International Economics: Developed vs Developing Nations Trade

This essay examines the significant economic differences between developed and developing nations and their impact on trade policies over the last four to five decades. Developing countries often lack a strong industrial base, relying on primary occupations and exporting raw materials. This creates a dependence relationship and trade deficit, leading developing nations to focus on manufacturing through import substitution strategies and protectionism. However, this often results in inefficiency and lack of global competitiveness. Examples like India and Japan illustrate these points, with China being an exception due to its massive infrastructure investment and opening of the economy. The essay concludes that infrastructure and economies of scale are crucial for developing countries to compete globally. Desklib provides access to similar essays and study resources for students.

INTERNATIONAL ECONOMICS
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INTERNATIONAL ECONOMICS
There are significant differences between the economies of developed nations and
developing nations. This tends to have significant impact on the underlying trade policies.
This has been apparent in the last four–five decades. The developing countries typically tend
to lack a strong industrial base and significant proportion population is dependent on primary
occupations such as agriculture, animal husbandry & mining (Mankiw,2016). The result of
this is that the developing countries tend to export raw materials such as agricultural and
mineral commodities. The industrial base required to convert into more useful and value
added products is typically lacking and hence this is carried out in the developed countries
which tend to export these to developing nations. The net result is that there is a dependence
relationship and trade deficit (Krugman & Obstfeld, 2014).
In order to reduce this dependence and move towards economic development, the
developing countries typically tend to focus on the manufacturing sector. This potentially can
also lead to higher employment and use of cheap labour owing to availability of cheap
manpower. This development of manufacturing sector is carried out as part of import
substitution strategy whereby the emphasis is on localisation of manufactured products
imported from developed countries. In this regards, some developing nations may develop
technical collaboration with developed nations so as to kickstart the process (Krugman &
Wells, 2015).
Another key pillar of this policy is protectionism which is aimed to protecting the
infant manufacturing industries. However, over the years, this protectionism tends to result in
inefficiency and development of government monopolies. The end result is that this fragile
manufacturing sector is not able to compete globally as it grows only on account of
protectionism and not global competitiveness. Meanwhile, the developed countries tend to
keep exporting high end capital goods besides services to these developing nations (Krugman
& Obstfeld, 2014).
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Some examples may be taken in order to substantiate on the above trade related
policies. An apt example of a developing country is India which after independence in 1947
aimed for industrial development through industrial development. In this regards, some
support was provided from the erstwhile Soviet Union. Meanwhile, a significant proportion
of the population continued to depend on agriculture. Even though India is a leading
producer of various agricultural commodities but owing to a huge population, the exports
were quite limited. For developing the industrial base, protectionism was deployed through
tariffs which led to growth in domestic manufacturing. However, these goods could not be
exported as they were not competitive on the global market which led to an economic crisis
caused due to balance of payments mismatch (Chibber, 2011).
The net result was the opening of economy and removal of various restrictions
coupled with diminished role of state thereby allowing market forces to function. An apt
example of developed country is Japan which despite lacking in resources tends to make up
with regards ton access to capital and technology. The country is dependent on other
developing countries such as China for iron ore, steel, aluminium but is a leader with regards
to high end capital goods besides automobiles and financial industry. Over the years, the
country has exported these products to both developed and developing nations (Mankiw,
2016).
A key aspect with regards to developing country is the struggle in relation to
competing with the global economy. This is primarily because the relevant infrastructure is
quite often lacking due to which the domestic production is not able to compete with the
global players. Further, in case of smaller developing nations, the home consumption base is
also not sizable owing to which economies of scale are difficult to realise (Krugman & Wells,
2015) . Also, there is lack of capital, state of art technology that plagues the production in
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various developing countries. The net result is that the manufactur3ed products are rarely able
to compete with the offering in the developed world (Krugman & Obstfeld, 2014).
An exception to the above trend is China which over the last two decades has
emerged as the manufacturing capital of the world. The key factor responsible for the same is
the opening of economy and massive investment in enabling infrastructure by the government
which provided a sound ecosystem that led to outsourcing related contracts primarily to tap
cheap labour. Gradually, the economies of scale grew and China developed into a global
manufacturing hub (Bapuji, 2014). Even though cheap labour is available in other developing
countries, very rarely can they provide requisite supporting infrastructure with regards to
electricity, roads, ports, ease of business due to which foreign capital is not attracted leading
to the products being non-competitive (Barro, 2017).
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References
Bapuji, H. (2014) Not Just China: The Rise of Recalls in the Age of Global Business (3rd ed.).
London, England: Palgrave MacMillan
Barro, R. (2017). Macroeconomics: A Modern Approach (4thed.). London, England: Cengage
Learning.
Chibber, V. (2011) Locked in Place: State-Building and Late Industrialization in India (3rd
ed.), London, England: Princeton University Press
Krugman, P. & Obstfeld, M. (2014) International Economics: Theory and Policy (8th ed.)
New York, NY: Addison-Wesley
Krugman, P. & Wells, R. (2015).Macroeconomics (3rd ed.). London, England: Worth
Publishers.
Mankiw, G. (2016). Principles of Macroeconomics (6th ed.). London, England: Cengage
Learning.
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