The Importance of Trade in Stimulating the Economies of Developing Nations

Trade plays a key role in stimulating the economies of nations around the globe. There is need for different economies to engage in trading activities in order to ensure stable and sustainable economic growth and development. In an effort to explain how trade can stimulate the economies of developing nations, there is need to address how increasing the level of openness of a developing nation can lead to its economic growth. Other aspects that regard to trade include the dynamic gains that a developing nation can reap from trade. There is also need to address the trade challenges that developing nations face as well as the policies that can impact trade and economic growth in developing countries. In addition, global organizations also play an important role in economic development of many nations across the globe (Robert J, 2012).

How Increasing Developing Nations’ Level of Openness Can Lead to Economic Growth Using Examples of Success in Specific Nations.

Most nations around the world have greatly benefited from trade as is witnessed by the levels of their economic growth. However, this economic growth calls for an increase in the level of openness to trade of a country. In this regard, if developing nations are to ensure increased and sustainable economic growth they have to increase their levels of openness. Openness in itself is a rough measure of the value a nation places upon trade. There are a number of benefits that a country can gain from trade openness. First, trade increases competition leading to lower prices for consumers hence ensuring improved living standards for them. Another benefit of openness is that it leads to increased technological development and innovation as trading countries are in a position to share their technological advancements. In addition, trade restrictions reduce the purchasing power of other nations leading to retaliatory actions. The above benefits are important in ensuring economic growth of developing nations. For instance, trade opening is an important element in the economic success of East Asia whereby the average import tariff has fallen from 30 percent to 10 percent over the past 20 years. In addition, countries that have opened their economies in recent years such as Vietnam, Uganda and India have experienced faster economic growth and more poverty reduction. Trade openness, therefore, can help developing countries expand business opportunities for their local companies, open up new markets as well as make it easier for them to export (Krueger, 1981)

Review of the Dynamic Gains from Trade.

There are many dynamic gains from trade that developing countries can reap. First and foremost, trade increases the level of incomes for trading nations leading to increased saving which translates to increased investments. Increased investments boost a country’s development and reduces poverty levels by generating growth, as well as broadening the major productive bases through private sector development (Robert, 2012). Also, trade provides greater options in the supply chain. This is achievable because trade expands consumers’ choices and lowers the price for goods and services as well as strengthening competition for government procurement. In addition, increased output level leads to benefits from economies of scale. As output production increases production cost per unit decreases. Thus, developing countries can save more by reducing their production costs. Trade also enhances competitiveness by helping developing countries acquire finances through investments, reduce the cost of inputs, increase the value added to their products and move up the global value chain. Trade also facilitates export diversification by allowing developing nations to access new materials and new markets which open up new production possibilities. Trade also plays a role in the improvement of labor, quality and environmental standards through increased competition and the exchange of best practices between trade partners. Lastly, trade helps to strengthen ties between nations by bringing people together in mutually beneficial and peaceful exchanges and in so doing contributes to stability and peace around the globe (Robert J, 2012).

Trade Challenges That Developing Nations Face.

Developing countries face several trade problems such as unstable export markets whereby exports are concentrated in only one or a few primary exports. In instances where these nations experience poor harvest or a decrease in market demand for such products, developing nations face reduced export revenues, disruption of domestic income and lower employment levels. Another problem facing developing nations is worsening terms of trade as a result of monopoly power of manufacturers in the industrial nations. Such monopoly power results in higher prices of goods in the world markets. In addition, as income rises, people tend to spend more on manufactured goods than on primary goods, hence contributing to worsening terms of trade for developing countries. Another problem facing developing nations is limited market access. For instance, global protectionism has been a major hindrance to their market access especially for agriculture and labor-intensive products such as clothing and textile industries. Also, tariffs imposed by industrial countries tend to be higher on goods from developing countries. Average tariff rates in rich countries are low, but they maintain barriers in areas where the developing nations have a comparative advantage. The last major problem facing developing countries is agricultural export subsidies of advanced nations. Subsidies of advanced nations depress world prices and make it more difficult for developing countries to compete in areas where they should have a comparative advantage (Dollar & Kraay, 2001).

Policies That Can Impact Trade and Economic Growth in Developing Nations.

There are various policies that can impact trade and economic growth in developing nations. Trade policies are concerned with two major objectives: the first objective is promotion of industrialization and the other objective is coping with uneven development in the domestic economy. Government policy to promote industrialization is justified by the argument that developing nations need to invest in infant industries. As such, developing nations should pursue the policy of import-substitution whereby governments use extensive trade barriers to protect domestic industries from import competition. This way, trade and industrial incentives will favor production for domestic market over the export market. This policy therefore should be implemented in developing nations for the sole purpose of protecting infant industries until they are strong enough to withstand competition in the world markets (Bouet, 2008).

Another policy developing nations can adopt involves the implementation of export-led growth whereby developing nations need to promote growth through exportation of manufactured products to other nations (Bouet, 2008). Therefore, there is need to encourage growth in industries with comparative advantage. Low trade restrictions on imported goods usually encourage competition which translates into growing economies in the long run. For instance, the Asian economies have seen increased economic growth as a result of implementation of the export-led growth. Policies that encourage international trade are also crucial in enhancing economic growth. For example, in 1999 in Hong Kong and Singapore exports exceeded 100 percent of GDP through the implementation of the export-led growth policy. In addition to the above-mentioned policies, developing nations can foster trade by investing in multilateral programs such as commodity agreements, buffer stocks, cartels and multilateral contracts (Bouet, 2008).

 Regional trade agreements also come in handy in ensuring growth of economies. Regional trade agreements among nations result in reduction of trade barriers for a small group of trading partners, thus discriminating against the rest of the world. Such regional trade agreements include free trade areas and customs unions (Robert, 2012). Potential benefits from regional trade agreements include elimination of international trade, payments and mobility of factors of production such as labor and capital. Member countries also stand greater economic integration because of commonality of interests. Regional Trade Agreements also help workers adjust from import-competing positions where comparative advantage is weak to export-competing industries where competitive advantage is strong. In addition, Regional Trade Agreements ensure improved intellectual property right protection, enhanced labor rights, government procurement policies, opening of service sectors to competition, enhanced rules of foreign investment, environmental standards and improved customs facilitation. Trade agreements also have dynamic effects. The first effect is economies of scale whereby access to larger markets allows producers to become more efficient through greater specialization, better equipment and usage of by-products. The second effect is greater competition because increased number of producers makes collusion in the market less likely and forces firms to become more efficient. The last effect of trade agreements is stimulation of investments as a result of increased rates of returns as trade makes greater levels of investment more likely (Robert, 2012).

The Role of Global Organizations in Economic Development.

Global organizations have played a key role in economic development for many nations around the world. Some of the major global organizations that enhance economic development are the World Trade Organization, the World Economic Forum, the International Economic Development Council, the International Monetary fund and the World Bank. These organizations play different roles in ensuring sustainable growth and development in member countries. For instance, the World Bank is one of the world’s largest sources of development assistance that is intended to eliminate poverty and improve living standards. The World Bank works with various government agencies, non-governmental organizations as well as the private sector in order to formulate assistance strategies in development. The World Bank assists developing nations by directing them towards sustainable, stable and equitable growth. The Bank also emphasizes the need to invest in health and education, social development, protecting the environment, strengthening government efficiency delivery of services, encouraging business development and promoting macroeconomic reforms (Krueger, 1981).

 The other global organization that plays a major role in economic development as mentioned above is the World Economic Forum (Sobel, 2012). The Forums’ major role is improving the state of the world by serving global public interest by encouraging social progress and economic growth. The Forum also creates partnerships between and among intellectual, business and political leaders of society for the sole purpose of defining, discussing and advancing key issues on the global agenda (Sobel, 2012).

The World Trade Organization is the only global organization created for the purpose of addressing the rules of trade between nations. The major goals of the World Trade Organization is to help exporters, producers of goods and services as well as importers to effectively and efficiently conduct global commerce. The International Monetary Fund centers on promoting international monetary cooperation, monetary exchange stability and orderly exchange arrangements. The organization also works to foster high levels of employment, economic growth as well as providing temporary financial assistance to countries so as to aid in their economies’ balance of payments adjustments. The International Economic Development council focuses mainly on the field of economic development by providing leadership and excellence in economic development for its communities, members and also its partners (Sobel, 2012). Generally, all international organizations help in economic development through studying, collecting and propagating information as well as setting up internationally accepted laws. These international organizations also help in cooperation of different nation by setting up negotiation terms between them and helping in technical assistance. Moreover, International Organizations set up bilateral or multilateral agreements between nations thereby increasing their economic development in the long run. All these international organizations positively impact the growth and development of economies around the globe, especially those of developing countries (Sobel, 2012).

References

Bouët A, (2008), The Expected Benefits of Trade Liberalization for World Income and Development: Opening the” black Box” of Global Trade Modeling, Intl Food Policy Research Institute, Washington.

Dollar D & Kraay A, (2001), Trade, growth, and poverty. World Bank, Development Research Group, Macroeconomics and Growth.

Krueger A O (Ed.), (1981), Trade and Employment in Developing Countries, Volume 1: Individual Studies (Vol. 1), University of Chicago Press, Chicago.

Robert J Carbaugh, 2012, International Economics 14th Edition, South-Western Cengage Learning, Massachusetts.

Sobel A C, (2012), Birth of Hegemony: Crisis, Financial Revolution, and Emerging Global Networks, University of Chicago Press, Chicago.

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