CHAPTER 14TRADE POLICIES FORDEVELOPING COUNTRIESObjectives of the ChapterChapter 14 examines the interactions between emerging economies and the rest of the world. It begins by offering perspectives on the link between growth and foreign trade, on the changing pattern of comparative advantage in the Third World, on the collective political voice gained by the developing countries after World War II, and on the movement toward market-oriented economies in the countries of the former Soviet Union. The “New International Economic Order” movement urged that incomes of developing countries be raised through cartels to restrict trade in primary products, schemes to stabilize primary product prices, and preferential tariff reductions to foster developing country exports of manufactured goods.Several alternatives to free trade have been proposed specifically for developing countries. New industries can be nurtured by restricting imports of manufactured goods. Price-raising cartels can be used to increase the prices of primary product exports. Finally, there are attempts to increase exports of manufactured goods to industrialized countries. Special obstacles are faced in the transition economies of Central and Eastern Europe. These countries are trying to move from isolation, central planning, and a goal of self-sufficiency to openness, capitalist markets, and a goal of increased national income.After studying Chapter 14 you should know how to1. contrast the growth rates for high-, middle-, and low-income countries.2. identify the forms taken by the increased political awareness and voice of developing countries inthe international arena.3. explain how declining prices for primary products can work against developing countries.4. explain the concept of import-substituting industrialization and how this strategy for developmenthas been implemented, and evaluate its performance relative to a strategy of promoting exports of manufactured goods.5. describe the challenges faced by transition economies moving from central planning to market-driven trade with the world economy.Important ConceptsCMEA:Council for Mutual Economic Assistance (1949-1991), an organizationof Soviet Bloc countries intended to promote and coordinatemultilateral trade within the centrally-planned economies of the bloc. Engel’s Law:Because the income elasticity of demand for food is less than one, asper capita incomes rise in the long run, demand will shift away fromfood and the relative price of food will fall.ISI:Import-substituting industrialization. A strategy for development thatcalls for governments of developing countries to identify largedomestic markets as indicated by substantial imports over the years toensure technologies of production can be mastered by localmanufacturers or supplied by foreign investors, or to use subsidies tomake it profitable for potential investors or state enterprises to set uphigh-cost local production facilities.NICs:Newly-industrializing countries. Most prominent of these are SouthKorea, Taiwan, Hong Kong, and Singapore (“the Four Tigers”), whoseper capita incomes rose to the level of the industrialized countries,thanks to high income growth rates through the late 1990s. “Newly-globalizing developing countries” are those that had closed economiesin 1980, but whose growth rates skyrocketed in the late 1990s as tradewas liberalized. This group includes China, Brazil, and India. OPEC: Organization of Petroleum Exporting Countries. Established in 1960,this cartel has a membership of 12 producers (from the Middle East,Africa, and South America) as of 2008. OPEC was successful inengineering enormous increases in the price of crude oil during1973-74 and 1979-80. Because of supply conditions, it is unlikely thatcartels in other primary products could ac hieve anything like OPEC’ssuccess.Transition economies: Countries of the former Soviet Union (FSU) and its satellites that aremoving from central planning to market orientation. Beginning in1989, these countries started to “liberalize” by moving toward market-determined prices, private ownership of resources and businesses, andopenness to international competition and trade. These countries maysuffer from a “transition recession” early in the liberalization period asold business practices and relationships are re-organized.Warm-up QuestionsTrue or False? Explain.1. T / F All OPEC countries are both wealthy and developed.2. T / F Developing countries all have the same problems and potentials.3. T / F Engel’s Law means trouble for food produc ers in a prospering world.4. T / F A cartel that is optimal for its members is also optimal for the world.5. T / F “Shock Therapy” appears to work better in transition economies than a “kinder andgentler” approach.Multiple Choice1. The optimal monopoly markup isA. higher with more elastic demand for cartel sales.B. higher with less elastic demand for cartel sales.C. lower with less elastic demand for cartel sales.D. higher with more elastic supply schedules.2. An international cartel that maximizes its profits is optimal forA. the member countries and the world.B. the member countries but not the world.C. the consuming countries of the world.D. no country at all.3. Which of the following is not a valid argument in favor of ISI?A. There can be large economic and social side benefits from industrialization.B. For a large country, replacing imports can bring better terms-of-trade effects.C. Replacing imports of manufacturers uses cheap, convenient market information.D. GDP per capita has grown faster in countries with ISI.4. Arguments in favor of having developing countries focus on exporting manufactured goodsincludeA. strong support in industrialized countries for free trade in manufactured goods.B. very low tariffs on manufactured textiles, apparel, and footwear in industrialized countries.C. political preference for VERs among importing countries.D. a downward trend in the prices of primary products.5. Which of the following causes a downward trend in the relative prices of primary products?A. Slow productivity growth in the primary sector.B. Development of synthetic substitutes for primary products.C. The nonrenewable nature of many primary products.D. A high income elasticity of demand for food.Problems1. You have been appointed as an advisor to the Saxon government, which is consideringimplementing measures to increase Saxon production of electronic equipment.a. What are arguments in favor of promoting such industrialization? Are there any argumentsagainst it?b. What methods would you suggest the Saxon government use to encourage suchindustrialization?2. Is our hypothetical country of Saxony doomed to poverty because of its reliance on foodproduction and export?3. Instead of focusing exclusively on exporting raw rubber, Malaysia is increasingly involved in theproduction and export of rubber-based goods such as surgical gloves. Discuss motives forchoosing this new strategy and policies for implementing it.4. Assume that you are the head of a diamond cartel called DeBooz. If the price elasticity ofdemand for exports of diamonds is –0.5, the diamond cartel’s sha re of world sales is 50 percent, and the elasticity of competing supply is 1.0, what is the optimal cartel markup rate for DeBooz?Discussion Topics1. If all countries desire to become industrialized, will no country produce primary goods?2. In a broad sense of the word, is “develop ed” always the same as “industrialized”? As“wealthy?”。