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International trade and Development Lecture # 03 Learning Goals 01 • You will be able to understand why traditional trade theories are irrelevant for developing nations and the development process. 02 • You can understand why international trade is comsidered as an engine of growth. 03 • Compare imports substitution with export orientation as a development strategy. 04 • 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 industrial 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: i. Richly endowed with natural resources such as fertile land, forests, and mineral deposits. Second, workers with various skills ii. 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 competition 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 costly 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 advantage. Thank You