International Trade

and Development
Globalization The increasing
integration of national economies
into expanding international
markets.
 Market integration refers to how markets
trade with one another. When markets are
highly integrated, there are less trade barriers
and prices are similar. In case of low
integration, prices among these markets
fluctuate and there are several barriers in
trade. International trade helps the integration
of markets because the latter allows price
signals to be transmitted from one market to
another.
World Trade Organization (WTO)
Geneva-based watchdog and enforcer of
international trade agreements since
1995; replaced the General Agreement
on Tariffs and Trade.
International trade has often played a central role
in the historical experience of the developing
world. In recent years, much of the attention to
trade and development issues has been focused on
understanding the spectacular export success of
East Asia. Taiwan, South Korea, and other East
Asian economies pioneered this strategy, which
has been successfully followed by their much
larger neighbor, China.
Primary products. Products derived
from all extractive occupations—farming,
lumbering, fishing, mining, and
quarrying, foodstuffs, and raw materials.
Export dependence
A country’s reliance on exports
as the major source of financing
for development activities.
 Free trade The importation and exportation of goods
without any barriers in the form of tariffs, quotas, or other
restrictions
Export earnings instability Wide fluctuations in
developing-country earnings on commodity exports
resulting from low price and income elasticities of demand
leading to erratic movements in export prices
Commodity terms of trade The ratio of a country’s average
export price to its average import price
 In 1947, twenty three nations including the United
States signed the General Agreement on Tariffs and
Trade (GATT) until it became a treaty among 123
nations whose governments agreed to promote trade
among members. The treaty was intended to be
multilateral and GATT negotiators did succeed in
liberalizing world merchandise trade. It is based on
three principles: equal, non-discriminatory trade
treatment for all member nations, the reduction of
tariffs by multilateral negotiation, and the elimination
of import quotas. Hence, GATT provided a forum for
the multilateral negotiation of reduced trade barriers.
The Association of Southeast Asian Nations (ASEAN). The
ASEAN is the top preferential trade agreement in the Asia
Pacific area. Established in 1967, ASEAN is an organization
for economic, political, social and cultural cooperation
among its members. Its original members are Indonesia,
Malaysia, Brunei, Singapore, Thailand and Philippines. In
July 1995, Vietnam was admitted to the ASEAN while
Cambodia and Laos were able to join in July 1997. Burma,
now Myanmar, was granted admission in 1998.
Gulf Cooperation Council (GCC). In May 1981, GCC was
established by Qatar, Oman, Saudi Arabia, Bahrain, Kuwait,
and the United Arab Emirates. The purpose of GCC is to foster
unity among its members based on their common objectives
and their similar political and cultural identities, which are
rooted in Islamic beliefs. Gulf finance ministers outlined an
economic cooperation agreement in terms of financial and
monetary coordination, investment, petroleum and abolition
of custom duties.
The European Union. In 1951, Belgium, Germany, France, Italy, Luxembourg
and the Netherlands were the only European countries which started to
cooperate economically. Over time, 22 more countries decided to join. The
Union’s members (aside from the pioneer members) include Denmark,
Ireland, United Kingdom, Greece, Portugal, Spain, Austria, Finland, Sweden,
Cyprus, Czechia, Estonia, Latvia, Hungary, Lithuania, Malta, Poland, Slovakia,
Slovania, Bulgaria, Romania and Croatia. The Euro is the official currency of
19 EU countries and they are collectively known as the Eurozone. The EU is
more than a common market because the citizens of the member countries
are able to freely cross borders within the Union. This is because the Union
encourages the development of a community wide labor pool.
South African Development Community (SADC). Established in
1992, the SADC is referred to as a mechanism by which the
region’s black ruled states could promote trade, cooperation,
and economic integration. SADC members are Angola,
Botswana, Democratic Republic of Congo, Lesotho, Malawi,
Madagascar, Mauritius, Mozambique, Namibia, South Africa,
Seychelles, Swaziland, Tanzania, Zambia and Zimbabwe.
Economic Cooperation of West African States
(ECOWAS). To promote trade, cooperation, and
self-reliance in West Africa, 15 states signed the
ECOWAS in May 1975. The member countries
include Benin, Burkina Faso, Cape Verde, Gambia,
Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger,
Nigeria, Senegal, Sierra Leone, Mauritania and
Togo. These countries agreed to establish a free
trade area for unprocessed agricultural products
and handicrafts and abolished tariffs on industrial
goods .
North American Free Trade Agreement. On August 12,
1992, representatives from Canada, Mexico, and United
States concluded negotiations for the NAFTA. The three
member countries’ governments pledged to promote
economic growth through tariff reductions and
expanded trade and investment. The benefits of
continental free trade benefited these countries through
the gradual elimination of barriers to the flow of goods,
services, and investment.
The United States-Mexico-Canada
Agreement, also known as the
USMCA, is a trade deal between the
three nations which was signed on
November 30, 2018.
Common Market of the South (Mercosur). The government
of Brazil, Paraguay, Uruguay, and Argentina signed the
Asuncion Treaty to form the Common Market of the South
(Mercado Comun del Sur or Mercosur) in March 1991. The
presidents of the four countries agreed to begin phasing in
tariffs on August 5, 1994. A few months after, goods,
services, and factors of production moved freely throughout
the member countries.
Andean Community. Formed in 1969, the Andean Community,
formerly the Andean Pact, was aimed to accelerate development of
member states namely, Peru, Bolivia, Ecuador, Venezuela and
Colombia through economic and social integration. These countries
agreed to lower tariffs among members and work together to decide
what products each country should produce. Foreign goods and
companies were kept out as much as possible.
The Role of the
Financial System in
Economic Development
Six Major Functions of Finance
1. Providing payment services. It is inconvenient,
inefficient, and risky to carry around enough cash
to pay for purchased goods and services. Financial
institutions provide an efficient alternative. The
most obvious examples are personal and
commercial checking and check-clearing and
credit and debit card services; each is growing in
importance, in the modern sectors at least, even
in low-income countries.
2. Matching savers and investors. Although many
people save, such as for retirement, and many
have investment projects, such as building a
factory or expanding the inventory carried by a
family microenterprise, it would be only by the
wildest of coincidences that each investor saved
exactly as much as needed to finance a given
project. Therefore, it is important that savers
and investors somehow meet and agree on
terms for loans or other forms of finance.
3. Generating and distributing information. From a
society wide viewpoint, one of the most
important functions of the financial system is to
generate and distribute information. Stock and
bond prices in the daily newspapers of developing
countries (and increasingly on the Internet as
well) are a familiar example; these prices
represent the average judgment of thousands, if
not millions, of investors, based on the
information they have available about these and
all other investments.
4. Allocating credit efficiently.
Channeling investment funds to uses
yielding the highest rate of return
allows increases in specialization and
the division of labor, which have
been recognized since the time of
Adam Smith as a key to the wealth of
nations.
5. Pricing, pooling, and trading
risks. Insurance markets provide
protection against risk, but so does
the diversification possible in stock
markets or in banks’ loan
syndications.
6. Increasing asset liquidity. Some investments are
very long-lived; in some cases—a hydroelectric
plant, for example—such investments may last a
century or more. Sooner or later, investors in such
plants are likely to want to sell them. In some cases,
it can be quite difficult to find a buyer at the time
one wishes to sell—at retirement, for instance.
Financial development increases liquidity by making
it easier to sell, for example, on the stock market or
to a syndicate of banks or insurance companies.
 Keynesian Economists vs Monetarist
Theory
The Keynesian economists argue that an expanded
supply of money in circulation increases the
availability of loanable funds. Expanded supply of
money in circulation increases the availability of
loanable funds. A supply of loanable funds in excess
of demand leads to lower interest rates. Because pri-
vate investment is assumed to be inversely related
to prevailing interest rates, business people will
expand their investments as interest rates fall and
credit becomes more available.
Pump priming - an action taken by a government
wherein they inject a small amount of money into
a sluggish economy in hopes of spurring economic
growth.
The monetarist theory of economic
activity advocates argue that by
controlling the growth of the money
supply, governments of developed
countries can regulate their nations’
economic activity and control inflation.
Monetary policy. Activities of a
central bank designed to
influence financial variables such
as the money supply and interest
rates.
Money supply .The sum total of
currency in circulation plus
commercial bank demand
deposits and sometimes savings
bank time deposits.
Currency substitution .The use of foreign currency
(e.g.,U.S. dollars) as a medium of exchange in place of
or along with the local currency (e.g., Mexican pesos).

Transparency (financial) .In finance, full disclosure by

public and private banks of the quality and status of
their loan and investment portfolios so that domestic
and foreign investors can make informed decisions.
Organized money market .The formal banking system in which
loanable funds are channeled through recognized and licensed
financial intermediaries.

Unorganized money market .The informal and often usurious

credit system that exists in most developing countries
(especially in rural areas) where low-income farms and firms
with little collateral borrow from moneylenders at exorbitant
rates of interest.

Financial liberalization .Eliminating various forms of government

intervention in financial markets, thereby allowing supply and
demand to determine the level of interest rates, for example.
Central bank. The major financial institution responsible for
issuing a nation’s currency, managing foreign reserves,
implementing monetary policy, and providing banking
services to the government and commercial banks.

Currency board. A form of central bank that issues

domestic currency for foreign exchange at a fixed exchange
rate.

Development banks. Specialized public and private financial

intermediaries that provide medium- and long- term credit
for development projects.
Informal finance. Loans not passed through the formal banking
system—for example, loans between family members.

Rotating savings and credit association (ROSCA). A group formed by

formal agreement among 40 to 50 individuals to pool their savings and
allocate loans on a rotating basis to each member.

Microfinance. Financial services, including credit, supplied in small

allotments to people who might otherwise have no access to them or
have access only on very unfavorable terms. Includes microsavings and
microinsurance as well as microcredit.

Group lending scheme. A formal arrangement among a group of

potential borrowers to borrow money from commercial or government
banks and other sources as a single entity and then allocate funds and
repay loans as a group, thereby lowering borrowing costs.
Fiscal policy - the use of government spending and
taxation to influence the economy. When the
government decides on the goods and services it
purchases, the transfer payments it distributes, or
the taxes it collects, it is engaging in fiscal policy.
 Taxes
Direct taxes. Taxes levied directly on
individuals or businesses—for example,
income taxes.
Indirect taxes. Taxes including customs duties
(tariffs), excise taxes, sales taxes, value added
taxes (VATs), and export duties— levied on
goods purchased by consumers and exported
by producers.
Expansionary fiscal policy is when the government expands
the money supply in the economy using budgetary tools to
either increase spending or cut taxes—both of which provide
consumers and businesses with more money to spend. The
purpose of expansionary fiscal policy is to boost growth to a
healthy economic level, which is needed during the
contractionary phase of the business cycle. The government
wants to reduce unemployment, increase consumer demand,
and avoid a recession.
Keynesian Theory of Employment
John Maynard Keynes was an early 20th-century
British economist, known as the father of Keynesian
economics. His career included academic roles and
government service.
One of the hallmarks of Keynesian economics is that
governments should actively try to influence the course
of their nations' economies—especially to increase
spending and lower taxes in order to stimulate demand
in the face of recession.
The Monetarist Approach
The monetarist theory, as popularized
by Milton Friedman, asserts that money
supply is the primary factor in
determining inflation/deflation in an
economy. According to the theory,
monetary policy is a much more
effective tool than the fiscal policy for
stimulating the economy or slowing
down the rate of inflation.
Contractionary fiscal policy is when the
government either cuts spending or
raises taxes. It gets its name from the
way it contracts the economy. It reduces
the amount of money available for
businesses and consumers to spend. The
goal of contractionary fiscal policy is to
reduce inflation.