International
Trade & Economic
Development
CHAPTER - 5
Introduction
• Foreign trade is a major source of foreign exchange revenue for a country.
• The foreign exchange earned through exports is used mainly, to finance the
import expenditure through which we buy our needs from abroad.
• A number of Middle East countries are growing at a fast pace, thanks to oil-
exports, but this sort of one-dimensional growth can hardly be called
development.
• Development refers to a qualitative change in the basic parameters of
society.
• It is a broader and richer abstraction than mere growth which may leave the
majority of the people in an object of poverty.
Importance of Foreign Trade
• From the economic history of the now advanced countries, one can clearly
make the tremendous importance of foreign trade.
• The great geographical discoveries of the 15th – 17th centuries like the opening
of the Americas, the sea route to India, etc., were certainly spurred in part by
the necessity of finding the missing links in foreign trade in the form of gold,
spices, cloth, etc.
• In fact, there was a school of economic thought called the Mercantilists who
held that wealth would be created in a country primarily by foreign trade.
• The results of the great geographical discoveries led to the colonization of
large parts of Asia, Africa and Latin America.
• The traders soon became colonizers and exploited these areas in terms of
natural resources, markets, etc., in order to generate the industrial revolution in
the metropolitan countries, especially Britain and France.
• The importance of foreign trade as one of the motive forces of economic
development is now recognized all over the world.
Terms of Trade: ”The ratio between a country's export prices and its import prices”
• ToT is an important question in the whole argument around foreign trade.
• Historically, prices of goods exported by developing countries were, till
recently, rising at a slower pace than prices of the goods of developed
countries.
• This led to a deterioration in the terms of trade for the developing
countries and consequently, the outflow of resources from the developing
countries.
• But since the Oil crisis of 1973, there is evidence that the tide is changing.
• Prices, especially those of natural resources, are growing more and more
and reflect scarcity.
• Developing countries are also coming together more and more, to
collectively enhance the markets. The North-South dialogue is also looking
into these problems which.
• The colonial model of international trade condemned the developing
countries, to the role of agricultural and natural resource exporters.
• This was based partly on the Ricardian concept of comparative costs,
where in it was argued that a country must specialize in the production of
these commodities in which it had a natural advantage.
Patterns of International Trade
• Firstly, international trade is now more and more characterized by
- Trade in the means of production.
• That is to say that means of production are occupying a larger place in the
total trade turnover.
• This means that the already developed countries are monopolizing a larger
part of the trade.
• Secondly, trade is becoming more science intensive
- i.e. the frontier areas of science and technology etc., are coming to
define trade flows in a more definite manner.
• The role of natural resources in international trade is slowly going down.
• Foreign trade plays a very important role in developing the economies of the
LDCs. However, their exports structure is very weak.
• This is because, 90 % of their export products are primary agricultural
products whose prices in international markets are highly fluctuating and
decreases.
• It lacks also diversification and improvements of the volume or quantity
and quality of their exports.
• On the other hand, the imports of LDCs are manufactured products of very
high cost like machinery, equipment, spare parts, fuel, fertilizer and similar
other products.
• Hence, the major problem of LDCs in their trade sector, is how to balance
the gap between the imports expenditure and the export revenue, which
highly has affected balance of payments position.
• Foreign trade possesses great importance for LDCs.
• It provides the urge to develop the knowledge and experience, that make
development possible and the means to accomplish it.
• When a country specializes in the production of a few goods due to
international trade and division of labor, it exports those commodities, which it
produces cheaper in exchange for what others can produce at a lower cost.
• However, economists like Prebisch, Singer and Myrdal has criticized that,
historically international trade has retarded the development of LDCs.
Three arguments are usually advanced in support of this view that
international trade has strong backwash effects on the LDCs.
1 Trade operates with a fundamental bias in favor of the richer and progressive
regions, and in disfavor of the less developed countries.
- According to the writings of Myrdal, free trade or unhampered trade
between two countries of which, one is industrial and the other
underdeveloped, strengthens the former and impoverishes the latter.
- The rich countries have a large base of manufacturing industries with
strong spread effects.
- By exporting their industrial products at cheap rates to LDCs, they
have priced out the latter.
- This has tended to convert the backward countries into the producers
of primary products for exports.
- The demand for primary products being inelastic in the export market,
suffer from excessive price fluctuations.
2 In the opinion of Prebisch there has been a secular deterioration in the
terms of trade of the LDCs.
- It implies that there has been an international transfer of income from
the poor to the rich countries, and that the gains from international trade
have gone more to developed countries, at the expense of the LDCs.
- This in turn is reducing their level of real income and hence, their
capacity for development.
3 It has been contended that the operation of the international demonstration
effect through foreign trade has adversely affected capital formation in
LDCs.
- But all of these criticisms are unfounded.
- There is no empirical evidence to prove that the development of the
export sector has been at the expense of the domestic sector.
- Foreign trade has not always stood in the way of domestic investment.
- Nevertheless, as pointed out by Nurkse, “even unsteady growth through
foreign trade is surely better than no growth at all.”
- The adverse effects of the demonstration effect are also exaggerated.
Questions
1. Discuss how the factors listed below could foster
economic development peculiarly in favor of LDCs?
- Economic Integration
- Regional Trading Bloc
- Economic union
- Free trade area
2. How countries can benefit from trade even if they do
not export?
3. Discuss the most prominent international trade
theories from your international economics class?
