34. Free trade and developing countries

“The wealth of all nations arises from the

labour and industry of the people”

(Charles D’Arenant, 1656-1714)

The developing countries have long been skeptical of the argument for free trade, which they believe ignores the question of how the gains from free trade are distributed between rich and poor countries. Free trade has often been unpopular and various arguments have often been advanced against it. The one is that free trade –particularly between developed and less developed countries – will cause unemployment in less developed countries. In fact, it is not true that free trade causes unemployment. It may, however, have an effect on wages.

Many developing countries are highly dependent on one or two products for their exports. These products are often primary commodities – for example, copper in Zambia and cocoa in Ghana. The terms of trade for many primary commodities have deterio­rated over the last twenty years reflecting both increased supply and reduced demand as artificial substitutes have been developed. Moreover, the price of many primary commodities is highly vol­atile. As a consequence, many developing countries have sought to diversify away from primary commodities by establishing their own manufacturing industries.

Feeling that competition from the industrialised countries would prevent them from developing their own manufacturing industries, many developing countries adopted highly protectionist economic strategies in the 1950s and 1960s. Average tariff rates of 100% on imported manufactures were common, and extensive use of quotas and other trade barriers was also made. High levels of protection were often justified by the ‘infant industry’ argument.

The results of these protectionist policies were in many cases disappointing. Infant industries have often been slow to grow up and have continued to produce at high cost, high domestic costs have made it difficult to export, and have discouraged foreign investment, protected firms have become monopolists in domestic markets.

In recent years, many less developed countries – in particular, the so-called newly industrialised countries – have moved towards more export-orientated policies, often with spectacular results. A recent study by the World Bank of the trade policies of 41 less developed countries found that there was a strong relationship between what the Bank termed ‘outward-orientated’ trade policies and growth. The countries with the highest rates of growth – Singapore, South Korea – had the most liberal trade policies. Conversely, countries with import substitut­ing trade policies – such as Ghana, Peru and Zambia – had some of the lowest rates of growth, often experiencing absolute falls in national income.

Despite the apparent advantages of following export-orientated trade policies, developing countries face formidable barriers in increasing their exports of manufactured goods. Their comparative advantage generally lies in labour intensive products, and yet it is precisely those products that attract the highest rates of protection in the developed countries.

Comprehension:

1. Why did developing countries adopt highly protectionist economic strategies?

2. What were the results of these policies?

3. Why was it difficult to export goods?

4. What policies have newly-industrialised countries moved towards?

5. Are there any disadvantages of export-oriented trade policies?