Does Increased Participation in International Trade Promote Economic Growth in Low-Income Countries - Essay Example

Does Increased Participation In International Trade Promote Economic Growth And Development In Low-Income Countries? Name Institution Course Date Does Increased Participation In International Trade Promote Economic Growth And Development In Low-Income Countries? Introduction The impact of international trade on economic growth and development has been significant. The classical and neo-classical economists have put a lot of emphasis on the importance of international trade citing it as the engine of growth and development (Drabek, & Laird 1998, p. 241). The increased foreign trade coupled with globalization has resulted in the emergence of world economies that are more connected. Because of this, there has been a huge increase in trade between different countries and its impact is seen in the form of growth and development across the world (Gandolfo 2013, p. 182). The essence of countries engaging in international trade is based on the fact that countries across the globe differ in terms of the resource endowment, technological know-how, preferences, production scale and growth and development capacity (Krueger 1978, p. 2). Therefore, countries trade with one another so as to be able to get the market for the products and services they have in abundant and to easily get those that the country lack or insufficient to meet the demand. In the recent years, the focus of the importance of international trade in economic growth and development has been put on the low-income nations that are believed to be benefiting significantly from participating in international trade (Maneschi 1998, p. 2). Using theoretical underpinnings, this essay will explore how the involvement of low-income nations in international trade promotes economic growth and development using Kenya as a case study. Trade-growth Debate Over the past few decades, the trade volumes between nations have increased significantly. The growth of trade between nations has been facilitated by globalization and increased integration of world economies. Gandolfo (2013, p. 4) defines international trade as an economic concept that means the exchange of goods, services, and capital across international borders. However, the impact of international trade on economic growth and development has not just been important, but also controversial for many years. Several studies have found that trade liberalization and openness to be directly related to economic growth and development (IMF 2001; Drabek, & Laird 1998, p. 240; Maneschi 1998, p. 9). On the contrary, some researchers have claimed that trade may not be beneficial for the economic growth and development of all nations all the time. A study by Frankel and Romer (1999, p. 381) found a country's openness to trade to have an impact on the level of per capital income. The researchers argued that involvement in trade promotes a country's growth through increased capital stock, higher factor productivity and stock of education. Frankel and Romer's views are supported by Kavoussi (1985, p. 383) study that found that trade promoted growth and development in France. Similarly, Lin (2000, p. 146) observed that the economic growth and developments that China has registered in recent decades were catalysed by increases in imports, and exports, as well as growth in the volume of trade and labour force. However, the believe that trade promotes economic growth has been criticized by economists, such as Cooper (2001, p. 4) who through his analysis concluded that there are no concrete theoretical reasons to believe that trade promotes the growth and development of economies. According to Cooper (2001, p. 7) trade is merely a product of economic growth arguing that the economy of a country would grow rapidly even where there are high trade barriers as was the case in the 1950s. Cooper, therefore, believes that other factors outside trade are responsible for growth. Impact of International Trade on Economic Growth and Development in Kenya Kenya is one of the low-income countries that have achieved significant growth and development over the last few decades due to its participation in international trade. Kenya's involvement in international trade has helped boost economic growth and development by allowing the East African country to get a ready market for its surplus products. Like in most developing countries, the economy of Kenya is largely driven by the agricultural sector. Kenya currently ranks among the world's top producers of coffee, tea, and pyrethrum. Therefore, by participating in international trade with other countries, Kenya has been able to get a ready market for its export products that generate millions of dollars to Kenya's economy every year. In 2014, Kenya's exports stood at $5.96 billion with its main export partners being Uganda, the UK, Tanzania, Netherlands, the U.S., Pakistan and the United Arab Emirates (Global Edge 2017). The earnings generated from exports to foreign countries accounts for about 15.77 of Kenya's GDP according to 2015 figures. This indicated the extent to which trade is important for the growth and development of Kenya's economy considering that, in the absence of international trade; Kenya could not have been able to get a ready market for its vast resources. Kenya's participation in foreign trade has also been of benefit to the economic growth and development of the nation as it has enabled Kenya to get products and services that it has a deficit in or does not produce through imports. According to 2014 statistics, Kenya imported goods and services worth $18 billion which made it the 81st largest importer in the world. Kenya's major imports include refined petroleum, which accounts for about 22.4% of total imports followed by cars, which accounts for about 2.9% of total imports (Global Edge 2017). Other major imports include iron, used clothing, what, rice, palm oil, and raw sugar among others. According to 2015 figures, imports accounts for 29.04% of Kenya's GDP (Global Edge 2017). Accordingly, this indicates the extent to which international trade has been critical to the economic growth and development of Kenya's economy. In the absence of international trade, Kenya could have found it difficult getting these important products that it needs to spur economic growth and development. For instance, considering that Kenya lacks the technological knowhow to manufacture cars or aircraft, it has had to depend on imports from foreign countries since cars and aircraft are important for faster movement of people and goods from one part of the world to another. Kenya's import of products it lacks is supported by absolute advantage theory that holds that a country should produce only those products, where it is efficient and trade those where it lacks the efficiency, according to Gandolfo (2013, p. 183). The positive impact of international trade on Kenya's economy has also been noticed in the sense that foreign trade has helped boost development and reduce the level of poverty in the country through increased commercial growth and investments. Kenya has made a significant improvement in terms of poverty reduction and development partly because of international trade. Through trade liberalization, Kenya has been ranked by the World Bank as one of the most promising investment destinations in Africa (Kariuki 2016). By creating a conducive environment for foreign companies, Kenya has experienced an influx in the number of foreign investitures in recent years as demonstrated by companies, such as Google, Apple, Samsung, Unilever, Woolworths, KFC and General Motors among other international companies that have set businesses in Kenya and this has helped promote growth through taxes collected by the government of Kenya as well as employment created to the Kenyan population. Accordingly, this has resulted in a reduction in the poverty level, as well as increased the living standards of the Kenyan people. Apart from the large foreign direct investment flow in the Kenyan economy, Kenya's participation in foreign trade has also been helping in facilitating growth and development of its economy by creating opportunities for Kenyan local companies in the foreign countries. For instance, the fact that Kenya is a member of the East African Community has helped open up new market opportunities for Kenyan companies in Uganda and Tanzania, where several Kenyan companies have expanded their businesses, thereby creating new markets for Kenyan companies. Consequently, this spurs Kenya's economic growth and development (Kariuki 2016). Additionally, Kenya's involvement in international trade has resulted in a technological transfer that has been critical in promoting economic growth and development as noted by Maneschi (1998, p. 12). Because of international trade, Kenya has been able to send its personnel into developed countries, such as the UK and the U.S. for training in science and technology, which they bring back home and apply in industries, such as motor assembling industry. Besides, Kenya hires a large number of foreigners, including Chinese, Britons, and Americans in technical areas and this promotes technology transfer that has help move Kenya to almost an industrialized country. Conclusion The role of international trade has been significant. As demonstrated in the essay, there has been a significant growth in foreign trade in the recent decades as companies seek to find goods and services that they experience a shortage of and find markets for their surplus products and services. Although a section of researchers have criticized trade arguing that it does not promote economic growth and development, evidence gathered from Kenya indicates that foreign trade has a positive impact on economic growth and development as earlier suggested by classical and neo-classical economists. International trade has promoted the growth of Kenya's economy by providing its market for its export products, allowing importing goods and services it lacks, facilitating the exchange of technological know-how, promoting foreign direct investments, as well as creating new market opportunities for its local industries among other benefits. Therefore, eliminating barriers to trade can be used as a tool for promoting economic growth and development in low-income countries. References Cooper, N. R. 2001, “Growth and inequality: The role of foreign trade and investment”, paper delivered at World Bank Conference on Development Economics, December. Drabek, Z. and Laird, S 1998, “The new liberalism: trade policy developments in emerging markets, Journal of World Trade, Vol. 32, pp. 241-269. Frankel, J.A., & Romer, D 1999, “Does trade cause growth?” American Economic Review, Vol. 89, pp. 379-399. Gandolfo, G 2013, International trade theory and policy. Springer Science & Business Media, London. Global Edge 2017, Kenya: Trade statistics, viewed 2 Feb. 17 https://globaledge.msu.edu/countries/kenya/tradestats IMF 2001, Global trade liberalization and the developing countries, viewed 2 Feb. 17 https://www.imf.org/external/np/exr/ib/2001/110801.htm Kariuki, J 2016, Nairobi grabs top slot in FDI destinations in Africa. Daily Nation 2 February, viewed 2 Feb. 17 http://www.nation.co.ke/business/Nairobi-grabs-top-slot-of-FDI-destinations-in-Africa/996-3058904-105flv8/index.html Kavoussi, R.M 1985, “International trade and economic development: the recent experience of developing countries”, Journal of Developing Areas, Vol. 19, pp. 379-392. Krueger, A 1978, Foreign Trade Regimes and Economic Development: Liberalization Attempts and Consequences, Ballinger, Cambridge, Massachusetts. Lin, S 2000, “Foreign trade and China’s economic development: A time-series analysis, Journal of Economic Development, Vol. 25 No. 1, pp. 145-153. Maneschi, A 1998, Comparative advantage in international trade: A Historical perspective. Edward Elgar Publishing, New York. Read More