Trade Theory and the

Development Experience
Overview
• Globalization
• Trade and Development
• Theories of International Trade
• Limitations of Free-trade Theory for
LDCs
Globalization
• Globalization refers to the increased
openness of economies international trade,
financial flows and direct foreign investment.
• Promise of globalization: expanded
opportunities, rapid growth of knowledge and
innovation, greater interdependence,
convergence of living standards
• Traps of globalization: Exploitations by
developed economies, strengthened patterns
of dependency
Trade and Development
• How does international trade affect economic
growth?
• How does trade alter the distribution of
income?
• How can trade promote development?
• Can LDCs determine how much they trade?
• Is an outward-looking or an inward-looking
trade policy best?
Key Issues for LDCs
• Many LDCs rely heavily on exports (usually
primary products)
• Many LDCs also rely heavily on imports
(typically of machinery, capital goods,
intermediate producer goods, and consumer
products)
• Importance of exports to different developing
nations
• Demand elasticities and export earnings
instability
Theories of International
Trade
Terms of Trade and Prebisch-Singer Thesis
– Total export earnings depend on:
• Total volume of exports sold AND
• Price paid for exports(Commodities terms of trade)
– Prebisch and Singer argue that export prices fall
over time, so LDCs lose revenue unless they can
continually increase export volumes .
– There will continue to be decline in prices of
primary commodities resulting in transfer of
income from LDCs to Developed Nations.
– Prebisch and Singer think LDCs need to avoid a
dependence on primary exports
Trade Theory (cont’d)

• The principle of comparative

advantage(Traditional theory)
• Relative factor endowments and
international specialization: the
Neoclassical model
• Trade theory and development:
Increases world’s output, Consumption
capacities, access to scarce resources,
world markets, Income equalities etc
Limitations of the Neoclassical Model
• Fixed resources, full employment, and
international factor immobility(North and
South Model of Unequal trade, Vent for
surplus theory of trade and Multinational
Corporations)
• Fixed, freely available technology and
consumer sovereignty(Synthetic
Substitutes)
• Internal factor mobility and perfect
competition (Monopolistic and oligopolistic
market controls)
• Governmental non-interference in trade
• Balanced trade and international price
adjustments
• Trade gains accruing to nationals
North South Model

• Initial high Resource Endowments generate

economies in Manufacturing output and
higher profits
• Leads to monopoly power further leading to
capital accumulation.
• Income elasticities of demand
• Capital flight will further add to the problem
Conclusions
• Trade can lead to rapid economic growth
under some circumstances
• Trade seems to reinforce existing income
inequalities
• Trade can benefit LDCs if they can extract
trade concessions from developed countries
• LDCs generally must trade
• Regional cooperation may help LDCs