Trade and Development

In the previous chapter we attempted to establish the role of foreign borrowing in the development process. Using dual-gap analysis, it was shown that foreign borrowing can be used to bridge either a domestic savings-investment gap or a foreign exchange gap, whichever is the larger. We saw that the policy issue is the decision on how far borrowing should go. How large can the import surplus be without leading to severe future balance-of-payments difficulties in the form of large outflows of debt repayments, and without generating inflation due to currency depreciation and the necessity to develop high-cost import-substitute activities? The empirical evidence is overwhelming that the conflict is very real between maintaining an adequate growth rate and preserving a reasonable balance on international payments. The ultimate solution must lie in improving the balance of payments through trade. The growth rates of individual developing countries since 1950 correlate better with their export performance than with almost any other single economic indicator. The export performance of the developing countries, however, has continued to lag behind that of developed, industrialised countries. Throughout the 1950s and 1960s the volume of exports from developing countries grew at a rate of approximately 5 per cent per annum compared with 8 per cent for developed countries. The discrepancy in rates of growth was even wider in value terms, causing the developing countries’ share of the total value of world trade to fall from 28 per cent in 1950 to 16 per cent in 1972.