Chapter 14 Trade Policies for Developing
Countries
Chapter 14. Trade policies for developing
countries
Link to syllabus
Who are third world?
Terms: Poor/UDC,LDC, developing. Third world. [vs. DCs] No
good term for successful industrializers like S. Korea, nor
country like Singapore.
Newer terms: NICS, OPEC, Transition Econ., Emerging markets
Historical phases of trade policies in LDCs
Colonial phase: free trade, or perhaps mercantilism.
Exploitation of raw materials
Industrialization post-WWII (earlier in Egypt, India, L.A.)
OPEC - taxing exports
East Asian NICs—pushing exports. Led to East Asian Miracle
General shift towards free trade in 1970/90s. Why? End of
cold war. Spread of technology. Dispersion of power in
center countries. Failure of ISI
Variety of experiences. Mentions “Four Tigers” and NICs. BRICK
My position that China deserves singular rank.
In 1/3 of LDCs, income/cap fell during 1990s.
Notes that exports are 27% of GDP for LDCs, 16% in DCs. Most
trade takes place among DCs.
Fig. 14.1 page 296
Growth Rates
of GDP &
GDP/capita
Figure 14.1 p. 318 Growth rates of per
capita GDP, and level
Challenges for LDCs (a.k.a., characteristics):
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Capital and labor markets work less efficiently/ market
imperfections
Poverty and other social problems in LDCs. Building governments.
Mention Arthur Lewis “Econ development with unlimited supply
of labor.”
W. Arthur Lewis, 1915-1990
W. Arthur Lewis, 1915-1990
Born St. Lucia (Caribbean)
Educated at LSE
Taught at U. of Manchester, under Hayek,
and at Princeton
Adviser to the UN, gov’t of Ghana,
Nobel Prize, 1979
Econ development with unlimited supply of
labor.”
“Economic Development with Unlimited
Supplies of Labor” 1954
Trade Policy Alternatives for Developing Countries
(p. 298)
• Focus on exporting primary products
• Attempt to raise the world prices of
primary products that are exported
• Protect and encourage new industries that
produce products sold into the local
market
• Encourage new industries that produce
products that are exported
Trade Policy Alternatives for LDCs (p. 319)
1. Focus on exporting primary products
2. Attempt to raise the world prices of primary
products that are exported
3. Protect and encourage new industries that
produce products sold into the local market
4. Encourage new industries that produce
products that are exported
Raúl Prebisch, 1901 - 1985
Born in a province of Argentina. Parents were
German immigrants. Studied at University of
Buenos Aires, where he later taught. During the 1930s
he moved from classical orthodoxy to a form of
Keynesianism. In 1948 he was the first director of ECLA,
[CEPAL] and in 1950 promulgated what became known as
the Prebisch-Singer hypothesis, which argued against free
trade because of an alleged trend toward falling terms
of trade for raw materials. Although he is said to
have favored ISI, he was often critical of its excesses.
Prebisch 1901-1985
Self-taught
From 1964-1969 he led UNCTAD, a UN body that
worked for Third World countries.
Declining terms of trade
Prebisch [Singer] argued in 1950s about downward trend and
instability of primary product prices. [immiserizing growth]
Talk about ECLA. (1930s Depression, and DC protectionism). ISI
(which had started before WWI).
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Why? 1) Engel’s Law 2) Tech creating substitutes (e.g. rubber,
cotton) 3) imperialism. Why not? 1) Limited supply 2) Slow
productivity growth.
That raw materials have higher price fluctuations is usually
granted. Easy to explain by inelastic S & D curves.
To which I would add supply would have been larger if LDCs had
continued to invest in raw materials.
Data: mixed. Mentions decline in transport costs, unmeasured
quality change in manufactures. Note that DCs export lots of
raw materials, some LDCs (Korea) only export industrial goods.
Oil/fuels should be set aside. Something of an out-of-date issue.
Figure 14.2 page 303
Relative price of
primary products
Figure 14.2 page 325. Relative prices of
primary products
Discussion of ISI
Got a push in 1920s and 1930s, when prices of raw materials fell.
(Australia as well as Brazil). More attention among newly
independent countries in 1950s and 60s (ex-colonies).
Arguments for ISI:
Infant Industry
Optimal Tariff
Developing government (due to higher tax revenue)
Terms of trade effects. Avoiding immiserizing growth.
Replacing imported industrial goods is a convenient strategy, given
limited market information.
Nothing about social change, technology.
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Import Substituting Industries (p. 311)
Potential strengths
• Infant industries can grow up
• Developing government can get much-needed revenue
• The country’s international terms of trade can improve
• Information on demand is acquired cheaply
Actual experience
• Deadweight losses from resource misallocation
• Developing countries practicing or adopting freer-trade
policies grow more quickly
P. 333 Discussion of Import Substitution
Industries
Strengths:
Infant industries can grow up
Gov’ts get revenue
May help terms of trade
Information on demand is acquired cheaply
Actual Experience with ISI (a.k.a. weaknesses)
Significant Resource Misallocation
LDCs that adopted freer trade polices grow more quickly.
Experience Most of today’s industrial countries (US, Germany,
Italy, Japan; Russia, China. Even England against India)
followed something like this. (but, many infant industries never
grew up).
Many LDCs have been unsuccessful, and welfare costs have
been high.
What about change in trade policy, from ISI to export promotion.
E.g. Taiwan, Korea late 1950s early 60s. vs. Ghana.
What about comparing growth rates of countries practicing ISI vs.
export promotion. (WDR 1984, 1994).
Comment that correlation does not prove causation.
OPEC 73/74, 79/80. Greatest seizure of monopoly power in
history. Important assertion of power by people from third
world. Note that there had been fear of recession due to unrecycled petro-dollars. Also, significant problems in OPEC
countries with fall in prices. Led to nationalization of firms.
Figure 14.3 page 307
Cartel as profit maximizing monopoly
Figure 14.3 page 329. Cartel as profit
maximizing monopoly
C is competitive solution. B is monopoly
(tightly controlled cartel).
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Graph from Bade/P: Oil prices
Why did price fall?
Collapse of OPEC (including cheating).
Growth of alternative production: North Sea,
Mexico, Russia.
More efficient consumption.
Erosion of Cartel Power (p. 308)
• Declining demand as buyers respond by
switching to substitutes
• Increasing responsiveness of competing
supply from noncartel producers
• Declining share of the cartel’s production
in the world market
• Cheating by the cartel members
U.S. Petroleum Production, Consumption, Imports
Erosion of Cartel Power (p. 330)
Declining demand as buyers switch to
substitutes
Increasing responsiveness of competing
supply by non-cartel producers
Declining share of the cartel’s production
Cheating by cartel members
U.S. Petroleum Production, Consumption,
Imports
Source: U.S. DoE
U.S. currently imports 60% of its consumption.
Reference to a formula for maximum price.
Other cartels besides oil? (bananas, copper). Uranium. Defense
items. Diamonds.
Figure 13.4 page 329
Changing mix of exports from LDCs
End of chapter
Figure 14.4 page 337. Changing mix of
exports from LDCs
Since 1980s. Asian NICs.
Doesn’t mention Export processing zones.
Comment that DCs have discriminated against
exports from LDCs. NTBs. Especially
textiles, footwear.
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Figure 13.5
page 331
Trade reform in
Transition
economies
Figure 13.5 page 331 old edition.
Trade reform in transition
economies.
Transition: basically since 1989.
(earlier in Hungary,
Czechoslovakia).
CMEA (or Comecon) countries used barter. USSR was central,
exported oil at subsidized prices.
Transition reforms included: 1) creation of markets 2) private
ownership (privatization of SOEs) 3) legal system with
contracts and property laws.
Was generally a rapid push towards liberalization. Joined WTO,
associated with EU. Not Former Soviet Union.
Creation of European Bank for Reconstruction and Development.
Why: politics/history: Party forced itself on East Europeans; its
rejection was not as strong in FSU.
Decline in income is over.
General sense that the quicker the reform, the better.
Russia trying to get into WTO: US politics vetoing it, holding Iran
nuclear policy hostage.