Trade and Development Policies

Over the last several decades, economists have debated the relevance of two alternative strategies for developing countries to achieve industrialisation and growth. One camp, whose spokesmen included a number of prominent Latin American economists, stressed the potential advantages of growth through ‘import substitution’ policies. This strategy suggests high tariff and nontariff barriers be erected around domestic industries to replace foreign supply. Under a protective umbrella of artificial trade restraints, it was theorised that local firms would have the opportunity to achieve economies of scale associated with larger production volumes, or to lower unit costs through specialisation or factors associated with the learning curve. However, a number of practical disadvantages often resulted from attempts to apply import substitution policies with the result that this strategy has experienced declining professional favour.¹

The classical model of trade according to comparative advantage is based on several assumptions which must be relaxed when applying the theorem in practice. Aside from the problem of having to generalise from a two-country two-commodity framework, comparative advantage rests on the presumption of identical production functions, full employment, and factors of production being internationally immobile. A further requirement is that perfect competition exists within and between countries. This latter stipulation appears especially inappropriate in describing relations between most developed and developing nations.

A major element in the overall development strategy pursued by the United Nations Conference on Trade and Development is that LDCs should adopt policies aimed at promoting collective self-reliance. According to UNCTAD (May 1976), collective self-reliance embraces two essential elements: establishing common positions to increase the LDCs’ bargaining power vis-à-vis the industrialised countries, and promotion of trade, investment, technological, and other forms of economic cooperation. If the LDCs succeeded in pursuing such policies, it should loosen economic ties to industrial nations. This could lead to considerably more freedom to follow independent policies directly geared to national development objectives, or rectify institutional imbalances of the sort discussed in the preceding chapter.

A major debate in the fourth meeting of the United Nations Conference on Trade and Development centred on the need for basic reforms in the commodity trade of developing countries. The proposed measures, discussed under the general title of an ‘integrated programme’ for commodities, covered all aspects of LDCs’ commodity trade ranging from price formation, to market access, as well as questions concerning marketing and distribution arrangements. According to UNCTAD (May 1976), a primary objective of the programme is to maintain commodity prices at levels which are equitable to consumers and remunerative to producers. These price maintenance policies recognise the need to provide incentives for adequate investment in commodity production, compensate producers for the depletion of non-renewable resources such as ores, and keep prices of natural commodities competitive with synthetics. Special importance is also attributed to the need to reduce excessive fluctuations in LDC commodity export prices and earnings.

International trade theory rests on several strict assumptions concerning the nature of this exchange and conditions in domestic and international markets. For example, the classical model of trade according to comparative advantage is based on a two-commodity, two-factor, two-country world with full employment, identical production functions, and perfect competition in both domestic and international markets. Given these conditions it was demonstrated that both countries will be better off with free trade or, at the least, one country will be better off while the other’s position would not deteriorate.

In previous analyses of developing country trade relations, economists have generally focused attention on the exchange between LDCs and the developed market economy countries (DMECs). There are various reasons for this concentration of interest. Firstly, trade with the DMECs is of primary importance as these markets received 73 per cent of developing country exports in 1976 and supplied 68 per cent of imports. In contrast, the centrally planned countries (CPCs) accounted for only 4 per cent of LDC exports and 5 per cent of imports, figures which were well below corresponding ratios for LDC intra-trade. Thus, the fact that existing trade volumes are so small may be a major reason for the relative lack of attention devoted to this exchange.

A factor leading to recent demands for increased protection in industrial markets is that developing countries achieved substantial export capacities in a number of industrial sectors over a remarkably short period of time, and this increase was largely unanticipated in the developed market economy countries. A further difficulty resulted from the fact that this increased capacity in sectors such as steel, shipbuilding, and electronics came ‘on stream’ at a time when these industries were experiencing a prolonged cyclical downturn which left demand very depressed relative to historical levels. Lack of effective demand, coupled with an inflow of goods from new foreign competitors, contributed to reduced profits and employment in the developed countries. This led to increased pressure for new protectionist measures by representatives of both labour and management, who faced the loss of domestic employment or declining profits.