 Education

The Role of the State and the Private Sector

Financial Systems

Top 10

Infrastructure and Energy

5 Infrastructure Investment

Competitiveness

The Labour Market

3 R&D Investment

Innovation

International Trade

Environmental Sustainability

2 Environment


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