Brief: Economic development will be defined. The role of trade in efficient
             allocation of resources will be presented with special reference to the
             international division of labor. Concepts of export-led growth versus
             demand-led growth strategies with their diverse implications will be
             discussed. Global commodity chain framework will also be presented.

       Reading Material:

       Akyüz, Y. (2003) Developing Countries and World Trade: Performance and Prospects,
          UNCTAD: Geneva. pp. 1-32

       Gereffi, G. (1999) “A Commodity Chains Framework for Analyzing Global Industries”,

       Kokko, A. (2002) “Export-led Growth in East Asia: Lessons for Europe’s Transition
          Economies” European Institute of Japanese Studies Working Paper Series, No:142.

        Economic growth constitutes the central focus of economic development. Growth
is universally expressed as the increase in the total product of a country aggregately
measured in the market prices of goods and services, and corrected for the changes in the
price level for the concerned period. This very roughly defines the increase in the
productive capacity of the country, the fluctuations the capacity utilization as well as
possibility of unemployed resources being assumed away.
        Modern economic system is totally dependant on growth. Growth is not simply a
positive and desired outcome of the operations of the economy but it is also the necessary
condition for the system to sustain its basic course of operation. Growth of an economy is
principally constrained by the productive capabilities of its productive resources. The
factors of production, usually summarized in the categories of labor, capital and nature in
economic theory constitute the productive resources of the country. The levels of
productivity these factors possess is not certainly static. The productivity of the labor
force, or the productivity of the capital equipment can be enhanced in many different
ways. One most apparent and basic way to do so is to develop capacity to labor for
specific areas or design capital equipment and tools that are most appropriate for specific
industries. Namely the increased division of labor will eventually result in increased
productivity. Besides, enhancing specialization in the factors of production, given that
certain industries and certain sectors are more adequate for the employment of principally
one factor to others, specialization may take the form of enjoying the advantages of
having one specific factor abundant and inclining more to the development of those
sectors that would largely employ these factors. This constitutes the basis of international
division of labor.
        It has long been argued that countries, by specializing in the industries that
specifically employ the most abundant factor of production that is available to them
would altogether benefit from the increased productivity due to division of labor. But the
precondition for that is the existence of extensive trade between these countries.
Otherwise, Each country will end up with a specific product in their hands in quantities
that is way over their own need on the one hand and others in extreme scarcity.

         In this line of thought, trade is thought to facilitate the fruitful possibilities of
specialization, that will in turn enhance the productivity. In other words, the total
resources will be allocated efficiently among nations. The productivity increase will be
eventually translated into economic growth. On the other hand, by specializing in certain
industries, prices of all goods will be lowered through trade, and this will cause the total
welfare to rise significantly.
         This approach has been challenged since 1940s, by the actual experiences of the
developing countries. The difficulties arising due to the static position of the less
developed countries in the international division of labor, forced them to seek answers to
their balance of payment problems. The basic problem was that the world prices of
different set of commodities showed different systematic trends. On the one hand the
prices of manufactured goods with the increasing world demand was escalating, on the
other the prices of primary commodities stagnated. Hence the countries who have
specialized in the production of the former were systematically gaining in the expense of
the others who have specialized in the production of the latter.
         The agenda for the less developed countries in 1950s and 1960s was to “create
new external conditions for accelerating the rate of growth” (Akyüz, 2003). These
conditions included:
     New positions in world trade that would guarantee price stabilization (against the
         unstable prices of less developed country exports – primary commodities).
     Improved market access for primary exports.
     Greater policy space for developing local industries and reduction of the barriers
         to their exports.
     Reduction of the burden of debt services.
The following period of protected internal demand-driven growth experiences throughout
the developing world proved that the comparative advantage among economies due to
factor abundancy principle is not static but dynamic. Namely, by appropriate external
conditions and policy incentives, the position of a country in the world division of labor
can be persistently altered.
         By the 1970s, however, these experiments showed mixed results, the reasoning of
which is still a big debate. While a number of countries in South East Asia have managed
to promote their economies into strong industrial bases and switch relatively smoothly to
export-promotion, others suffered from inadequate industrial structures that are still weak
in world competition and dependant on extensive market protection. The eventual debt
crisis, which is due to the deficiency in the capacity of the developing countries to service
their debts in the wake of interest rate surges, opened a new bitter scene in the world
         Today, although there has been many developments in the world market, the
agenda for the less developed countries is more or less same as it was in 1950s. The
general developments can be summarized as follows (Akyüz, 2003):
     From the 1980s onwards the exports of developing countries have grown faster
         than the world average and at the beginning of 21st century account for almost one
         third of world merchandise trade.
     Much of the growth has been in manufactures. However, growth in trade in
         several primary commodities has been as rapid as in some manufactures, and

       countries which successfully entered such sectors have experienced a significant
       expansion in their exports and incomes.
      Many developing countries appear to have succeeded in moving into technology-
       intensive manufactured exports (electronic and electrical goods)
      However, with the exception of few East Asian first-tier economies, developing
       country exports are still concentrated on products derived essentially from the
       exploitation of natural resources and the use of unskilled labor.
      “[The] considerable expansion of technology-intensive, supply-dynamic, high-
       value-added exports from the developing countries is misleading… In reality,
       those countries often involved in the low-skilled assembly stages of international
       production chains organized by transnational corporations. Most of the
       technology and skills are embodied in imported parts and components, and much
       of the value added accrues to producers in more advanced countries…” (Akyüz,
       2003: XIII).
      “…[W]hile the share of developing countries in world manufacturing exports,
       including those of rapidly growing high-tech products, expanding rapidly”, their
       share in the manufacturing value added does not seem to share the same
       dynamism and most of the time stagnates.

As can be observed from the above discussion what you export is very important. Impact
of trade on the economic growth is largely dependant on the specific specialization of the
country in means of international division of labor. Moreover, trade has also new
implications in means of being organized within what is called ‘the global production
networks’. Before introducing the concept of global production network, it is wise to
present the dynamic products in world trade:
        According to the World Trade and Development Report 2002 defines the market
dynamism of the products as the high average annual export value growth. Given that
between 1980 and 1998, the total value of world exports (except fuel) grew at a rate of
8.4 percent annually. The products whose export value grew from 11.5 % to 16.3 (almost
double the average) are classified as the most dynamic products among a total of 225
products. The top products are transistors and semi conductors, computers, parts of
computers and office machines, optical instruments. These are obviously high-tech
products. The total list is given in table 1 (table 3.1 in TD Report 2002, p.55). It is also
argued that the most of these dynamic products fall into three specific product groups:
    - Electronic and electrical goods
    - Textiles and labor-intensive products, particularly clothing
    - Finished products from industries that require high R&D expenditures and are
        characterized by high technological complexity and/or economies of scale
    - Primary commodities including silk, non-alcoholic beverages and cereals
When it comes to the most-dynamic agricultural products the list is given in table 2 (table
3.3 in TD Report 2002, p.61).
        The reasons behind why some commodities are more dynamic in world trade than
others are various and can be summarized as follows:
    1. World income and composition of demand. The growing world income is the
        basic source behind increasing trade. Higher income signifies higher demand in
        world markets. This phenomenon is summarized in the concept of income

      elasticity of demand, which measures the sensitivity of quantity of goods
      demanded to a change in income level. Income elasticity differs from commodity
      to commodity and it also changes for an individual commodity during the course
      of economic growth. While at the first stages of economic development income
      elasticity for resource-based primary commodities is high, it gradually decreases
      as the income grows. However, still certain primary commodities do better than
   2. Market access. Application of several Non-Tariff Measures (tariff Rate Quotas,
      Anti-dumping measures, Voluntary Export Restraints) arbitrarily applied,
      specially by developed countries, during the course of long WTO negotiations
      since 1994 Uruguay Round create incentives for developing countries to switch
      from certain exports to others.
   3. Global production networks. The transnational companies by outsourcing certain
      stages of production and marketing, impose the production of certain set of export
      commodities. On general, “product groups with the fastest and most stable growth
      rate… [since 1980s]… are also the ones most effected by the globalization of
      production processes through international production sharing” (Akyüz, 2003).

Global production network, or with a different terminology, the global commodity chain
“… refers to the whole range of activities involved in the design, production, and
marketing of a product” (Gereffi, 1999). All these are organized in scattered and
differentiated stages in geographically different parts of the world. It is argued that there
are two kinds of such chains according to the leading actor in creation and supervision of
the chains (Gereffi, 1999):

   1. Producer-driven commodity chains: “Producer-driven commodity chains are
      those in which large, usually transnational, manufacturers play the central roles in
      coordinating production networks (including their backward and forward
      linkages). This is characteristic of capital- and technology-intensive industries
      such as automobiles, aircraft, computers, semiconductors, and heavy machinery”
   2. Buyer-driven commodity chains: “Buyer-driven commodity chains refer to those
      industries in which large retailers, marketers, and branded manufacturers play the
      pivotal roles in setting up decentralized production networks in a variety of
      exporting countries, typically located in the third world. This pattern of trade-led
      industrialization has become common in labor-intensive, consumer goods
      industries such as garments, footwear, toys, housewares, consumer electronics,
      and a variety of handicrafts. Production is generally carried out by tiered networks
      of third world contractors that make finished goods for foreign buyers. The
      specifications are supplied by the large retailers or marketers that order the goods”

The foreign direct investment in the context of global production networks will be
discussed in the session on trade and FDI.
        One last point in the linkage between trade and economic development is the role
of state in export promotion. The most successful countries that have implemented

export-led growth strategies as argued above are the East Asian countries. Although they
have historical and geographical peculiarities, their common experience shows the
necessity of active state policy during the course of export-led growth strategy. “Some
general guidelines for what is required in this process are provided by the long term
growth experiences of the richer EU countries. These include a central role for the private
sector, free markets and prices for the efficient allocation of resources, appropriate
incentives for entrepreneurship, and participation in the international economy, but also
an important role for the public sector. Sustainable development requires a strong state to
maintain competition and protect property rights, and to provide infrastructure, education,
and social services in those cases where the market outcomes are not satisfactory”
(Kokko, 2002). It is argued that export promotion does not mean simply to provide
market orientation and firmly establish free market principles, but it also includes a clear-
cut industrial policy accommodating the opening up of the domestic markets. Industrial
policy includes competition policy as well as industrial rationalization. The common
elements of the Asian experience can be roughly summarized as follows:
     “Governments invested heavily in infrastructure. At the early stages of
        development, efforts focused on transportation networks – roads, railroads, port
        facilities – while investments in electricity and telecommunications were more
        important at later stages of the process. Investment in education was particularly
        important, and countries where human capital accumulation was slow have
        become trapped into low wage and low value added sectors”.
     Exporters were given access to inputs and capital goods at world market prices.
     Exporters were given preferential access to capital and foreign exchange. In many
        cases, credit was also provided at lower interest rates.
     Various kinds of fiscal incentives, ranging from tax holidays to accelerated
        depreciation allowances, were used to encourage investment in new export areas.
        These measures are likely to be most important at the early stages of export
        development programs.
     Governments played an active role in developing new markets by establishing
        institutions specialized in marketing and research, and by disseminating
        information about foreign markets.
     Governments were concerned about enhancing the reputation of the country’s
        exports, and established regulations and licensing procedures to guarantee high


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