International Trade and
Economic Development
Chapter 30 IB Economics
International barriers to development
 Over-specialisation
 If a country is dependent on a narrow range of exports
they face great vulnerability and uncertainty
 If a tropical country that is reliant on tourism revenues
will be limited if the global tourist trade is damaged as
a result of a global slowdown in economic growth
 Countries that were dependent on the export of a
small range of low-skill manufactured goods such as
textiles were damaged when China joined the WTO
and increased their supply of textiles on world markets
driving down prices
 Price volatility of primary products
 Many developed countries focus on exporting primary
commodities which are price inelastic (D&S)
 Any change in supply or demand can lead to large price
fluctuations
 This will have a marked impact on the export revenues
 This makes it difficult for producers and governments
to plan ahead
 This means investment is less likely
 Less investment means less growth
 Less growth may mean less development
International barriers to development
 Inability to access international markets
 Protectionism by developed countries to developing
countries means that they cannot use their comparative
advantage and export to developed countries
 They will have limited ability to earn foreign exchange
 This is especially the case in primary product markets
 The US pays over $3 billion in subsidies to American cotton
farmers
 They produce more and push the world price down
 They export their surplus to developing countries who
don’t benefit from subsidies
 This damages the developing country’s producers
 The US does the same with maize, rice and dairy products
 The same happens in the EU with the CAP where they
overproduce and export sugar, cereals and dairy produce
 Small scale farmers in developing countries are effectively
deprived of the ability to earn a living
 Developed countries also use tariff escalation whereby
they put higher tariffs on finished goods so that developed
countries become trapped as suppliers of raw materials
International barriers to development
 Inability to access international market
continued…
 A final factor that prevents countries from
accessing international markets is non
convertible currency
 Any currency that is used primarily for domestic
transactions and is not openly traded on a forex
market.
 This usually is a result of government
restrictions, which prevent it from being
exchanged for foreign currencies
 Most operate a fixed exchange rate where the
domestic currency is pegged to the US Dollar
 Long term changes in the terms of trade
 Changes in the relative prices of exports and
imports have a marked effect upon the ability of
developing countries to trade internationally
 If commodity prices fall over time the revenues
fall and so does their ability to buy imports
Trade Strategies for economic growth and
development
 Import substitution
 Remember that growth is not development but
if it can generate income it may lead to
development
 Import substitution is a strategy to produce as
many products domestically rather than import
 This means less leakages from the economy
 To do this the government will need to
 Decide what to produce domestically –
probably labour intensive, low skill
manufactured goods such as clothes and
shoes
 Subsidise domestic industries
 Implement a protectionist system with high
import tariffs
 This will protect jobs in the domestic industries,
protect the local culture and protect the
economy from the power of multinational
corporations.
Trade Strategies for economic growth and development
 Import substitution
 The disadvantages of import substitution are
 It may only protect jobs in the short run; if there is
little growth there will not be much job creation
 The country does not enjoy the advantages of
comparative advantage and specialisation and will
produce inefficiently
 The lack of competition may drive domestic
industries to be inefficient and not invest in R&D
 Domestic supply constraints may lead to inflation
 Other countries may take retaliatory protectionist
measures
 The main countries to adopt this strategy were in Latin
America
 Former colonies also gained their independence by
doing this
 The problem was that government overspending lead to
debt crisis and countries had to go to the IMF for help
Trade Strategies for economic growth and development
 Export promotion
 Often called export led growth
 Growth is achieved by concentrating on increasing
exports and export revenue
 The country will need to adopt some of the following
policies
 Liberalised trade – open up markets to foreign
competition
 Liberalised capital flows – reduce restrictions on FDI
 A floating exchange rate
 Investment in infrastructure that allows trade to take
place
 Minimal government intervention
 Export growth based on primary products is unlikely due
to falling commodity prices and protectionism from
developed countries
 It is usually focused on manufactured products
 The Asian tigers started by manufacturing labour
intensive products and eventually moved onto more
sophisticated capital intensive products
Trade Strategies for economic growth and development
 Export promotion - evaluation
 There are a number of problems with export led growth
 With the success of the Asian Tigers developed
countries lobbied their governments to place tariffs on
developing countries which removed their comparative
advantage
 Developed countries used tariff escalation to put higher
tariffs on processed goods and assembled products
pushing the developing countries back to primary
products
 In the assumptions required for export led growth it
mentions ‘little government intervention’ however the
Asian Tigers succeeded because their governments
intervened arguing the infant industries needed
protection
 If countries attract MNCs they may become powerful
and lead to problems (next chapter)
 Export promotion could lead to more income inequality
giving growth but not necessarily economic
development
Trade Strategies for economic growth and development
 Trade Liberalisation
 The WTO attempts to promote trade liberalisation (removal of
protectionism) to try to help developing countries and allow
them to benefit from their comparative advantage
 The World Bank, the IMF and the US Treasury department, in
return for financial help, insists that developing countries
follow the Washington Consensus
 A balanced budget (fiscal)
 Spending priorities must be basic health and education
 Interest rate liberalisation
 A competitive exchange rate
 Trade liberalisation
 Liberalisation of FDI flows
 Privatisation
 Deregulation
 Secure property rights
 There has been a lot of criticism of this and some argue that
these conditions are only set so that MNCs can get access to
low cost labour
 Many Latin American countries have been successfully moving
to an inward policy
Trade Strategies for economic growth and
development
 Bilateral and regional trade agreements
 The more agreements that are made the
greater will be the ability of developing
countries to trade and so gain growth and
eventually development
 Diversification
 Many developing countries are now pursuing
export diversification to gain growth
 The aim is to move away from just primary
products to manufactured and semimanufactured goods
 This helps to protect themselves from volatile
price changes
 There will also be increased use of technology
and increased demand for skilled workers
 The problem of tariff escalation still exists
 Plus a more highly qualified workforce is
required
Development Strategies
 Fair Trade Organisations
 Fair Trade organisations ensure that farmers in developing
countries get a fair price and earn a decent income
 Consumers will pay a higher price for goods that have the
fair trade mark because they want to contribute to better
conditions for producers
 A trading company wishing to qualify for the International
Fairtrade Certification Mark must meet the following
criteria
 Product must reach trader as directly as possible with
few, if any, intermediaries
 Product must be purchased at minimum price
 Producer receives a premium for goods that are
certified as organic
 The trader must be committed to a long term contract
 Producer has access to credit from trader
 Producers must be managed democratically – no use of
child labour
 Sustainable farming methods must be used
 The fairtrade premium must be used to aid local
community development
Watch Fair Trade Video
Watch Chocolate
Slavery Video
Complete Q 1 and
2 on P377