Global Economics 13th Edition Robert

Carbaugh Solutions Manual

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 CHAPTER 7

TRADE POLICIES FOR THE DEVELOPING NATIONS

CHAPTER OVERVIEW

This chapter discusses the economic characteristics of the developing countries and the trade policies that have been
implemented to improve the well being of their people. The chapter begins by identifying the major trade problems
of developing countries: (1) lack of economic diversification, (2) unstable export markets, and (3) worsening terms of
trade.

Attention then turns to policies to stabilize the prices of primary products: (1) production and export controls, (2)
buffer stocks, and (3) multinational contracts. In general, these policies have had only modest success in stabilizing
commodity markets. To further help developing countries improve their economic well-being, industrial countries have
extended nonreciprocal tariff preferences to exports of developing countries.

To enhance economic growth, developing countries have enacted an inward-looking strategy (import substitution) and
an outward-looking strategy (export-led growth). Developing countries which have pursued export-led growth have
generally realized higher rates of economic growth than those countries that adopted import-substitution policies.

From the 1960s to the mid-1990s, East Asian economies realized remarkable records of high and sustained
economic growth. By the late 1990s, however, several nations experienced financial crises that weakened their
economies.

After completing this chapter, the student should be able to:

• Identify the trade problems of the developing countries.
• Discuss the nature and operation of international commodity agreements.
• Explain how the generalized systems of preferences attempts to improve the welfare of developing countries.
• Discuss the advantages and disadvantages of import-substitution policies and export-led growth.
• Assess the recent economic performance of the East Asian economies.

© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
BRIEF ANSWERS TO STUDY QUESTIONS

1. The purpose is a cartel is to restrict market output, thus driving up price and profits; output restriction requires
cartel members to sell no more than their quotas. An individual cartel member has the economic incentive to
sell more than its quota, thus becoming a cheater. But if all cartel members sell more than their quotas, the
cartel price will fall and profits will vanish.

2. Prior to the 1990s, India adopted a system of import substitution to protect its young producers from
foreign competition. As India became isolated from the global economy, its economic growth suffered and
poverty became widespread. By the 1990s, the government of India realized that a movement toward an
outward-oriented, market-based economy was essential for the improvement of its peoples’ standard of
living. Such reforms were initiated and the result was improvements in economic growth and the
reduction of poverty.

3. During the 1960s oil was relatively abundant at the world level, which limited OPEC's ability to raise oil prices.
By the 1970s oil was perceived as being in short supply. Following the Yom Kippur War in 1973, OPEC
realized that market conditions would support substantial increases in the price of oil. Among the factors that
contributed to the downfall of OPEC during the 1980s were worldwide recession, oil conservation efforts of
importing countries, and increased oil supply by non-OPEC nations.

4. Since the 1970s, China has abolished much of its centrally-planned economy and allowed free enterprise to
replace it. This move toward capitalism has dramatically improved the productivity and export performance of
the Chinese. In the United States, there has existed pressure to use China’s normal-trade-relation status as
a lever to force China to improve in areas such as human rights, trade, and weapons proliferation. Although
China has moved away from central planning, government intervention in its economy still remains strong.

5. Many developing countries find that their economies are greatly tied to the export of one commodity, such as
tin. Since the price elasticities of supply and demand of most commodities are low, modest changes in supply
or demand can exert large swings in commodity prices and export earnings.

6. Developing countries use import substitution policies to restrict the import of manufacturers so that domestic
producers can take over established markets. Export promotion policies attempt to replace commodity exports
with exports of processed primary products, semi-manufacturers, and manufacturers.

© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 7. International commodity agreements have been applied to commodities such as tin, cocoa, coffee,
sugar, and wheat. Deciding on acceptable ranges for price and output fluctuations has been
difficult. Convincing countries to accept production and export quotas has also been difficult,
especially during periods of falling market demand.

8. East Asia’s growth strategy has emphasized high rates of investment combined with high and
increasing endowments of human capital due to universal primary and secondary education. East
Asia’s economies have followed a flying geese pattern of growth in which countries gradually move
up in technological development by following in the pattern of countries ahead of them in the
development process. Moreover, industrial policies have attempted to support selected sectors of
East Asia’s economies. Economic growth for East Asia has been export oriented.

9. To promote stability in commodity markets, international commodity agreements have relied on

production and export controls, buffer stocks, and multilateral contracts.

10. Under the GSP program, industrial countries reduce tariffs on imports from developing countries
below the levels applied to imports from other industrial countries.

11. Developing nations often contend that the existing pattern of trade and specialization has made
them excessively dependent on primary products, which has led to unstable export markets and a
secularly declining terms of trade.

© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.