Economic Development and International Trade - Essay Example

?Economics Development with International trade It is widely believed that Adam Smith, in 1776, highlighted the positive effects of the internationaltrade on the economic growth of a country. The same international trade was given a respected position as the driving force behind the quick economic growth in the 60’s owing to some successful studies and experiments. Since then, the subject of economic development and international trade has been highlighted in the world media following the period of intense globalization. Economists believe that the impact of the international trade on the economic development of the developing nations depends on the level of the liberalization policies followed by the concerned nations. The recognition of such an impact has forced several international organizations such as World Bank, United Nations and World Trade Organization to forward endless proposals to open the borders to trade. Since then, many countries have reduced their commercial as well as non-commercial barriers to trade which has greatly helped to strengthen their economy. (Spanu, 2003) However, the economists worldwide are divided into two groups: one believing that the resultant impact is positive, while the other considering that the impact is largely negative. One group of the policy makers and economists believes that the international trade has positively affected the economic growth of the developing nations. An analysis of performance of several Latin countries was undertaken by a research group. It identified the economic impact on the Latin economies from the increased trade opportunities. The group concluded that the increased trade will open new employment opportunities for the concerned nationalities. In a high case scenario, it will lead to a creation of 2.7 million jobs. (Latin American Trade & Transportation Study) The research work of the past shows the international trade affects the economic growth of a country in a positive way. It allows a country to accumulate capital, upgrade industrial infrastructure and technology, and develop institutions. The research has shown that the increased imports of the much needed equipment and technology will boost the productivity of the local markets. Similarly, increased exports from all around the world will always boost the productivity for better competition and share in the world market. Kavoussi (1984) studied 73 different countries in the middle and low income range and concluded that the higher economic growth rates were strongly correlated with higher export growth rates. (Sun and Heshmati, 2010) People’s Republic of China is one of the greatest examples of the present history that illuminates the openness to international trade positively impacts the economic growth. The open door policy, followed by China, has led the country to achieve a high economic growth rate, enormous flow of foreign exchange into the country as well as paved way for increased employment opportunities. It has led to drastic improvement of the local industries and advancement of technological sector as well. Since 1979, China’s share in global trade has increased steadily. In 2008, it share in the world trade market was 7.9 percent and was ranked third in terms of trade volume in the world. (Sun and Heshmati, 2010) India is another case that illustrates the fact that trade liberalization impact the economic development of the concerned nation. The new Indian policy of Liberalization, Privatization and Globalization (LPG model) followed by them in 1990s was aimed at making the Indian economy globally competitive and fastest growing economy in the world. This shift in policy in 1991 paved way for tremendous improvement in every sector of the Indian economy as well as uplift of the billion people. The policy paved way for the integration of the Indian economy into the world economy in less than 15 years. (Malik, 2012) Uri Dadudh, Director of the International Trade Department of the World Bank, strongly believes that the trade liberalization will positively impact the economic growth of the countries. His analysis predicts that the international trade liberalization will increase the growth by 1-1.5 percent. Similarly, the chief economist of the Bank, Nicolas Stern, mentioned that agricultural subsidies are about US $1 billion a day which is six times bigger than aid to developing countries. Likewise, other nations such as UK and Japan raise barriers in other areas. Stern states “it is hypocritical to preach the advantages of trade and markets and then erect obstacles in precisely those markets in which developing countries have a comparative advantage1” In the paper Market Access for Developing Country Exports published by World Bank and IMF in 2002, the economists and policy makers criticized the protection followed by the developed nations and markets. These policies hindered the growth of the developing nations by making their good uncompetitive in the world market. The same report concluded that the world trade could increase by $250 billion to $650 billion annually if all trade barriers are eliminated. In this increment, they believe that the share of the developing nations will be one third to one half of the total trade volume. Through this, the World Bank predicts that the number of people living under poverty will reduce by 15 percent by 2015. (Spanu, 2003) The share of the developing nations in the world trade was only 0.5 percent. It was widely believed that the increase in exports due to the trade liberalization will benefit those countries in terms of income and employment opportunities. The world leaders at UN conference decided that the trade barriers to least developed countries’ exports must be relinquished. The analysts in the paper Back to Basics: Market Access Issues in the Doha Agenda (2003) concluded that the developing nations should be granted more time for transitioning to open market. This meant that the subsidies should be immediately abolished in the developed nations while the developing nations should be provided with more time period. (Spanu, 2003) On the other hand, another group of the economists and policy makers worldwide strongly believe that the international trade has brought about drastic negative impact of the developing nations’ economic growth. They believe that the trade liberalization policies have completely vandalized the infant industries in the concerned nations due to decreasing government protection. These companies have been out lashed by more competitive and advanced industries from the developed nations. The economists believe that the developed nations preach for openness while charging exorbitant rates to keep the exports of the developing uncompetitive. These double standards as followed by the developed nations in the past have destroyed the real purpose of open international trade. Therefore, increasing international trade under the banner of globalization has only benefitted the already developed nations. In the 1990s, the World Bank found that the increase of the trade to GDP ratio of a concerned nation paved way for a 5 percent increase in the per capita income. This led to the conclusion that openness to trade did lead to economic growth over a period of time. Similarly, IMF research analysis led to the conclusion that the low levels of trade led to higher debt levels for a particular nation. This explains the high debt levels of the developing nations due to their low trade levels. (Spanu, 2003) Anne Krueger in her paper Trade policy and economic development: how we learn points out the relationship between trade and economic development. Based on the historical analysis of the policies of different countries, she concluded that trade played a vital role in the economic development of a country. In the 1950s and 1960s, she believes that the import substitution policy was the driving force behind the economic development of a country. In the following years, several countries of South East Asia followed another strategy which boosted exports. Thus, Krueger argues that the countries moved from static trade strategy to a dynamic strategy. (Spanu, 2003) Dollar (1992), Ben-David (1993), Sachs and Warner (1995), Edwards (1998), and Frankel and Romer (1999) are some of other well known economists and policy makers who believe that economic growth is positively linked to international trade. (Spanu, 2003) Francisco Rodriguez and Dani Rodrik in their paper Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-national Evidence suggest based on their empirical evidence that the barriers to trade do not have a strong correlation to the economic development. (Spanu, 2003) In another paper Trade Policy Reform as Institutional Reform, Rodrik enforced that a country cannot develop itself without the international trade or by liberalizing trade. He based his conclusions on economic data for the last 50 years where he found that trade protection had no links to economic development. (Spanu, 2003) An analyst Jeffrey Nugent from the University of Southern California in his paper Trade Liberalization: Winners and Losers, Success and Failures states that only a few countries have liberalized their trade. Even those that liberalized their policies did not implement the entire trade program. He also points that the trade liberalization will have negative impact on the developing nations. He believes that the liberal international trade will harm the least developed countries’ exports and indirectly their national income. (Spanu, 2003) Jeffrey Nugent also studied the trade liberalization policies of the 1970s and 1980s of several countries including Australia, Bolivia, Chile, Korea, Mauritius, Mexico, Morocco, Spain, Taiwan and Turkey. He concluded the barriers to the successful implementation of the trade policies were embedded in the institutional crisis. It was successful in only those countries that followed consistent policies. (Spanu, 2003) United Nations Conference on Trade and Development in it World Investment Report (2002) points out that trade liberalization policies led to the opening up of many transnational corporations in every part of the world. The conference stressed that the high export growth rates in several countries was sirectly linked to the spreading out of these corporations. Our world, today, is dotted with industries having economies of scale. This cost advantage will prevent the other producers from entering the competitive market even though they might have some comparative advantage. A small country opens itself to international trade, but its industries are unable to compete due to their diseconomies of scale. Similarly, they are flooded with imported goods competing against their local goods and industries within their own borders. (Bidlingmaier, 2007) Likewise, the developing countries opt for specialization in their area of expertise in order to compete in the international markets. However, most of these developing nations specialize in sectors with less productivity or lower income elasticity of demand. Therefore, their income growth will always be slower compared to the developed nation and will, indirectly, affect the economic growth of the country. (Bidlingmaier, 2007) Conclusion Most of the economists and policy makers agree to the fact that trade liberalization positively affects the economic growth of a country. The openness to international trade paves way for improvement in all sectors of the economy. This shift in policy of trade brings advancement in technology, flow of foreign investment, employment generation, as well as competitiveness in the long run. Overall, it increases the growth rate of a country and paces way for economic development. However, the discussion remains as to what level of development should a country open up its markets to the world. In the past, the focus had been of the structural adjustment loans to the developing nation by the world bodies to motivate them to liberalize their trade policies. Conversely, the focus has moved in the recent past to the removal of all protectionist policies of the developed world which has caused much distress to the least developed economies. Bibliography Bidlingmaier, T. International Trade and Economic Growth in Developing Nations, Australia, 2007, Retrieved on April 14, 2012 from http://www.degit.ifw-kiel.de/papers/degit_12/C012_041.pdf Greenaway, D., Morgan, W., Wright, P. Trade liberalization and growth in developing countries, Journal of Development Economics, vol. 67, pp. 229-244. Rivera-Batiz, L.A. and Romer, P.M. (1991a), “Economic integration and endogenous growth”, Quarterly Journal of Economics, pp. 531-55 Spanu, V. Liberalization of International Trade and Economic Growth: Implications for both Developed and Developing Nations, Harvard University, 2003, Retrieved on April 12 2012 from http://www.cid.harvard.edu/cidtrade/Papers/Spanu.pdf Sun, P. Heshmati, A. International Trade and its Effects on Economic Growth in China. 2010. Retrieved on April 12th 2012 from http://ftp.iza.org/dp5151.pdf Read More