02/02/16
Lesson 1: Barriers to econ development, strategies for econ growth
International barriers to development:
1. Over-specilization on a narrow range of products.
- Developing countries are dependent on primary commodities, rise in price = growth.
- Revenue used to finance education, health and infrastructure = development.
- Prices fall = account deficit, difficult to finance current expenditure and necessary imports.
- Any country dependent on a narrow range of exports has potential to face vulnerability and uncertainty.
2. Price volatility of primary products.
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3. Inability to access international markets.
- Protectionism is any economic policy that is aimed at supporting domestic producers at the expense of foreign producers.
- These measures prevent developing countries from using their comparative advantage and exporting to developed countries, limiting their ability to earn foreign exchange. Ex: Cotton industry and dumping from overproduction.
Tariff escalation: Tariffs on goods rises the more the goods are processed.
- Importing countries protect their processing/manufacturing industries, lower tariffs on imports of raw materials and higher tariffs on processed/finished products.
Non-convertible currencies is a significant barrier for developing countries.
Trade strategies for economic growth and economic development:
1. Import substitution-Import Substitution Industrialization (ISI)
- Developing countries should produce goods domestically, rather than import them.
- Protects jobs, culture, multinational corporations.
- Short term growth, poor long term.
- Benefits of comparative advantage are not observed because lack of specialization, creating inefficiency.
- Lead to high rates of inflation due to domestic aggregate supply constraints.
- Other countries take retaliatory protectionist measures.
2. Export promotion-Export led growth
- Liberalized trade, capital flows (FDI), floating exchange rate, deregulation and minimal government intervention.
- Overall trend of primary products, exception of oil/metals, has been downward for many years.
- Increased manufacturing exports; Japan, South Korea, Hong Kong, Singapore, and Taiwan "Asian Tigers. Comparative advantage based on low skilled labor.
- MNC may become too powerful, free deregulated market might lead to greater economic growth and more inequality.
3. Trade liberalization
- Lower marginal tax rates/broaden tax base.
- Interest rate liberalization
- Competitive exchange rate
- Liberalization of FDI inflows
- Privatization, deregulation, secure property rights.
4. Bilateral and regional preferential trade agreements: More agreements that are made, the greater the ability of developing countries to trade and grow/develop.
5. Diversification
Development strategies
1. Fairtrade organizations: Fairtrade Labelling Organization International (FLO)
- Help small famers, began in Netherlands in 1988
- High quality and producer must use sustainable farming methods; includes bananas, cocoa, coffee, dried fruit/veggies, honey, juices, nuts/oil seeds and purees, quinoa, rice, spices, sugar, tea, and wine. Non-food products include cotton and cut flowers.