Download Lecture Slides Chapter 07

Trade Policies for the
Developing Nations
Chapter 7
Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.
Developing Nations Characteristics
o developing nations – relatively low per capita
GDP, life expectancy and adult literacy
o exports tend to focus on primary products such
as agricultural goods, raw materials & fuels
Developing Nations Trade Problems
o question on distribution of trade benefits
o unstable export markets
o concentration
of exports
particularly
problematic
o poor output or
decreased
demand will
significantly
decrease
trade revenue
Developing Nations Problems (cont.)
o inelastic supply and demand also problems
o shift in either demand or supply could cause
large decrease in prices and revenues
Developing Nations Problems (cont.)
o declining terms of trade
• developing nations concern that terms of
trade have deteriorated
• data does not support this conclusion
o limited market access
• industrial countries impose higher tariffs on
developing countries than on other industrial
• tariff escalation
o agricultural export subsidies in advanced
countries
International Commodity Agreements
1) production and export controls – target price
determines total quantity
o
lowering production leads to an increase in price
o
raising production leads to a decrease in price
2) buffer stock – association maintains stock of
exported good
o
o
buys additional stock to raise price
sells from existing stock to lower price
3) multilateral contracts – agreement stipulating
minimum price at which importers will purchase
and maximum price at which exporters will sell
Maximizing Cartel Profits
o If individual suppliers compete with each other
prices will fall to relatively low levels.
o OPEC or any
cartel colludes
to reduce
output levels
which increase
price and profits
for individual
firms.
o Profits are
maximized
where MC=MR.
Obstacles to Collusion
1) number of sellers: greater number of sellers
makes collusion more difficult
2) cost & demand differences: make it difficult to
agree on price
3) potential competition: possibility of new firms
entering market would cause agreement to
break apart
4) economic downturn: falling profits make firms
more likely to reduce prices
5) substitute goods: if consumers have
alternatives available, higher cartel prices may
cause consumers to shift purchases
Aiding Developing Countries
World Bank
o international organization that provides loans to
developing countries
o poverty
reduction and
economic
development
o UN
specialized
agency with
185 member
nations
Aiding Developing Countries (cont.)
International Monetary Fund (IMF)
o finances balance-of-payments for member
nations
o lender of last resort
o to obtain loan nation must agree to IMF fiscal
and monetary policy stipulations
Generalized System of Preferences
o industrialized nations temporarily reduce tariffs
on designated products from developing nations
o trade preferences are voluntary
Does Aid Promote Growth?
critics:
o aid fosters bureaucracy
o prolongs bad government
o moral hazard problems
proponents:
o enhanced poverty reduction
o prevented further decline in some nations
o growth-oriented aid which improves and
expands infrastructure has strong economic
impact
Import Substitution
o use of trade barriers to protect domestic
industries
o establishment of domestic industries to produce
goods previously imported
o based on rational that developing countries
cannot compete with established producers of
industrial goods – infant industry argument
o advantages: low risk, easily accomplished, and
provides incentive for others to relocate
o disadvantages: inefficient production, lack of
economies of scale, discriminated against other
non-protected industries, and corruption
Export-Led Growth
o trade controls limited or completely eliminated
o industrialization as natural result of development
o advantages: promotes production based on
comparative advantage, larger world market,
and promotes efficient production
Questions on Economic Growth
Growth Good for the Poor?
o critics: growth leads to increased income
inequality
o counter: higher growth rates decrease poverty
o counter: World Bank study indicating incomes
of poor rose in proportion to overall growth
Export Led Growth & Developing Countries?
o critics: increased exports lead to decreased
prices in world markets
o counter: developing countries as a group would
not have a huge impact on world markets
East Asian Economies
o substantial economic
growth 1995-2005
o high rates of
investment
o increasing human
capital - education
o discouraged union
formation
o initially relied on import substitution then shifted
to export-push strategies
o flying-geese pattern of growth – nations
advance technologically by following pattern
set by more advanced nations
China’s Transformation to Capitalism
o centrally planned economy from 1949-1970s
o minimal international trade
o 30th largest exporting country
o China “marketized” economy from 1970s
forward
o goods sold for market-determined prices
o production based comparative advantage
o labor intensive goods such as sporting goods,
toys, footwear, garments & textiles
o entered WTO in 2001
o world’s 2nd largest economy by 2005
India’s Economic Development
o 1947 independence brought socialism and
import substitution
o isolationist from 1950s to 1980s
o 1991 saw large reduction in tariffs and removal
of ban on foreign investment
o multinational companies outsourced back office
operations to India
o competitive auto market with free trade
improved efficiency in auto production
o forecast to become most populous country by
2030
o however retail sector still regulated and
inefficient due to closed markets