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1、7,Trade Policies for the Developing Nations,7Trade Policies for the Develo,Introduction,Economic and social indicators (Table 7.1)Developing nationsMisgivings about international trading systems Skepticism regarding the comparative advantage principle and free trade Policies aimed at improving the e
2、conomic conditions of developing nations,IntroductionEconomic and socia,Back,Back,Developing-Nation Trade Characteristics,Trade highly dependent on advanced nationsComposition of exportsEmphasis on primary products Manufactured goods - Labor intensive; modest amounts of technology usedStructure of o
3、utput (Table 7.2)Dominance of primary products has greatly diminished in the past three decades,Developing-Nation Trade Charac,Back,Back,Change in the Characteristics of Developing-Nation Trade,Investments in both people and factoriesSharp rise in average educational levels and capital stock per wor
4、kerImprovements in transport and communications, in conjunction with reformsLiberalization of trade barriers after mid-1980sCertain developing countries have not integrated strongly into the global economy,Change in the Characteristics,Tensions Between Developing Countries and Advanced Countries,Bes
5、t strategy for a poor country to take advantage of international tradeDeveloping countries have opened markets to international trade and foreign investmentImport barriers set by advanced nations,Tensions Between Developing Co,Reasons for Tensions,Need for topmost countries to create new industries
6、and productsStalling of innovation leads to competition from lower-wage workersProtectionist bias against catching upAdvanced countries Trade-off between helping their own, and the worlds poor,Reasons for Tensions Need for,Trade Problems of the Developing Nations,Unstable export marketsWorsening ter
7、ms of tradeLimited access to markets of industrial countries,Trade Problems of the Developi,Unstable Export Markets,Characteristic of many developing nations:Concentration of exports in one or few primary products (Table 7.3)Key factor underlying instability of primary product prices and producer re
8、venues:Low price elasticity of demand and supply schedules for products (tin, copper, coffee)Export price instability for a developing country (Figure 7.1),Unstable Export MarketsCharact,Back,Back,Back,Back,Worsening Terms of Trade,Used to justify the refusal to participate in trade-liberalization n
9、egotiationsDemand for preferential treatmentDeveloping nations complain about deteriorating commodity terms of tradeUN study in 1949 supported the assertion of worsening commodity terms of tradeOther studies led to opposite conclusions about terms-of-trade movements,Worsening Terms of TradeUsed t,Li
10、mited Market Access,Global protectionism - a hindrance to market accessEspecially true of agriculture and labor-intensive manufactured products (Figure 7.2)Rich nations maintain barriers in areas where developing nations have comparative advantageDeveloping nations plagued by tariff escalationAntidu
11、mping and countervailing duties act as substitutes for traditional trade barriers,Limited Market AccessGlobal pr,Back,Back,Limited Market Access,Poor countries have leaned on the U.S. and Europe to reduce trade barriersAverage tariff rate of developing countries is higher (Table 7.4)Critics note: De
12、veloping countries themselves are part of their problem They should liberalize tradeJustification provided by developing nations:Poor countries do not have social safety net and reeducation programs to cushion trade disadvantages,Continued,Limited Market AccessPoor coun,Back,Back,U.S. Subsidies Supp
13、ort American Farmers,World cotton prices in year 2002 decline to an unprofitable levelComparison:West Africa: Price being offered to farmers not sustainableMississippi Delta, U.S.: Farmers receive governmental subsidiesNo indications of depression in price,U.S. Subsidies Support America,U.S. Subsidi
14、es Support American Farmers,Since September 11, 2001:Strategy to combat poverty as part of campaign against terrorism Counteracted by subsidies to U.S. farmersLowers world prices of vital cash crops upon which developing nations dependRemoval of U.S. subsidies would bring a rise in world cotton pric
15、esAmerican cotton farmers maintain subsidies essential for survival,Continued,U.S. Subsidies Support America,U.S. Food Aid Support American Farmers,Growers in developing countries complain of U.S. policy on purchasing food grain for assistanceU.S. view: Policy supports American farmers, processors,
16、and shippers, and the worlds hungryDeveloping countries prefer food-aid policy of the European UnionAnalysts estimate: Transport and handling costs from U.S. to Africa add on to costGreatest benefit: Provides economic stimulus by providing cash to farmers in developing nations,U.S. Food Aid Support
17、American,Stabilizing Primary-Product Prices,International commodity agreements (ICAs)Agreements between leading producing and consuming nations of commodities such as coffee, rubber, and cocoaAreas include:Stabilizing pricesAssuring adequate supplies to consumersPromoting economic development of pro
18、ducersMeasures only have limited success,Stabilizing Primary-Product Pr,Production and Export Controls,Stabilizing export revenuesAffect price of commodities by influencing the world supply of the commodityTotal quantity based on target price agreed to by member countriesObstacle in attempting to im
19、pose limits on production and exportsDistribution of the limits among producing nationsNew producers drawn into the market by artificially high prices,Production and Export Controls,Buffer Stocks,Producers association (or international agency) is prepared to buy and sell a commodity in large amounts
20、Consists of supplies of a commodity financed and held by producers associationHypothetical price-stabilization efforts of the International Tin Agreement (Figure 7.3),Buffer StocksProducers associ,Back,Back,Buffer Stocks,Advantages: Primary producing nationsPromotes economic efficiencyStabilizing co
21、mmodity prices moderates the price inflation of industrialized nationsLimitations:Agreeing on target price that reflects long-term market trendsHigh costs of holding the stocksInclude transportation expenses, insurance, and labor costsPoor decisions in choice of price targets,Continued,Buffer Stocks
22、Advantages: Prima,Multilateral Contracts,Stipulates a minimum, and maximum price for purchase and sale of guaranteed quantities between producing nations and importersDesigned to hold prices within a target rangeResults in less distortion of the market mechanism and allocation of resourcesTend to fu
23、rnish only limited market stability,Multilateral ContractsStipulat,Does the Fair-Trade Movement Help Poor Coffee Farmers?,Started in Europe in the early 1990sObjective: To increase income of poor farmers in developing countries Farmers sell their beans directly to roasters and retailers, bypassing m
24、iddlemen in their own countriesResults:Increases farmers earnings Sets prices and arranges for export directly to brokerage firms and other distributorsCritics: Biggest winners are not farmers, but retailers,Does the Fair-Trade Movement H,The OPEC Oil Cartel,Maximize member nation profits by support
25、ing prices higher than would exist under more competitive conditionsMarket power stemmed from a combination of: A strong and inelastic demand for oil, andControl over half of world oil production and two-thirds of world oil reservesExercise considerable control over world oil prices, by restricting
26、competition among member nations,The OPEC Oil CartelMaximize me,Maximizing Cartel Profits,Cartels attempt to support prices higher than they would be under more competitive conditionsIncreasing the profits of its membersDemand and cost conditions of 10 oil suppliers (Figure 7.4),Maximizing Cartel Pr
27、ofitsCarte,Back,Back,Obstacles in Forming a Cartel,Number of sellersCost and demand differencesPotential competitionEconomic downturnSubstitute goods,Obstacles in Forming a CartelN,OPEC as a Cartel,Has disavowed the term “cartel”Attempted to formulate plans for systematic production control among it
28、s members as a way of firming up oil pricesDoes not control pricesCurrently controls less than 40% of world supplyAffected by high member violation of agreement: Higher production than assigned quotasException: Saudi Arabia,OPEC as a CartelHas disavowed,Need to Offset the Market Power of OPEC,Policy
29、 initiation to increase supply and/or decrease demandDifficulties for the U.S., to achieve these:Raising fuel economy standards mandated by the federal governmentIncreasing federal excise tax on gasolineAllowing oil companies to drill on federal land designated as wilderness in Alaska, where there i
30、s a good chance they might find oilDiversifying imports,Need to Offset the Market Powe,Aiding the Developing Countries,Institutions and policies created to support developing countries:The World BankThe International Monetary FundThe generalized system of preferences,Aiding the Developing Countrie,W
31、orld Bank,Provides loans to developing countriesMember governments and their agencies Private firms in member nationsAimed toward poverty reduction and economic developmentMade up of 184 member countriesOne among UNs specialized agencies,World BankProvides loans to de,World Bank Group,International
32、Bank for Reconstruction and DevelopmentInternational Development AssociationInternational Finance Corporation Multilateral Investment Guarantee AgencyInternational Center for Settlement of Investment Disputes,World Bank GroupInternational,World Bank Group: Functions,Provisions:Low-cost loans and gra
33、ntsEquity, long-term loans, loan guarantees, and advisory servicesProvides encouragements to foreign investment through:Guarantees to investors against losses caused by war, civil disturbance, etcInternational facilities for conciliation and arbitration of investment disputesWorld Bank lending by se
34、ctor (Table 7.5),World Bank Group: FunctionsPro,Back,Back,International Monetary Fund (IMF),Consists of 184 nationsA bank for member nations central banksProvides assistance with regard to BOP surpluses, or deficitsMajor sources of funds: quotas and loansAll loans subject to a degree of conditionali
35、tyCritics note: The moral-hazard problemContractionary effect of restrictive monetary and fiscal policy conditions,International Monetary Fund (I,Generalized System of Preferences,Attempts to promote economic development through increased trade, rather than foreign aidMajor industrial nations tempor
36、arily reduce tariffs on designated manufactured imports below the levels applied to imports from other industrial nationsTrade preferences granted by industrial countries are voluntaryProgram extends duty-free treatment to about 3,000 items,Generalized System of Preferen,Generalized System of Prefer
37、ences: Limitations,Mainly apply to products that already face relatively low tariffsProducts and countries removed from GSP eligibility because of lobbying by domestic interest groups in importing countriesInsufficient assistance to majority of the worlds poor,Generalized System of Preferen,Does Aid
38、 Promote the Growth of Developing Countries?,Critics maintain that aid has: Fostered government bureaucraciesProlonged bad governmentsFavored the wealthy in poor countriesBeen squanderedProponents counter:Contentions, while partially true, are overstatedAid enhances poverty reduction and growth in s
39、ome countriesAid prevents worse performance in other countries,Does Aid Promote the Growth of,Does Aid Promote the Growth of Developing Countries?,Center for Global Development in Washington, DC, research attempts to resolve this debateDistinguishing between types of aid granted:Aid for the developm
40、ent of infrastructureConsidered to have relatively strong effects on economic growthDesignated as growth-oriented aidAid for disaster and humanitarian relief:Tend to have less immediate effects on economic growth,Continued,Does Aid Promote the Growth of,Economic Growth Strategies,Developing countrie
41、s have pursued two competing strategies for industrialization besides economic assistance: Import substitutionExport-led growth,Economic Growth StrategiesDeve,Import Substitution,Extensive use of trade barriers to protect domestic industries from import competitionTrade and industrial incentives fav
42、or production for the domestic market over the export market,Import SubstitutionExtensive u,Import Substitution: Advantages,Low risks of establishing a home industry to replace importsEasier to protect its manufacturers against foreign competitors than to force industrial nations to reduce trade res
43、trictions To avoid the import tariff walls of the developing country, foreigners can locate manufacturing plants in the country,Import Substitution: Advantage,Import Substitution: Disadvantages,No incentive for sheltered industries to increase efficiencyLimited economies of scale and high unit costs
44、 due to small market size of developing countriesConsidering resource utilization, protection of import-competing industries automatically discriminates against all other industriesResistance to removal of restrictions Breeds corruption,Import Substitution: Disadvant,Import-Substitution Laws Backfir
45、e on Brazil,Restrictions to foster a homegrown electronics industry: Policies prohibiting electronic importsBan on foreign investment in Brazilian manufacturing plantsOnly 30 percent foreign ownership in local businessEffect: Brazilian electronics industry was uncompetitive and technologically outda
46、ted,Import-Substitution Laws Backf,Import-Substitution Laws Backfire on Brazil,Ban lifted in 1991Continued to protect domestic industry with high import dutiesForeign partners were permitted to: Raise ownership shares to 49 percentTransfer technology into the Brazilian economy,Continued,Import-Subst
47、itution Laws Backf,Export-Led Growth,Links the domestic economy to the world economyInvolves promoting growth through the export of manufactured goodsTrade controls either nonexistent or very lowIndustrialization viewed as a natural outcome of development,Export-Led GrowthLinks the dom,Export-Led Gr
48、owth: Advantages,Encourage industries in which developing countries may have a comparative advantageAccess to larger markets ensures greater scope for exploiting economies of scale for domestic manufacturersLow restrictions on imported goods imposes a competitive discipline on domestic firmsRelation
49、ship between openness and economic growth (Figure 7.5),Export-Led Growth: AdvantagesE,Back,Back,Is Economic Growth Good for the Poor?,Critics view: Potential benefits undermined or even offset entirely by sharp increases in inequality that accompany growthProponents view: Liberal economic policies r
50、aise incomes of the poor and everyone else in society proportionatelyResearchers at the World Bank confirm: Incomes of the poor have risen one for one with overall growthConclusion: Growth benefits poor as much as everyone else, so that growth-enhancing policies should be at the center of successful
