Trade Strategies - Barriers to Development

IMPORT SUBSTITUTION

A country aims to produce simple consumer goods domestically rather than import them, using protectionist measures to limit foreign competition.  In time, the industries grow, benefit from economies of scale and become competitive on world markets.

Import substitution Adv and Disadv

Adv:

Creates an opportunity for industrialisation and economic diversification

Infant Industry arguments

Reduces BoP problems as imports are reduced.

Disadv:

• HIGH LEVELS OF PROTECTION CAN LEAD TO INEFFICIENCY 

• CAPITAL INTENSIVE METHODS HAVE NEGATIVE IMPACTS ON EMPLOYMENT AND INCOME DISTRIBUTION

• REDUCED FOCUS ON AGRICULTURE RESULTS INCREASES NEED FOR FOOD IMPORTS

Import substitution evaluation

Consensus now that import substitution is not favoured, leads to inefficiency and increasing protectionism.  However at an early STAGE OF DEVELOPMENT for a time limited period… Generally, export promotion is now favoured.

Export Promotion

A strategy to achieve economic growth by expanding exports; this can include export subsidies and exchange rate devaluation to make exports more competitive.

Export Promotion adv and disadv

adv:

EXPANDED MARKETS ALLOWS FOR ECONOMIES OF SCALE AND IMPROVED EFFICIENCY

EXPORT EARNINGS REDUCE BOP PROBLEMS

disadv:

Possibility of retaliatory protectionist measures

(Initial) costs to the government

Export Promotion evaluation

A very successful strategy for some Newly Industrialised countries since the 1950s.  However the ROLE OF DEVELOPED COUNTRIES is critical here – if they respond by increasing protectionist measures…

BILATERAL AND REGIONAL PREFERENTIAL TRADE AGREEMENTS

Bilateral is between two countries; regional between two trading blocs.  Trade agreements seek to reduce or eliminate tariffs and other barriers to trade on certain goods to promote free trade and cooperation.

Bilaterl and Regional Preferential Trade Agreements (BRPTA) adv and disadv

adv:

INCREASED COMPETITION, COSTS, PRICES AND CHOICE

ECONOMIES OF SCALE AND INCREASED EFFICIENCY

disadv

AGREEMENTS WITH DEVELOPED COUNTRIES DO NOT ALWAYS INCLUDE MATCHING TARIFF CUTS FROM THE DEVELOPED COUNTRY

DEVELOPING COUNTRIES ARE AT A DISADVANTAGE IN NEGOTIATIONS AS THEY LACK THE SAME BARGAINING POWER

BRPTA evaluation

FTAs have some benefits but are less desirable than global initiatives via the WTO.  However these may be an important first step to promoting export led growth.

TRADE LIBERALISATION

The elimination of barriers to free trade such as tariffs and quotas.

Trade Liberalisation adv and disadv

adv:

Free trade THEORY suggests overall gains will result…comparative advantage…increases in world output…efficiency….

disdav:

IF DEVELOPED COUNTRIES MAINTAIN PROTECTION THEN EXPORT BENEFITS MAY NOT BE REALISED

INCREASING INCOME INEQUALITY AND POVERTY IF IMPORTS ARE SUCKED IN…

Trade Liberalisation evaluation

The Washington Consensus and its free trade philosophy is argued not to have benefitted many developing countries, that some government intervention and protection is necessary for sustainable growth. The ROLE OF DEVELOPED COUNTRIES is critical – they should work in a transparent and equitable way. LDCs cannot rely on trade liberalisation – a RANGE OF MEASURES is needed…

Diversification

(Export) diversification aims to move from the production and export of primary commodities to a broader range of primary and manufactured and semi-manufactured goods.  This reduces dependence on primary commodities and exposure to supply and demand side shocks

Diversification adv and disadv

adv:

SUSTAINED INCREASES IN DEMAND POSSIBLE (LINK TO INCOME INELASTICITY)

REDUCED VULNERABILITY TO PRICE VOLATILITY IN PRIMARY GOODS MARKETS

disadv:

Some loss of economies of scale

Greater need for food and commodity imports

Diversification evaluation

This is a critical strategy for growth and development, a sign of a maturing economy. However this is unlikely to be the FIRST STAGE OF DEVELOPMENT, there may need to be improvements in infrastructure and human capital development before…