Trade and Debt Problems of the Third World



LDCs are becoming increasingly conscious of the limitations of an industrialisation strategy based on import substitution (building up local industry behind tariff walls). For many of the smaller LDCs import substitution results in a gross misallocation of resources, discrimination against exports and widespread production at negative value added. As a consequence there has been a marked shift in focus. They have adopted a variety of measures to promote industrial exports. The reason for this shift in emphasis is that the package of policies used to stimulate import substitution discriminates significantly against the development of export production. This discrimination exists for a variety of reasons. The import regime (based on tariffs, quotas and exchange controls) typically allows a country to balance its international payments at a higher exchange rate than would be possible with a more liberal policy. Thus, regardless of whether the trade and exchange barriers were erected primarily to protect domestic industry as part of an import substitution strategy or merely to conserve foreign exchange or to provide government revenue, the effect in all cases is to overvalue the exchange rate. An overvalued exchange rate discourages manufactured exports in at least three ways:
  1. (1)

    It reduces the profitability of exporting as an activity. The domestic currency value of foreign exchange earnings are reduced below the rate that would be set by a more appropriate exchange rate. Imported inputs or domestically produced import-competing inputs have to be purchased by the export industries at above world prices. In many countries this contributes to an ‘inefficiency illusion’, i.e. because domestic production costs exceed world prices, the impression is created that local industry cannot compete or export without protection.

  2. (2)

    It provides an environment for a protected industry to tolerate relatively more inefficiency than an unprotected one. Slack management, underutilised capacity, unexploited economies of scale often prevent firms from exporting their output.

  3. (3)

    Existing export opportunities may not be grasped because production for the protected domestic market is typically more profitable and assured.



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Further Reading

  1. A. K. Bhattacharya, Foreign Trade and International Development (Lexington Mass.: Lexington Books, 1976 ). An up-to-date discussion of LDC trade problems.Google Scholar
  2. G. K. Helleiner, International Trade and Economic Development (Harmondsworth: Penguin Books, 1972 ). This text describes and analyses the issues of world trade as they relate to the LDCs.Google Scholar
  3. K. Morton and P. Tulloch, Trade and Developing Countries ( London: Croom Helm—ODI, 1977 ).Google Scholar
  4. T. Murray, Trade Preferences for Developing Countries (London: Macmillan, 1977 ). A detailed, critical analysis of the GSP scheme.Google Scholar
  5. B. Södersten, International Economics (London: Macmillan, 1971). Chap. 23 contains a useful, clear exposition of the trade problems of developing countries.Google Scholar
  6. P. Streeten (ed.), Trade Strategies for Development, Papers of the 9th Cambridge Conference on Development Problems (London: Macmillan, 1973 ).Google Scholar

Copyright information

© Leonard Gomes 1978

Authors and Affiliations

  1. 1.Middlesex PolytechnicUK

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