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Developing Countries Comparative Advantage Essay

1139 words - 5 pages

According to the United Nations (UN) a developing country is a country with a relatively low standard of living, underdeveloped industrialized base, and moderate to low Human Development Index (HDI). This index is a comparative measure of poverty, literacy, education, life expectancy and other factors for countries worldwide. The index was developed in 1990 by Pakistani and economist Mahbub ul Haq, and has been used since 1993 by the United Nations development program. In order for a country to become a developed nation, it would involve a modern infrastructure, (both physical and institutional), and a move away from low value added sectors such as agriculture and natural resource ...view middle of the document...

Developing countries cannot afford the large subsidies, often directed to narrow advantaged interests that trade protection provides. Moreover, the increase growth that results from free trade itself tends to increase the incomes of the poor in roughly the same proportion as those of the population as a whole. New jobs are created for unskilled workers, raising them into the middle class. Overall inequality among countries has been on the decline since 1990, reflecting more rapid economic growth in developing countries, in part as a result of trade liberalization. Developing countries would gain more from global trade liberalization as a percentage of their Gross Domestic Product (GDP) than industrial countries because their economies are more highly protected and because they face higher barriers. Although there are benefits from improved access to other countries markets, countries benefit most from liberalizing their own markets.
The main benefits for industrial countries would come from the liberalization of their agricultural markets. Developing companies would gain about equally from liberalization of manufacturing and agriculture. The group of low income countries, however, would gain most from agricultural liberalization in industrial countries because of the greater relative importance of agriculture in their economies. But trade alone cannot guarantee economic development. Trade policy needs to be complemented with a closely coordinated policy package to maximize the benefits from increased trade. Past experience shows that this is true for developing countries as it is for developed ones. However significant differences in the policy environment among developing countries means that policies need to be customized to meet each country's situation. An approach which has worked for one country may not work for another. In order for trade policies to be effective, it needs to be closely linked with reforms in other areas, such as foreign direct investment (FDI), so that more trade is accompanied by more FDI.
FDI can facilitate structural adjustments as a key driver of export growth as has been the case for electronics and automobiles in Thailand. It can also act as a channel for technology transfer, as has been seen with the copper, wine and salmon industries in Chile; or the cut flower and processed tuna industries in Ecuador. FDI can also help make it easier to achieve structural change through mergers and acquisitions. Labor market reforms may also be needed to facilitate the movement of labor from shrinking to growing sectors while allowing workers to adapt to change through education. Governments may also need to reform the tax system, as tariff cuts...

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