International Economics 17th Edition

Carbaugh Solutions Manual

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 Instructor’s Manual
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, (3) falling commodity prices, (4) worsening terms of trade, (5) limited market access, and (6)
agricultural export subsidies of developing nations. Sweatshop factories are also noted as a problem for
developing countries with a focus on the worker tragedies in Bangladesh.

Attention then turns to policies to stabilize the prices of primary products: (1) production and export controls,
(2) buffer stocks, and (3) multilateral 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.

OPEC is discussed as a way in which otherwise marginalized nations collectively derive power. Foreign aid
is offered as a substitute as provided by the institutions of the World Bank and IMF.

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.

Despite the sluggish economic performance of many developing nations, a group of East Asia economies,
namely China and Indonesia, have realized remarkable economic growth in recent decades. It is noted that
the success of these economies is due to high rates of investment, increased endowments of an educated
work force, and the use of export promotion policies. A discussion of China and India’s economic success
closes the chapter.

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.

BRIEF ANSWERS TO STUDY QUESTIONS

1. 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 secularly
declining terms of trade.

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

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

3. 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.
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in
part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website for classroom use.
 Instructor’s Manual

4. 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.

5. 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.

6. 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.

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

8. 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.

9. 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 and can likely continue in
the future provided they account for externalities (e.g. environment).

10. 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.

11. 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.

© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in
part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website for classroom use.