Trade Openness and Growth Evidence from Developing Countries by Alok

Trade Openness and Growth Evidence from Developing Countries by Alok - Transcript

Trade Openness and Growth Trade Openness and Growth Evidence from Developing Countries
Submitted by ALOK ALAMBAN

Introduction Introduction
Recent decades have seen rapid growth of

world economy specially less developed countries LDCs This growth has been stimulated by faster rise in international trade The process began with General Agreement on Tariffs and Trade GATT in 1947 Creation of World trade organisation WTO in 1994 Trade growth has been helped by technological development and efforts to increase trade openness

Meaning of trade openness Meaning of trade openness
Free movement of goods capital and services Import substitution policy of LDCs to be done Reduction in tariff barriers and protection policy

away with Rationalisation of subsidies as per WTO norms Greater financial integration of the world economy

Benefits of trade openness Benefits of trade openness
Trade enables developing countries to import

capital equipment and intermediate inputs essential for growth Trade openness brings more intense competition and makes sure that local firms operate more efficiently than under protection It also creates greater awareness of new foreign ideas and technology Opening up of trade creates employment opportunities in LDCs



An increase in the ratio of trade to GDP by 1 point raises per capita income by between to 2 percent

By world bank estimates due to trade opening number of people in absolute poverty in LDCs has declined by 120 million between 1993 98 see table at the end


Higher trade integration also influences important dimensions of social well being a faster increase in life expectancy and faster reduction in infant mortality A study has shown that 11 point reduction in average tariff rate is associated with 3 6 fewer infants dying per 1000 births



Number of people below US 1 a day in million
500 400 300 200 100 0 east asia excluding china south asia sub saharanlatin america middle africa east north africa 1990 2000

poverty across regions

middle east N Africa latin america sub saharan africa south asia east asia exluding china east asia 0 10 20 30 40 50 2000 1990

Where does this openness fall behind Where does this openness fall behind
It creates high volatility of macroeconomic variables both monetary and fiscal With increased flow of capital LDCs are more vulnerable of speculative attacks Incessant opening of trade for aid purposes result in high external debt at times leading to bankruptcy LDCs which have shaky governments are often mired in corruption Overall trade integration has been uneven Asia and Latin America have benefited Middle East and whole of African continent has lacked behind


Country specific examples Country specific examples


China Liberalization policy first began in 1978 Rapid growth since 1980 and also remarkable increase in real income per head of almost 400 FDI inflow in China has increased from 25 billion in 1990 to 450 billion in 2002 Average tariff which stood at 43 in 1992 has come down to 16 6 in 2001 China s share in word trade has considerably increased with its exports reaching up to 767 billion Trade integration of China has seen its GDP growth of almost 10 or more for the period 1980 to till now

India

Liberalization process began in 1991 Growth between 1981 88 was 4 8 which improved to 6 5 since then Current expectations are to grow at a rate of 10 Highest industrial tariff which was as high as 350 in 1991 is as low as 12 5 now Exports as a share of GDP has increased up to 8 9 Persons living below poverty line has declined from 39 in 1987 88 to 25 3 in 1999 2000

Also success story of east Asia due to

trade integration is well known Countries such as South Korea Vietnam Taiwan Their success has been termed as East Asian Miracle Positive effects of international trade has also been felt in Latin American countries Spearheaded by Brazil

In retrospect In retrospect








But the trade opening policies have not always favored LDCs opening has more been in the industrial sector and has benefited industrial nations as they have at times muscled their way into LDCs Liberalization of agriculture trade shall benefit LDCs countries due to greater relative importance of agriculture in their economies For example the European Commission is spending 2 7 billion euro per year making sugar profitable for European farmers at the same time that it is shutting out low cost imports of tropical sugar Also policy failures have at times yielded negative results







A premature capital account liberalization in a country with large fiscal deficits can have a effect by inducing large capital inflows causing the country s exchange rate to rise thus making its exports uncompetitive The collapse of structural reforms in the Southern Cone countries of Latin America at the end of the 1970s is partly attributed to this kind of inappropriate sequencing of reforms As in Mexico and Argentina Extremely stringent job security regulations may prevent firms hit by import competition from laying off workers driving them into bankruptcy as appears to have been the case in Peru in the 1980s

What lies ahead What lies ahead






Potential gains from eliminating remaining trade barriers are immense Estimates of the gains from eliminating all barriers to merchandise trade range from US 250 billion to US 680 billion per year About two thirds of these gains would accrue to industrial countries But the amount accruing to developing countries would still be more than twice the level of aid they currently receive Moreover developing countries would gain more from global trade liberalization as a percentage of their GDP than industrial countries because their economies are more highly protected and because they face higher barriers









The EU for example has adopted an Everything but Arms proposal that gives the least developed countries duty and quota free access for over 900 items with restrictions on rice sugar and banana imports phased out by 2009 Canada Japan and others have also recently given the poorest countries better market access for a range of manufactured goods A new round of negotiations would raise global growth prospects and strengthen the international trading system The IMF considers a successful trade round to be an important step toward meeting the goal of making globalization work for the benefit of all

Table 1 Population living below US 1 per day in developing countries 1990 and 2000

Number of people below US 1 a day millions 1990 2000 estimate

Poverty Rate 2000 estimate 1990

East Asia Excluding China South Asia Sub Saharan Africa Latin America Middle East N Africa

470 110 466 241 48 5

261 57 432 323 46 8

29 4 24 1 41 5 47 4 11 2 1

14 5 10 6 31 9 49 10 8 2 8