Trade Growth and Development - Essay Example

? Trade Growth and Development Introduction Definition of terms International trade is a trade or exchange of goods between two or more nations. This can be at the individual level, organizational, company level, or at the government level. International trade occurs when there is movement of goods across national borders. Economic growth is the increase in a country’s production measured in Gross National Product or Gross National Income or income per capita (Nafziger 2005). A sign of growth in the economy is shown by the boost in the quantity of trade conducted in a country, setting up of buildings, roads among other visible factors. Economic development, on the other hand, encompasses economic growth as well as the additional factors of changes in output distribution and economic structure (Nafziger 2005). The changes include improvements in the welfare of the citizens, their level of happiness, as well as, their physical health conditions among others. Contribution of International Trade in Economic Growth and Development Looking at the impact that international trade has had on the growth and development of economies, this article will divide the impacts into two parts namely; the impacts on the developing countries and the impacts on the developed countries. Each of the two categories will look at the gains and losses that have been the result of international trade on different economies. As the previous paragraph has suggested, there are varying implications of international trade in the different economies. The first focus is based on the developing world. It explores the positive and negative impacts of international trade on the developing world. Impact of International Trade on the Economies of the Developing World Advantages There are numerous benefits of undertaking international trade for a developing country. One of the main benefits is the issue of specialization which comes from division of labour (Rodney 1972). For a number of reasons a country cannot be able to produce all goods that it needs. However, a country like Libya has oil, but a lot of its land is arid. This means that she has no ability to feed her population and, as a result, she uses the proceeds from her oil to purchase food to sustain her hence international trade allows her to survive (Rodney 1972). Additionally, specialization allows a country to stick to what it can best produce and leave what it cannot to those that can do so. This leads to economic growth and development because when it specializes in what it can do best, it’s able to maximize its resources and invest proceeds on welfare services like hospitals and roads which are vital indicators of growth and development of the economy. At the same time, the costs of production are prohibitive in most developing countries. Essentially, industries incur high costs to produce commodities and then charge high prices for goods. Among other reasons, most developing economies are labour intensive when it comes to production of their goods. Though the positive aspect of this is that it has created employment to a lot of people, it, however, is costly to the government. The benefit of international trade is that it allows importation of machinery that makes production cheaper and thus enhances the efficient production of goods. As a result, the quality of manufactured goods improves thus allowing the countries to gain more from their products as a result of increased value of exports. Due to unfavourable balance of trade, the least developing countries have also opted to embrace the concept of value addition (Morton 2011). This means that they export some finished products though they account for about 10% of their income from export (Morton 2011). Though the level of processing is not as high as it is in many developed countries, the developing countries have managed to reach a level of being manufactures and semi-manufacturers as the line between manufacturing and owning raw products is blurred (Morton 2011). This is a plus for economic growth and development as processing creates employment meaning more people have disposable incomes, leading to higher purchasing power which involves spending chain reaction on several industries. International trade also has the benefit of allowing the developing country to gain new and valuable technology (Cherunilam 2008). This is a great benefit to the developing country as it gives allowance to a competitive edge in the international scene. It also implies that the expansion and development of the economy is steady and able to go up. The reason for this is that technology simplifies the way things are done thus allowing the country to save resources and utilise the money in other welfare matters such as infrastructure development, which in turn makes economic growth and development very easier. It is through trade that capital moves from the core to the periphery. In essence, developed countries can help developing countries through resources that are advanced to the developing countries. For instance, banks dealing with multinational companies, which invest money into the economies of developing countries, allow circulation of foreign currencies leading to a boost in the local economy (Cherunilam 2008). Moreover, for international trade allows the breaking of monopolies within the economies of developing countries through liberalising the market. This is an advantage to the local economy as better skilled, and more efficient foreign companies inject money into the economy leading to a boost in the national economy (Cherunilam 2008). It allows the country to thrive in private companies. These companies streamline the service delivery allowing the economy to grow. Disadvantages Many years ago Africa experienced international trade. In this time, the form of exchange was mainly barter. The African gained mainly trinkets in return for her valuable timber, minerals among other resources (Morton 2011). This went on to point of taking able bodied people to go serve in plantations, in Europe and America. This was a very uneven balance of trade on the part of Africa as she lost more than she gained (Rodney 1972). Over the years, this has not changed much. The developed countries’ economies continue to benefit more than the economies of the developing world. As it is the case, the developing countries specialize more in export primary products in their raw form. Economies of Countries in the developing world rely highly on agriculture, and they in return import masses of manufactured goods as they are unable to manufacture such products on their own (Morton 2011). The con of international trade for a developing country is allowing cheap imports into the struggling economy thus translating to carnage many indigenous industries. Importation of cheap products like clothes has had the benefit of ensuring that more citizens get access to good clothes at reasonable prices. This means the level of decency among the citizens is upheld (Cherunilam 2008). In addition, textile industry and the people employed in those industries go down as they cannot be able to compete. The impact on the economy is devastating since the country has to spend more on the welfare of the unemployed thus stretching its already lean resources on unnecessary expenses. Needless to say, once the local industries collapse, the country is forced to depend on the country that can produce the commodities. Thus, the country without means of production is dependent as argued in the dependency theory of Theotonio Dos Santos (Chilcotes 2003). This implies that the developed countries are at the core while the developing countries are at the periphery. The state of affairs is counterproductive for economic growth and development in the developing economy (Morton 2011). On the one hand, while a liberal and open market is desirable, there is the threat that it is a lee way for foreign companies to exploit local economies. This is because the local companies are ill equipped to compete with foreign companies. In the end, the local economy is flooded with cheap and largely useless goods that are dumped into the country. The goods are cheaper than those on the local market thus threatening those produced within the local economy (Rodney 1972). Additionally, the value of largely unprocessed goods is lower than the value of the manufactured ones. This implies that developing countries spend more on buy goods than they spend from the sale of their goods (Cherunilam 2008). These unfavourable terms of trade cannot be easily resolved and, therefore, under the current situation, developing countries are getting dire deals from international trade (Morton 2011). It is clear that though the negatives and positives seem to balance, one thing that is clear is that impact of international trade on the developing countries is a double edged sword. This implies that the benefits of international trade are numerous such as the introduction of technology to efficiently increase the value of products to give them better bargaining power internationally. Conversely, harms that come as a result of getting redundant technology that is expensive, ends up being destructive to the economy (Rodney 1972). Impact of International Trade on the Economies of the Developed World The conditions are a bit different to those of developing countries. In developed economies, the impacts are as discussed. Advantages There are numerous benefits that developed countries have accrued from international trade such as the relative equal balance of trade especially among themselves. A cited instance is of a survey done in 2008 by Economists. It reported that 52% of Germany’s exports to France are things that France equally exports back to her, for example, cars for cars. Unlike the case in the developing world, the developed world has a better bargaining power due to the refined quality of goods they produce. This means that even the price is high enough to suit the goods. Moreover, volume of sales is high and thus the growth is always assured among these countries. It is vital to indicate, that the balance of trade is always in their favour. In comparison to the developing countries, the developed countries control a lot of the international trade since they own the major forms of production (Chilcotes 2003). The major industries are owned by nationals from the Organisation for Economic Co-operation and Development (OECD). This implies that the highest turnover of money flows into their economies. The entertainment industry, for example, is dominated by America’s Hollywood. The proceeds from the cinemas produced in Hollywood are very high and, as a beneficiary, American economy gains a lot. It is, then, apparent that the playing field is slanted in favour of the U.S, and, as a result, her economy gets to grow more every day (Chilcotes 2003). The developed countries have formed regional blocks that allow them to have a better bargaining power. An example of this is the European Union, which plays a major role in terms of negotiating for trade among themselves and with states that are outside the union. As a result, these countries help each other and thus grow and develop their economies together (Rodney 1972). This has allowed them to protect their economies as they set standards of the goods that can be traded within their borders. Another advantage of international trade for developed countries is that they find easy market within the developing world, for example, through the role played by their governments. This means that their home governments may specify to the recipient country that it must source commodities for the implementation of a project funded by the parent government from within that the government’s borders (Chilcotes 2003). This thus boosts the terms of trade for the home government (Rodney 1972). Another benefit of international trade is the freedom of movement of labour force from one nation to another. The local economy gets to benefit greatly from the skilled labour migrating from the developing world looking for better terms of employment. As a result of this, the economies of the developed world are capable of growing by leaps and bounds due to productive labour. Disadvantages History has been in favour of the countries that form the developed world. In his book, Rodney (1972) discusses the role that Europe played in the retardation of Africa while gaining for herself. History is filled with paradigm of how the colonial masters plundered resources from Africa and put Africans through a lot of suffering. As a result, the economies of the developed countries may be highly affected to a point of having law suits filled in want of compensations (Chilcotes 2003). A major issue of international trade is usually the threat of having to deal with unpredictable governments that may be hostile to foreign investors. A case in point is that of Zimbabwe and Venezuela. Over the years, these two countries have experienced a state sponsored drive to nationalise some companies that are found in sensitive areas. Farms, for example, have been repossessed with little and sometimes no reimbursements for the investors (Rodney 1972). This is a waste of resources, and the great looser is the foreign investor who is thrown out unceremoniously. This affects the economies of foreign countries because it cuts off the inflow of remittances. Another shortcoming of international trade is the insecurity for the investments that it attracts. During the recent global meltdown, the banks owned by developed countries almost went bankrupt and their mother countries spent a lot of money attempting to bail them out. This caused uproar, and this is still on-going because some countries like Greece are not yet recovered. This has been a strain on the economies all over the developed world as the amounts used as bailout money could have been utilised effectively (Rodney 1972). It is, therefore, not safe to participate in international trade. Many multinationals have been blamed for causing wars and exploiting children in mining of precious minerals plus using the children as child soldiers. These are gross human rights violations over and above blight on the economies of the host countries. This is because wars destabilize the economies. An example is the case in, Liberia, Sierra Leone and recently in the DRC Congo. It is argued that these countries are unable to fully garner the benefits of the resources they produce (Rodney 1972). Essentially, the economies of such countries are losing out on lots of cash that they could collect as tax. In this regard, something needs to be done. Conclusion Economic development encompasses economic growth as well as the additional factors of changes in output distribution and economic structure. The benefits of international trade are best felt by the developed countries as compared to developing countries. This is because the developed economies have a controlling stake and, therefore, what they say goes. Economies of Countries in the developing world rely highly on agriculture, and they in return import masses of manufactured goods as they are unable to manufacture such products on their own. The developed countries control a lot of the international trade since they own the major forms of production. There is a downside to international trade even for the developed countries, and even though the benefits outweigh the losses, they are, nonetheless, present and need to be considered before investments are made. A major issue of international trade is usually the threat of having to deal with unpredictable governments that may be hostile to foreign investors. Bibliography: Cherunilam, F., 2003. International Economics. New Delhi: Tata McGraw-Hill. Chilcote, R. H., 2003. Development in Theory and Practice: Latin American Perspectives. Oxford: Rowsman & Littlefield Publishers, Inc. Morton, K. and Tulloch, P., 2011. Trade and Developing Countries. New York: Routledge Taylor & Francis Group. Nafziger, E. W., 2006. Economic Development. New York: Cambridge University Press. Rodney, W., 1972. How Europe Underdeveloped Africa. Nairobi: East African Education Publishers Ltd. Read More