Trade: The engine of growth and development

Economists believe that trade is the engine of growth. If trade grows, country develops and leads to higher standard of living. In between trade increase and economic growth certain elements impact the pattern of development. Economic analysis has shown over the years that foreign borrowing can be used to bridge either the domestic-investment saving gap or a foreign exchange gap, whichever is larger. As such policy issue involves a decision on how far borrowing should go. How large can the import surplus be without leading to too great a dependence on imported capital and to severe future Balance of Payments difficul-ties in the form of large outflows of debt repayment and profits? The empirical evidence is that the conflict is very real between maintaining an adequate growth rate and preserving a reasonable balance on interna-tional payments.

The ultimate solution must be in improving the Balance of Payments through Trade. The growth rates of individual developing economies since 1950 correlate better with their export performance than with al-most any other single economic factor. The export performance of the developing countries has continued to lag behind that of developed industrialized countries. Last three decades since 1950 showed that export from developing countries grew at a rate of approximately 5 per cent per annum compared to 8 per cent for developed countries. The discrepancy in the rate of growth was even wider in value terms causing de-veloping countries’ share of the total value of world trade to fall.

Although the export trade of developing countries is dominated by primary commodities, the conception must be dispelled that the world trade is nearly polarized into two camps; the underdeveloped world pro-ducing and exporting mainly primary products in exchange for manufactured commodities.

In practice, a good deal of trade in both manufactured and primary commodities goes on among the de-veloped an d developing countries alike with the developed countries exporting substantial quantities of primary products and the developing countries exporting a few manufactured goods. Developed countries generally account for about half of the world’s supply of primary products. In short the distinction between developed and developing countries is not wholly synonymous with the distinction between primary prod-ucts and producers of manufactured goods. This must be kept in mind while discussing the Terms of Trade i.e, the ratio of export to import prices.

There is a distinction to be made between the terms of trade for developing and developed countries and the Terms of Trade for primary and manufactured goods. The fact remains, however, that primary prod-ucts to dominate the Balance of Payments of most developing countries and that the developing countries’ share of world trade in manufactures is small. Exports of primary products account for major portion of the export earnings of the developing countries. On the other hand manufactured goods from developing countries account for a small part of the world trade in manufactures. Moreover, the range of these trad-ed goods is narrow, about 80 per cent consisting of Textiles and light engineering products. Bangladesh is an example of this view.

Historically trade has been an important main spring of growth for countries at different stages of devel-opment. The last two centuries witnessed that industrialized countries had access to food and raw materi-als in primary products of developing countries, which allowed most developed countries to reap the gains from International specialization. The developed countries assisted the developing countries in their devel-opment process by the demand for raw materials and international investment. However, the situation is different today. Most world trade takes place in industrialized countries from which the developing coun-tries are left out and the demand for developing countries ‘traditional exports’ is slack relative to demand for industrial goods.

Three major factors have been at work in the developed countries retarding the growth of traditional ex-ports of developing countries. The first one is the pattern of demand has shifted to goods with a relatively low import content of primary commodities. Second is Technological change has led to the development of synthetic substitute for raw materials. Third, Developed countries have pursued protectionist policies which have retarded the growth of their imports of both primary and manufactured goods.

In view of these trading developments, and the emergence of a foreign exchange gap as the constraint on growth in developing countries, there has been a complete rethinking by some economists as to the lines on which trade should take place. The Balance of Payments difficulties and foreign exchange shortage of developing countries has led to a switch from viewing trade from traditional classical standpoint of re-source allocation to viewing the effects of trade on Balance of Payments. It is Balance of Payments diffi-culties, necessitating foreign exchange borrowing if growth is to be sustained, that has led to the slogan in recent times of “Trade, Not Aid”. The problem facing the developing countries is not so much whether to trade but in what goods to trade and to ensure that the terms on which they trade with developed coun-tries are favourable. There is no dispute that there are both static and dynamic gains on trade. What is in dispute is whether the overall gains could not be greater, and the distribution of gains between countries fairer, if the pattern of trade was different from present structure and the developed countries were to modify their trading policies towards the developing countries.

If the price elasticity of demand for the exports of developing countries is low and demand is slow in ex-panding, it would seem useless to push factors of production into existing export activities. The effect of increased output would be to reduce prices and worsen the terms of trade. So what the developing coun-tries shall have to do? The answer would appear to be industrialization and to produce industrial goods with a higher price and income elasticity of demand either for exports or for domestic markets –the latter implying import substitution.

Let us now look at the gains from trade. While it is quite logical to look at trade from the point of view of the Balance of Payments, and to regard the Balance of Payments as a development problem than can be solved by new trade policies, the benefits from trade in traditional trade theory is not measured by the for-eign exchange earned but by the increase in the value of output and real income from domestic resources that trade permits. Optimal trade policy, measured by the output gains from trade must be clearly distin-guished from the maximization of foreign exchange earnings. The gains from trade can be divided into two groups—the static and the dynamic gains. The static gains are those which accrue from international spe-cialization according to the doctrine of comparative advantage.

The dynamic gains are those which result from the impact of trade on the production possibilities at large. Economies of scale, international investment and transmission of technical knowledge would be example of dynamic gains. In addition, trade can provide a vent for surplus commodities which brings otherwise unemployed resources into employment and also enables countries to purchase goods from abroad. This is important for two reasons. The first one is that if there are no domestic substitutes, the ability to import can relieve domestic bottlenecks in production. The second is that imports may simply be more productive than domestic resources.

Statistical evidence for today’s developing countries is not unequivocal, but in general it supports the hy-pothesis that the growth of export trade plays a major part in the growth process by stimulating demand and encouraging saving and capital accumulation. Exports increase the supply potential of the economy by raising the capacity of imports. From this point of view it is clear that trade is an engine of economic growth and development of the developing countries.

The writer is former Director General of EPB. He can be contacted at [email protected]