ch07 15e(2)
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INTERNATIONAL ECONOMICS, 15E
Robert Carbaugh
Trade Policies for the Developing Nations
Chapter 7
Chapter Outline (1 of 2)
Developing Nation Trade Characteristics
Tensions Between Developing Nations and Advanced Nations
Trade Problems of the Developing Nations
Stabilizing Primary-Product PricesThe OPEC Oil CartelAiding the Developing NationsEconomic Growth Strategies:
Import Substitution Versus Export Led Growth
Chapter Outline (2 of 2)
East Asian EconomiesChina’s Great Leap ForwardIndia: Breaking Out of the Third
WorldBrazil Takes Off
Trade Policies for the Developing Nations (1 of 2)
Commonly accepted practice to array all nations according to real income, and draw line between advanced and developing nations◦Advanced nations are those of North
America Western Europe, plus Australia, New Zealand, and Japan
◦Developing nations are most of those in Africa, Asia, Latin America and the Middle East
Trade Policies for the Developing Nations (2 of 2)
Advanced nations◦High levels of gross domestic product
per capita◦Longer life expectancies◦Higher levels of adult literacy
Developing nations◦Low levels of GDP/Capita, ◦Shorter life expectancies ◦Lower levels of adult literacy
Table 7.1- Basic Economic & Social Indicators for Selected Nations, 2011
Developing-Nation Trade Characteristics (1 of 2)
Highly dependent on advanced nations
Imports originate in advanced nations
Exports mainly to advanced nations primarily in:◦Primary products
Agricultural goods, raw materials, and fuels◦Simple Manufactured goods
Textiles, Labor intensive, Low – TechnologyTrade among developing nations is
relatively minor
Developing-Nation Trade Characteristics (2 of 2)
Developing nations – moving into exports of manufactured products◦Investment in human capital and
technology Higher educational levels Higher capital stock per worker
◦Improvements in transport & communications
◦Trade Reforms◦Liberalization of trade barriers
Tensions Between Developing-Nations & Advanced Nations Poor nations◦Need to take advantage of
international trade◦Problem: advanced world – increased
barriers to imports from developing nations
◦Other problems: Structural weaknesses Nonexistent or inadequate institutions and
policies Law and order, sustainable macroeconomic management, and public services
Trade Problems of the Developing Nations (1 of 6)
Unstable Export Markets ◦Exports - concentrated in only one or a
few primary commodities◦Instability of prices and producer
revenues◦Low price elasticities of demand and
supply◦Changes in demand induce wide
fluctuations in price when supply is inelastic
◦Changes in supply induce wide fluctuations in price when demand is inelastic
Table 7.2- Developing Nation Dependence on Primary Products, 2012
Figure 7.1- Export Price Instability for a Developing Nation
Trade Problems of the Developing Nations (2 of 6)
Falling Commodity Prices Threaten Growth of Exporting Nations◦2000-2008- increasing commodity
prices benefited developing nations◦2008-09- recession, shrinking
economies, lower demand, falling prices
◦Economies of developing nations tied to primary products, exported to advanced nations
◦Advanced nation economic downturns passed on to developing nations
Trade Problems of the Developing Nations (3 of 6)
Worsening Terms of Trade◦Prices of exports relative to imports
have fallen Import – manufactured goods traded in
monopolistic markets. Gains in productivity translate into higher
earnings and as incomes rise in third world, people spend more on manufactured goods
Export - primary goods traded in competitive
◦markets and productivity gains result in lower prices
Trade Problems of the Developing Nations (4 of 6)
Limited Market Access◦Global protectionism
Agriculture Labor-intensive low – skill manufactured
products◦Higher tariffs
Major trading blocks: EU, NAFTA◦Tariff escalation
By developed and developing nations◦Quotas on imports
Table 7.3- Tariffs of Selected Developing Nations & Advanced Nations… 2012
Trade Problems of the Developing Nations (5 of 6)
Agricultural Export Subsidies of Advanced Nations◦Discourages agricultural imports◦Displaces developing-nation shipments
to advanced-nation markets◦Results in unwanted surpluses which:
Are often dumped on to the world markets Lead to decreasing prices for many
agricultural commodities sold by developing countries
Reduces the export revenues of developing nations
Trade Problems of the Developing Nations (6 of 6)
Bangladesh’s Sweatshop Reputation◦A sweatshop is a factory with poor &
unsafe working conditions, unreasonable hours, unfair wages, child labor, and a lack of benefits for workers.
◦Bangladesh provides the world’s clothing industry with millions of workers who quickly churn out huge amounts of well made clothing for the lowest wages in the world Expected to suffer the most from the expiration
of the MFA, but orders kept coming because of low wages
Producers rushed to expand capacity, often unsafely; several deadly clothing factory fires, collapse of 8-story building
Stabilizing Primary-Product Prices (1 of 6)
International Commodity Agreements (ICAs)◦Attempt to stabilize export prices and
revenues of primary products◦Agreements between leading
producing and consuming nations of commodities Stabilizing prices Assuring adequate supplies to consumers Promoting economic development of
producers
Stabilizing Primary-Product Prices (2 of 6)
Production and Export Controls◦Affect the price - influence world
supply Based on a target price
◦Obstacles: Distribution of the limits among producing
nations Entrance of new producers Producers have the incentive to cheat on
output restrictions Enforcement is difficult
Stabilizing Primary-Product Prices (3 of 6)
Buffer Stocks◦Establishment of a producers’
association (international agency) Prepared to buy and sell a commodity in
large amounts◦Supplies of a commodity
Financed and held by the producers’ association
◦Buffer stock manager Buys from the market when prices are
falling Sells from the buffer stock when prices are
high
Stabilizing Primary-Product Prices (4 of 6)
Buffer Stocks (cont.)
◦Advantages Can promote economic efficiency Can moderate the price inflation of the
industrialized nations◦Problems
Agreeing on a target price High costs of holding the stocks Poor decisions
Figure 7.2- Buffer Stock:Price Ceiling and Price Support
Stabilizing Primary-Product Prices (5 of 6)
Multilateral Contracts◦To hold the price within a target range
Minimum price at which importers will purchase guaranteed quantities
Maximum price at which producing nations will sell guaranteed amounts to the importers
◦Advantage Less distortion of the market mechanism
and the allocation of resources◦Tend to furnish only limited market
stability
Stabilizing Primary-Product Prices (6 of 6)
Does the Fair Trade Movement Help Poor Coffee Farmers? ◦Object of fair trade coffee movement
to increase income to farmers by setting up system for them to bypass middlemen & sell directly to roasters & retailers Difference in price from $0.40/lb. to
$1.26/lb.◦Great success in Europe; fair trade
coffee sells in 35,000 stores with sales of $250 million/year
◦Slow to catch on in U.S.
The OPEC Oil Cartel (1 of 4)
Cartels are formed among exporting nations to increase price and realize “monopoly” profits
Organization of Petroleum Exporting Countries (OPEC) was formed to increase oil revenues of oil producing countries
Prior to OPEC, oil producing nations behaved like individual competitive sellers ($3/barrel)
OPEC – restricted output and competition resulting in high prices ($100/barrel)
The OPEC Oil Cartel (2 of 4)
Maximizing Cartel Profits◦Behaving like a profit-maximizing
monopolist Restricting output and raising prices
Problems with cartels: Incentive to cheat Large number of sellers Cost and demand differences Potential competition Economic downturn Substitute goods
Figure 7.3- Maximizing OPEC Profits
The OPEC Oil Cartel (3 of 4)
OPEC as a Cartel◦OPEC currently controls less than 40%
of world supply, insufficient to establish effective cartel Exception is Saudi Arabia, with large
reserves, ready to influence prices◦To offset market power of OPEC
Raising the fuel economy standards mandated by the federal government Resistance from auto producers
Increasing the federal excise tax on gasoline Harm low-income consumers
The OPEC Oil Cartel (4 of 4)
To offset market power (cont.)
◦Allow oil companies to drill on federal land designated as wilderness in Alaska What if the wilderness is destroyed?
◦Diversify oil imports Work more closely with unsavory regimes
(Angola, Indonesia, and Vietnam)◦Develop alternate sources of energy
such as biofuels and wind power Require governmental subsidies financed
by taxpayers
Aiding the Developing Nations (1 of 4)
The World Bank◦Provides loans & grants to developing
nations for poverty reduction & economic development Funds for specific development such as
hospitals, schools, highways, dams, Aids awareness, rebuilding
Corrupt government officials sometimes divert development dollars to their own use;
◦World Bank’s role diminishing; new competitors fund developing nations
◦BRICs funding infrastructure & industry for poor nations to lock in access to raw materials, more
Table 7.4- World Bank Lending by Sector
Aiding the Developing Nations (2 of 4)
International Monetary Fund◦A bank for the central banks of
member nations◦Surplus nations channel funds to
nations with temporary deficits◦Two major sources of IMF funds
Quotas Subscriptions, pooled funds of member nations; generate most IMF funds; larger quota for wealthier nations
Loans Loans from member nations IMF has lines of credit with advanced nations, Saudi Arabia
Aiding the Developing Nations (3 of 4)
Generalized System of Preferences◦Major advanced nations temporarily
reduce tariffs on designated manufactured imports from developing nations below the levels applied to imports from other advanced nations
◦Attempts to promote economic development through increased trade rather than foreign aid
◦Trade preferences granted by a nation are voluntary; granting nation sets eligibility, terms
◦A nation may “graduate” out of the program if successful
Aiding the Developing Nations (4 of 4)
Does Aid Promote Growth of Developing Nations? ◦Critics contend aid prolongs bad
governments, favors the wealthy in poor nations, squandered
◦Proponents counter that although sometimes ineffective, has reduced poverty, spurred growth
◦Global Development distinguishes type of aid For infrastructure development, growth
oriented aid which has strong effect on economic growth
Disaster & humanitarian relief, food supply, water sanitation have less effect on economic growth
Economic Growth Strategies: Import Substitution Vs Export Led Growth(1 of 7)
Import substitution ◦Extensive use of trade barriers
To produce goods which were formerly imported by protecting domestic industries from import competition through trade barriers
◦Inward-oriented Trade and industrial incentives favor
production for the domestic market over the export market
Extension of Infant-industry argument
Economic Growth Strategies: Import Substitution Vs Export Led Growth(2 of 7)
Advantages of import substitution ◦Low risks of establishing a home
industry to replace imports ◦Easier to protect from foreign
competitors as compared with having advanced nations reduce their trade restrictions
◦Foreign firms have an incentive to locate manufacturing plants in a developing nation
Economic Growth Strategies: Import Substitution Vs Export Led Growth( 3of 7)
Disadvantages of import substitution ◦Domestic industries
No incentive to increase their efficiency◦Producers cannot avail of economies of
scale◦Discriminates against all other
producers Including potential exporting ones
◦Very difficult to remove the restrictions once placed
◦Breeds corruption
Economic Growth Strategies: Import Substitution Vs Export Led Growth( 4 of 7)
Export-led growth◦Export-oriented policy◦Outward oriented - links the domestic
economy to the world economy◦Promote growth through the export of
manufactured goods◦Trade controls - nonexistent or very
low◦Industrialization
Natural outcome of development
Economic Growth Strategies: Import Substitution Vs Export Led Growth( 5 of 7)
Advantages of export-oriented policies◦Encourage industries in which
developing nations are likely to have a comparative advantage
◦Allow domestic producers greater scope for exploiting economies of scale
◦Impose a competitive discipline on domestic firms that forces them to increase efficiency
Economic Growth Strategies: Import Substitution Vs Export Led Growth( 6 of 7)
Is Economic Growth Good for the Poor?◦Developing nations with continuing
growth Significant progress in decreasing poverty
◦Liberal economic policies Open markets and monetary and fiscal
stability Raise the incomes of the poor and everyone
else in society proportionately
Economic Growth Strategies: Import Substitution Vs Export Led Growth( 7 of 7)
Can All Developing Nations Achieve Export Led Growth?◦Although exporting can promote
growth, dependent on willingness of advanced nations to absorb many goods from developing nations
◦Pessimists argue that if all developing nations tried to export simultaneously, price of their exports would drop
◦But production of developing nations equals only 5% of world output
East Asian Economies ( 1 of 3)
Economic success◦Highly diverse in natural resources,
populations, cultures, and economic policies
◦High rates of investment◦High and increasing endowments of
human capital due to universal primary and secondary education
East Asian Economies ( 2 of 3)
Foster competitiveness◦Invested in people◦Provided a favorable competitive
climate for private enterprise◦Economies - open to international
trade◦Actively sought foreign technology◦Discouraged the organization of trade
unions◦Free and competitive labor markets
No minimum wage legislation
Table 7.5- East Asian Economies’ Growth Rates of GDP per Capita…
East Asian Economies ( 3 of 3)
Flying Geese Pattern of Growth◦Nations gradually move up in
technological development ◦By following in the pattern of nations
ahead of them in the development process
◦Result of market forces
China’s Great Leap Forward ( 1 of 4)
1970s -◦Value of exports and imports less than
$15 billion◦30th largest exporting nation◦Negligible participant in world financial
markets2005 -
◦World’s second largest economy◦National output over half that of U.S.
60% larger than Japan’s
China’s Great Leap Forward ( 2 of 4)
Since 1970s, China’s “marketizing” its economy ◦Greater competition◦Open to foreign investment and joint
ventures◦Economic zones - firms could keep
foreign exchange earnings and hire and fire workers
◦Open to international trade
China’s Great Leap Forward ( 3 of 4)
Challenges for China’s Economy◦Privatization of industry◦Rising labor costs◦Development of infrastructure◦Reliance on investment spending◦Environmental future◦Status in global finance◦Convertibility of the Yuan
China’s Great Leap Forward ( 4 of 4)
China’s Export Boom Comes at a Cost: How to Make Factories Play Fair
U.S. demand for cheap goods creates issues◦Product safety
Dangerous, unsafe toys made in China and recalled because of lead paint, dangerous magnets, kerosene
◦Labor protections Pressure to cut costs leads to failure to pay
Chinese minimum wage, excessive hours, falsifying records
◦Quality of the environment China’s air, land and water all
contaminated
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India: Breaking Out of the Third World ( 1 of 3)
Rapidly improved economic performance ◦Freer trade policies
Economy of India◦Agriculture, handicrafts,
manufacturing, services◦Two-thirds of the Indian workforce –
agriculture◦Services - growing sector
India: Breaking Out of the Third World ( 2 of 3)
Issues to sustain robust economic growth◦Improvement in infrastructure
Roads, electric power generation, rail freight, and ports
◦High rate of population growth Major advantage - almost limitless labor
supply and consumer demand Necessity of investing in education and
health care Creating adequate opportunities for
employment
India: Breaking Out of the Third World ( 3 of 3)
Further efforts needed ◦Systematically deregulate sectors
Retailing, the news media, and banking◦Eliminate preferences for small-scale,
inefficient producers◦Repeal legislation blocking layoffs in
medium- and large-sized firms◦Reform its agriculture industry in order
to generate jobs in rural areas
Brazil Takes Off
By 2011, Brazil’s economy the largest in Latin America and world’s seventh largest
From the 1930’s to 1960’s, Brazil pursued import substitution policy with slower economic growth
1990’s – Brazil established pro-growth, open economy attracting FDI and privatization
Potential for Brazil to grow on a sustained basis with population and natural resources