Free Trade and Developing Countries - Essay Example

?Introduction One of the major principles of globalisation is free trade, which emphasise on elimination of barriers that limit trade between different countries in the global community (World Bank 2002). Proponents of free trade argue that it is one of the most “effective trade practices of ensuring sustainable economic development in developing economies” (Abiad, and Ashoka 2002, p49). However, since the inception of free trade, the world has experienced widespread increase in economic inequality. Poverty, especially in some developing countries is increasing at an alarming rate, while developed countries are experiencing improved living standards and economic development. Therefore, the notion that increasing the volume of commerce by promoting free trade would spur economic development is not applicable to all countries, especially in the developing world. This paper examines the various reasons why free trade is appropriate for promoting economic development in particular developing countries. Free trade provides more opportunities of accessing international resources in both developing and developed economies. However, unregulated access to international markets, especially of developing economies is disastrous to development and sustainability of local industry in these nations (Wilber and Jameson 1992). Therefore, for countries to reap maximum benefits of globalisation, they must device appropriate trading practices that encourage expansion of trade, while protecting the local industries at the same time. Free trade presents several benefits to developing countries. Some of the benefits include availability of cheaper and high quality commodities in the market due to increased competition. Globalisation promotes specialisation where countries specialize in large-scale production of goods and services (Barro, 1997). According to Barro (1997, p19), specialisation lowers the cost of production because the countries concentrate on production of goods and services that they can produce cheaply and more efficiently for the mass market. In addition, free trade promotes competition in the international market, which eventually benefits the consumers. According to Walter and Snyder, (2007), competition at international level compels companies to reduce the costs of their products and improve the quality in order to enhance competitiveness of their products in the market. The competition encourages innovation and adoption of more efficient technology in addition to encouraging more efficient use and management of the available resources. Therefore, free trade discourages entrenchment of monopoly in the global market. Trade monopoly causes several adverse effects in the market, including high prices, low production and reduced quality of goods and services produced (Colman and Nixson 1986). Market expansion is another important benefit of free trade to developing countries. Industrial growth and development is usually undermined by a constricted market. According to Bates (1981), limited market especially in least developed economies undermines division of labour, which ultimately leads to low production. Free trade encourages adoption of modern technology especially in developing economies that mostly rely on traditional methods of production, limiting mass production of goods and services (Bienen and Jeffrey 1996). In spite of the existence of free trade for a considerable time, developing economies still lag behind in utilization and adoption of modern technology in production. This undermines economic development and flow of capital in developing economies (Collier, 2008). In spite of the apparent advantages of globalisation to developing economies, free trade has negatively affected the economic growth of these countries in various ways. First, free trade promotes large scale and unsustainable utilisation of the available natural resources in the country (Blanchard 2008). Some of the natural resource includes mineral deposits, such as gold, diamonds, oil, copper and platinum among other valuable minerals. Other natural resources that are over exploited in developing countries include forests, rivers and other natural resources. Overexploitation of the natural resources leads to environmental degradation, reduced production and poverty after the mineral deposits are exhausted (Todaro and Smith 2008). In addition, unregulated exploitation of natural resources is one of the major causes of incessant conflicts in some of developing countries with rich mineral deposits including Sierra Leone, Democratic Republic of Congo, Angola and Sudan among other nations in African continent. Some of the major environmental impacts of overexploitation of natural resources have become apparent in developing countries. These effects include wide spread desertification, drought, soil erosion and pollution of the environment. These effects do not only decelerate economic development but also contribute to widespread poverty levels in developing countries in spite of the availability of natural resources. Free trade encourages the inflow of goods from other developed economies into the developing countries. However, the industrial development of these two types of countries differs greatly from each other (Stiglitz, 2002). According to Scholte(1997, p39), developed countries produce of goods and services at a much lower cost than developing countries because of increase adoption of advanced technology in production, which enhances mass production. However, industrial development in developing countries is at infant stage and low application of technology increases the cost production (Smith 1994). Therefore, goods produced in developed countries have a more competitive edge compared to those produced in developing economies. Free trade therefore destroys the infant industries in developing countries, leading to high levels of unemployment and dependence on goods and economic support from developed countries (Collier, 2008). Free trade encourages dependence on imports from the international market. In developing countries, the dependency causes massive deficits in balance of trade (Corden1997). Countries that cannot produce particular goods locally due to high costs resort to importing the commodities cheaply from the international market. This creates economic interdependence between different trading countries. Besides economic dependence, free trade promotes political dependence (Wilber and Jameson 1992). Many political systems and governments in developing countries depend on developed countries. Although communism fell in the last few decades, capitalism has become so widespread in the globe and developing countries have borne the greatest adverse effects due to globalisation (Crafts, 2000). Western countries have aggressively advocated for adoption of democracy in several developing countries creating more social, political and economic challenges in these countries (Nafziger, 1996). In oil rich Middle East countries for instance, western countries have consistently used trade bans and embargoes on the countries’ exports in order to compel them to make certain political and economic concessions (Myinth, 1971). In the recent Arab spring, developing countries with high level of economic progress such as Libya succumbed to western economic and political pressure. Milberg and Houston (2002) noted that very few developing countries demonstrate relative economic and political independence from the leading superpowers. Since the inception of globalisation, dumping of goods from developed economies in the markets of developing countries has increased tremendously. It is a common for developed countries to sell their exports at lower prices in international market than in their local markets (Dernburg 1989). Dumping destroys the economies of developing countries because it discourages innovation and development of local industries. The practice leads to unfair competition (Easterly, 2002). Other adverse effects of free trade to developing economies include proliferation of weapons that fuel civil wars and incessant conflicts, in addition to other harmful imports such as drugs that cause diseases that leads to low productivity of the affected population (Johnson 1962). In addition, free trade encourages “capital flight”, where people concentrate on purchasing luxurious commodities instead of making investments to create wealth and improve the livelihoods of the larger population (Irwin, 2009, p50). This is especially common in developing countries where influential people such as politicians purchase luxurious goods such as motor vehicles, airplanes among other commodities while the local population is dying from starvation, lack of water, diseases and other effects of poverty. In examining the appropriateness of free trade to developing countries, economic experts have indentified democracy as the most critical component of ensuring realisation of economic benefits of globalisation in the countries. According to Todaro and Smith (1997), political structure plays a critical role in determining the effectiveness of free trade in promoting economic growth in developing countries. Wilber and Jameson (1992, p208) noted that “the movement to embracing democratic governance preceded the global orientation towards free trade”. In 1975 for instance, there were about 30 democracies in the world and two decades later, the number had increased to over 90 democratic countries, which represented about 50% of the total countries in the world. In the beginning of the 21st century, the number of democratic countries in the world had risen to 140 (Prasad, et al 2003). This trend indicates a direct relation between democratic governance and globalisation. Countries with democratic government are inclined to embracing free trade than those with controlled or autocratic governance structure. According to Scholte (1997), any political transformation induces trade reforms in the particular region or country. In history, “drastic changes in trading policies of countries has always been preceded or accompanied by transformation of the political system”(Scholte, 1997, p173). Although not all political changes contribute to market reforms, overwhelming evidence demonstrate that democracy promotes market efficiency and realisation of benefits associated with free trade. For the last for decades, increased democratization has lowered the barriers to free trade significantly. Before free trade gained momentum, developing nations, especially least developed countries had prohibitive and extensive trade practices (Sachs, 2008). This situation remains in countries that have retained autocratic governance. The individuals that benefit from these prohibitive trading policies are those closely associated with supporting the ruling political administration. Other groups that gain from the restrictive policies include industry owners, highly skilled individuals and unionised workers, while low skilled and poor people especially in rural areas lose significant economic benefits (Sachs, 2008). These polices therefore exacerbate economic inequalities in developing countries. According to Todaro and Smith (1997), autocratic governments fear that encouraging trade reforms would threaten their leadership. The high protectionism trade policy especially in autocratic developing countries is a major impediment to realisation of the benefits associated with free trade. However, since the early 1990’s many developing countries have made significant political and trade reforms accompanied by removal of the existing trade restrictions. The trade reforms marked a paradigm shift from “the former inward oriented and import substituting structure to an outward oriented and export promoting framework” (Scholte, 1997). Some of the measure implemented to promote international trade included reduction of tariffs and other non-tariff barriers. Democratisation of the developing countries played a critical role in promoting free trade. According to Barro (1997), leaders in newly, democratic countries realised that the previously marginalised people in the society were an important source of political support. Therefore, eliminating barriers to free trade helped in securing their political support. The new democracies in developing countries were created during difficult economic and political times especially after the collapse of communism (Easterly, 2002). This implies that most democracies in developing world are relatively unstable, while others especially in Arab world are still autocratic. The relative instability makes them vulnerable to adverse effects of globalisation. Although developed countries advocate free trade, they still protect their local industries. However, opening up of markets to international competition in new democracies in developed countries has ruined their balance of payments and national production. This has created economic inequalities causing escalation of poverty levels, unemployment rates and economic regression or stagnation in developing countries. Countries with stable democracies in developing countries are recording positives economic benefits from free trade compared to their new and unstable counterparts (World Bank 2002). The social and economic policies of most developing countries prevent optimum realisation of the benefits associated with free trade and globalisation. Colman and Nixson (1986) argue that equal distribution of national resources promote stable democracies but this condition is noticeably absent in most developing countries. Free trade alone is not sufficient to guarantee economic development unless there is prudent and rigorous macroeconomic management in these countries. Other factors such as controlled privatisation of national corporations, macroeconomic stability in addition to trade liberalisation are essential in order to realise sustainable economic growth in the globalisation era (Nafziger 1996). Conclusion Developing countries should implement measures that encourage foreign investments while promoting free trade at the same time. These measures include developing effective financial institutions, such as stock exchanges, investment banks and investment funds among others. Establishment of effective organisation of regulating privatisation and liberalisation is important if the countries were to benefit from free trade. These regulatory institutions should ensure sequential implementation of economic reforms in order to mitigate their economies from adverse effects of free trade (Corden, 1997). Stiglitz (2002) argues that adverse effects of free trade originate from inadequate regulation but not from too much control. The agricultural markets of most industrialised countries remain inaccessible to developing countries. In many developing countries, agriculture constitutes one of the most important sectors in their economies (Irwin 2009). Therefore, to ensure that all developing countries benefit from free trade, industrialised countries should remove the barriers such as subsidies and other prohibitive regulations that undermine competitiveness of their agricultural products. Therefore, stable democratic political framework supported by sound financial and social policies are essential components of ensuring that developed countries benefit from free trade. Absence of these elements implies that some developing countries will continue experiencing negative effects of globalisation. Bibliography Abiad, A., and Ashoka M.(2002). Status quo bias in financial reform. International Monetary Fund working paper. Washington, DC: IMF. Barro, R.(1997). 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