• Dependent on developed countries– Export markets – Source of imports

• Primary product exports – Agricultural goods, raw materials– Labor-intensive manufactures

• Ladder metaphor

• “Flying geese” pattern/export-led growth– JAPAN– Asian tigers: Hong Kong, S. Korea, Taiwan, Singapore– Dragons: Thailand, Malaysia, Indonesia, Philippines– CHINA, INDIA, Vietnam, Bangladesh

Developing nations and trade

Developing nations: dependence on primary products

Major export % of total exportsCountry product 2002 2005

Nigeria Oil 96 88Saudi Arabia Oil 86 91Venezuela Oil 86 82Burundi Coffee 79 76Malawi Tobacco 51Mauritania Iron ore 56 36Zambia Copper 56 42Ethiopia Coffee 54 41Benin Cotton 41Chad Cotton 40Rwanda Coffee 31 46

Developing nations’ concerns:Trade barriers limit developing country exports

Average MFN Tariffs in

1997–1999 (Unweighted

in Percent)

Tariff protection in agriculture is higher than in manufactures.

Tariffs are relatively high on labor-intensive manufactures.

Developed countries often subsidize agricultural exports

Developing nations’ concernsAre gains from trade fairly distributed ?

– Commodity exports Competitive markets– Manufactured imports Monopoly power

Unstable export marketsPrimary-product exports inelastic supply and inelastic demand violent price fluctuations

Worsening terms of trade as incomes grow(?)Income elasiticities of demand

Primary Goods Trap• Primary products income elasticity: inelastic• Manufactures income elasticity: elastic

Developing nations’ concerns:Export price instability for a developing nation

Remedies for developing nation problems

• Stabilize commodity prices - international commodity agreements– Production and export controls– Buffer stocks – Brazilian coffee– Multilateral contracts – Min and Max Prices– Cartels – OPEC

• Generalized system of preferences (GSP)– Low tariffs in developed countries for selected

manufactures exported by LDCs

Growth strategies

• Import substitution industrialization (ISI)– Trade barriers protect emerging industries– Popular in 1950s and 1960s, particularly in LA

• Export-led growth– Manufactured exports engine of growth– More common starting in 1970s

• Asian “miracle”

Import substitution industrialization (ISI)PROs• Low risk: home market already exists for import substitutes• Easier to protect their own markets than to force industrial

nations to open theirs• Incentive for foreign firms to produce in developing country

get in under tariff

CONs• Shelter home industry from competition

– No incentive for efficiency/innovation

• Small size of home markets – Can’t exploit economies of scale

• Protection of import-competing industries handicaps other sectors, including potential exporters

Export-led growthPROs

• Encourages industries with comparative advantage labor-intensive manufactures

• Large export markets economies of scale

• Low level of trade restrictions domestic firms remain competitive

CONs

• Sensitive to economic cycles and protectionist pressures in export markets– HIGH barriers to labor–intensive exports

Openness and economic growth

Average Annual

Growth in Real

Income per Capita (%)

Source: David Dollar and Aart Kraay, Trade, Growth, and Poverty, World Bank Development Research Group, 2001.

• Brazil - import substitution in computers– Policy backfired, and was abandoned by 1991

• East Asian newly industrialized countries - export-led growth– Generally very successful, until 1997 crisis

• Success imprudence setback

– High rates of investment and building human capital– Problems overlooked: pollution, income distribution– Vulnerable to protectionist reactions elsewhere

Growth strategies: case studies

• China - transformation from extreme import-substitution to focus on exportsSharp devaluation in 1994 +

Wage and price controlsCompetitive Advantage Dramatic Growth FDI inflow Growth

reinforcedHeavy state role in economy (legacy of central planning)

issues of fairnessPolitical issues:

• Don’t enforce some agreements (intellectual property)• Respect for human rights http://falunhr.org/index.php?option=content&task=view&id=1644&Itemid=

• http://www.npr.org/templates/story/story.php?storyId=11141322

• Accession to the WTO adherence to global trade rules coping with dislocations

Mantra of the 1990s:Washington consensus – Market Fundamentalism:1. Fiscal policy discipline; 2. Redirect public spending away from subsidies/toward pro-growth, pro-poor services (education, health, infrastructure); 3. Tax reform: broaden tax base/ moderate marginal tax rates; 4. Market determined interest rates: positive (but moderate) real rates; 5. Competitive exchange rates: neither fixed nor free-floating; 6. Liberalize trade; 7. Facilitate foreign direct investment; 8. Privatize state enterprises; 9. Deregulate… except oversight of financial institutions; and, 10. Assure legal security for property rights.

1.11.21.3

2.12.22.32.42.5

3.13.23.33.43.53.6

4.14.24.3

5.15.2

6.16.26.3

7.17.2

8

9

Macro Economic Management

Financial Systems

The Role of the State and the Private Sector

Infrastructure and Energy

Competitiveness

The Labour Market

Innovation

International Trade

Environmental Sustainability

1 Education

2 Environment

3 R&D Investment

4 Efficient Taxes

5 Infrastructure Investment

The Santiago Consensus, 2007

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