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Chapter 17
Primary
Exports
Dwight H. Perkins
Steven Radelet
David L. Lindauer
Primary Exports
• international trade is one of the most
powerful forces affecting the process of
and economic development
• influences economic growth, income
distribution, use of natural resources,
economic and political relations with the
world
• provides access to new markets, new
opportunities, wider choices, competitive
prices
• allows low-income countries to import
machines and technology and facilitates
flow of knowledge and information
• Export-led growth
• WTO
• Bilateral trade agreements
Export characteristics of
developing countries
• exports of developing countries: oil and
petroleum products, minerals, food and
agriculture,,,,
• countries tend to export products based on
their own particular endowments of the
basic factors of production (L,L,K)
• i.e labor intensive
• import products that rely on factors of
production relatively scarce in their
countries
• almost all developing countries import
machines and capital equipments and
technology products
• many developing countries are highly
dependent on one or few primary
commodities in their export earnings
• the importance of diversified economic
base
Comparative Advantage
• A country has a comparative advantage in
producing (X) if it can produce (X) at lower cost
than anyone else.
• Having a comparative advantage is not the same
as being the best at something. In fact, someone
can be completely unskilled at doing something,
yet still have a comparative advantage at doing it!
How can that happen?
• comparative advantage refers to the ability of a
party to produce a particular good or service at a
lower marginal and opportunity cost over
another.
• Even if one country is more efficient in the
production of all goods (absolute advantage in all
goods) than the other, both countries will still
gain by trading with each other, as long as they
have different relative efficiencies
• comparative advantage has important
implications:
1. any country can increase its welfare by
trading
2. the smaller the country the greater it gains
from trade
3. export goods that are most intensively and
import the scarce
• before trade: produce and consume at (A)
• with trade: produce at (B) and increase
consumption of both to (C)
• C is on higher IC
• Different relative prices means an
opportunity to improve welfare through
trade
• with trade: produce more at higher world
prices
• import more at lower world prices
K-intensive
well endowed with L and L
Different relative prices
L-intensive
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Primary Exports as an
Engine of Growth
1. Improved Factor Utilization
• primary-export-led growth can drive an economy
to:
1. use more of the available factors of production
2. use those factors more efficiently
2. Expanded Factor Endowments
• lead to accumulation of additional factors
of production (K, L) through FDI, S, skills,
• i.e. international oil companies in
developing countries
3. Linkage Effect
• Stimulating other sectors of the economy
Barriers to primary Export
Led Growth
1. Sluggish demand growth
2. Declining terms of trade: the value of a
country's exports to that of its imports. If a
country's (TOT) is less than 100%, there is
more capital going out (to buy imports)
than there is coming in. If greater than
100%: the country is accumulating capital
(more money is coming in from exports).
3. Fluctuating export earnings
4. Ineffective linkages
5. Rent seeking and corruption
6. Dutch Disease