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International trade
and Development
Lecture # 03
Learning Goals
• You will be able to understand why traditional trade theories are
irrelevant for developing nations and the development process.
• You can understand why international trade is comsidered as an
engine of growth.
• Compare imports substitution with export orientation as a
development strategy.
• Describe the current problems facing developing countries
What is international trade?
Traditional Trade Theories Are Irrelevant For
Development Process
• Developing nations exporting primarily food and raw materials in
exchange for manufactured goods from developed nations.
• In 1980, manufactured products were only 25 percent of develop
ing country exports; by 2010, that figure exceeded 80 percent
• Until the 1980s, international economic system hindered develop
-ment through secularly declining terms of trade and widely
fluctuating export earnings for developing nations.
Trade as an engine of growth
 During the nineteenth century, most of the world’s modern
production was concentrated in Great Britain
 Large increase in population in resource poor Britain led to a rapidly
rising demand for the food and raw material
 Regions of recent settlement (the United States, Canada,Australia,
New Zealand, Argentina, Uruguay, and South Africa) export those food
and raw materials.
 During the century from 1815 to 1913, Britain’s population tripled, its
real GNP increased 10 times, and the volume of its imports increased
20 times.
Trade as an engine of growth (contd.)
 The regions of recent settlement were able to satisfy Britain’s demand
for food and raw materials because of several favorable circumstances:
Richly endowed with natural resources such as fertile land, forests, and
mineral deposits. Second, workers with various skills
The huge inflows of capital and workers made possible construction of
railroads, canals etc.
iii. The great improvement in sea transportation enabled these new lands
to satisfy the rising demand for wheat, corn, cotton, wool, leather, and
variety of other foods and raw materials more cheaply than traditional
sources of supply in Europe & elsewhere.
Why Developing Nations Want To Industrialize?
Faster technological progress
Creation of high paying jobs & solve the
unemployment and underemployment problems
Higher multipliers in production process
Rising terms of trade
Relief from BOP difficulties
Import-substitution industrialization (ISI) :
The industrialization policy that many developing nations
followed during the 1950s, 1960s, and 1970s involving the
replacement of imports of industrial goods with domestically
produced goods.
Export-oriented industrialization :
The policy of industrialization pursued by some developing
nations that involves increasing the output of manufactured
goods for export.
Advantages of Import Substitution
Reduced risk in setting up an industry to replace imports because market for
industrial product already exist.
Easier for developing nations to protect their domestic market against foreign
Foreign firms are induced to establish so-called tariff factories to
overcome the tariff wall of developing nations.
Disadvantages Of Import Substitution
No incentive to become more efficient.
Leads to inefficient industries
Import substitution becomes more and more difficult and
Advantages Of Export Orientation
Allows a developing nation to take advantage of economies of scale.
Stimulates efficiency throughout the economy.
The expansion of manufactured exports is not limited by the
growth of the domestic market.
Disadvantages Of Export Orientation
Have to face competition from the more established and
efficient industries in developed nations.
Developed nations often provide a high level of effective protection for
their industries producing simple labor-intensive commodities in which
developing nations already have or can soon acquire a comparative