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Trade problems facing many economically less developed countries

Dependence on developed economies          

Developing nations are highly dependent on the advanced or developed nations in terms of:

  • Income dependence: A majority of the exports of developing nations go to the developed nations.
  • dependence on Technology: Most imports of developing nations originate in the developed countries (medicine, new machines). Trade among developing nations is minor.

Primary products 

Exports of developing nations are primary products (agricultural goods, raw materials, and fuels). Some countries export drugs and low tech military goods to gain international currencies. Shares of manufactured exports tend to be less than 10% among African countries.

Price volatility of primary products

The fluctuations of commodity prices remain a central issue for developing countries. Often the collapse of commodity prices spells disaster for developing countries, since exports are needed for obtaining essential imports. But also, high commodity prices, particularly of food and energy, may be a significant problem for least developed countries (LDCs) creating food and energy shortages.

Labor intensive exports 

Exports of manufactured goods tend to be labor intensive (such as textiles). The absolute value of manufactured goods produced by the developing nations is low.

The rise in manufactured goods in developing nations is due to a handful of newly industrializing countries (NICs) such as Korea, Taiwan, and Singapore until 1980s. However, these countries have lost their export markets to China, which has emerged as an industrial giant in the 1990s.

Over-specialization on a narrow range of products

In most of the least developed and other low-income countries, primary products - incorporating low levels of processing - continue to account for the bulk of both national production and exports. Given the changing structure of world trade described at the beginning of this paper, it is not surprising that most of the countries that have participated little or not at all in global integration are primary commodity-dependent countries with relatively small and highly inefficient manufacturing sectors. As a result, these countries are especially vulnerable to external (or domestic) shocks and are generally viewed as having limited growth prospects.

Trade strategies for economic growth and economic development

Import substitution

The import substitution approach substitutes externally produced goods and services, especially basic necessities such as energy, food, and water, with locally produced ones. By doing so, local communities can put their (hard-earned) money to work within their boundaries. Import substitutes are meant to generate employment, reduce foreign exchange demand, stimulate innovation, and make the country self-reliant in critical areas such as food, defense, and advanced technology. Protectionism and subsidies to domestic industries will encourage inefficiency in the sense that domestic firms do not need to compete with other firms on the world market. There will thus be a loss of consumer welfare, both because the products produced domestically will be more expensive, and also because the government will have to levy higher taxes in order to finance the subsidies. Consumer welfare will also be reduced due to a more narrow range of choices. Furthermore, a policy of import substitution will not go unnoticed by other countries, and they will thus retaliate by using protectionist measures of their own.

Export promotion

This involves promoting exports industry. By promoting exports the economy can earn valuable foreign exchange which can be used to funding economic development projects. This can be achieved by improving the competitiveness of domestic firms and making use of the country’s specific factor endowments. Most products produced by less developed countries are primary commodities. Even if the prices of such products are competitive, the export revenue is still unlikely to pay for the costs of imports.

Trade liberalization

Trade liberalisation refers to the reduction or complete removal of protectionist measures that prevent free trade. This includes for example tariffs, quotas and subsidies to domestic producers. Many developing countries suffer from the protectionist measures used by the more developed countries as this reduces the competitiveness of their exports. For example, both the United States and the European Union offer substantial subsidies to farmers who produce agricultural products. This is to ensure that the European countries remain self-sufficient in terms of food production. However, it also means that the relatively cheap agricultural imports from e.g. African countries appear, by comparison, expensive. Many developing countries are therefore heavy critics of the protectionist measures which they argue act as a major constraint on worldwide economic development.

The role of the WTO

The main objective of the WTO, the World Trade Organisation is to promote free trade among its members. The current round of negotiations in the WTO is known as the Doha round negotiations, but it has been suspended due to fundamental disagreement and failure to reach consensus regarding issues relating to trade in relation to less developed countries. The main concerns were that the United States and the European Union refused to abandon their subsidies on agricultural products in order to increase the competitiveness of exports from developing countries. On the other hand, large developing countries such as India and Brazil refused to get rid of their protectionist measures levied against the import of manufactured goods. While most people agree that such measures would do much to improve economic development, a compromise currently seems beyond reach.

Bilateral and regional preferential trade agreements

By implementing different trading blocs is the hope that world trade, and thereby world output, should increase. That is, it is hoped that trading blocs should result in trade creation and not only trade diversion. A preferential trade agreement (PTA) is an agreement whereby the products from one country become cheaper due to a reduction, but not abolition, of tariffs. A bilateral PTA is an agreement between two parties, e.g. India and Nepal, while a multilateral or regional PTA, as the name suggests, is an agreement involving several countries. Examples of the latter include the Asia-Pacific Trade Agreement and the Latin American Integration Association.  It is believed that more agreements to promote trade with reduced protectionism, and eventually completely free trade, will result in economic growth and eventually economic development as the standard of living increases.

Diversification

One of the major problems that many developing countries face is their over-dependence on a narrow range of agricultural products. As such, they are vulnerable to the volatile nature of the prices of such products, originating in the fact that both price elasticity of demand and price elasticity of supply for such products are low. If prices fall in one year, due to a good worldwide harvest, the quantity demanded from any particular country would be reduced dramatically, and the country would be unable to rely on other exports to make up for the loss.

Diversification involves broadening the range of goods and services that developing countries are able to provide. For example, production of manufactured goods (i.e. industrialisation) would both reduce unemployment levels and enable the country to produce goods that, because they are income elastic (link), would allow the developing countries to benefit from worldwide economic growth. By doing so, the country would also be less vulnerable to volatile primary product prices and instead be able to stabilise their export revenue.

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