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The Role of Trade in Economic Development

Published online by Cambridge University Press:  22 May 2009

Isaiah Frank
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Extract

The key role of trade in the development process is widely accepted today. Two recent events, both relating to international organizations, underscore this acceptance. One was the convening in 1964 of the United Nations Conference on Trade and Development (UNCTAD) and its establishment as a permanent organ of the UN system. Under UNCTAD's aegis a continuing examination is being conducted as to ways of reshaping world trade policies in the interests of the developing countries. The other event was the adoption early the following year of a new set of articles on trade and development in the General Agreement on Tariffs and Trade (GATT). In the new articles recognition of the role of exports in economic development was established for the first time in the text of the GATT itself, and a constitutional basis was provided for GATT's many activities designed to promote the exports of developing countries. Elsewhere in this volume are essays evaluating the contributions of UNCTAD and GATT toward the promotion of development in the world's poor countries. In this essay I will rather explore more generally the relation between international trade and economic development and discuss some of the problems that have arisen in the effort to make trade a more effective instrument of development.

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Articles
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International Organization , Volume 22 , Issue 1 , Winter 1968 , pp. 44 - 71
Copyright
Copyright © The IO Foundation 1968

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References

1 See also Frank, Isaiah, “New Perspectives on Trade and Development,” Foreign Affairs, 04 1967 (Vol. 45, No. 3), pp. 520–540CrossRefGoogle Scholar.

2 One of the most frequently cited formulations was that of W. Arthur Lewis:

The central problem in the theory of economic growth is to understand the process whereby a community is converted from being a 5 percent to a 12 percent saver—with all the changes in attitudes, in institutions and in techniques which accompany this conversion.

(The Theory of Economic Growth [Homewood, III: Richard D. Irwin, 1955], p. 226Google Scholar.)

3 A study cited by Kuznets and based on data for 52 countries shows no systematic change in foreign trade ratios as one moves along the per capita income scale. (Kuznets, Simon, Six Lectures on Economic Growth [Glencoe, III: Free Press, 1959], p. 96Google Scholar.)

4 Deutsch, Karl W. and Eckstein, Alexander, “National Industrialization and the Declining Share of the International Economic Sector 1890–1959,” World Politics, 01 1961 (Vol. 13, No. 2), pp. 267–299CrossRefGoogle Scholar; and Kuznets, pp. 101–103.

5 Lipsey, Robert E., Price and Quantity Trends in the Foreign Trade of the United States (Princeton, N.J: Princeton University Press, 1963)Google Scholar.

6 Cooper, Richard N., “Growth and Trade: Some Hypotheses About Long-Term Trends,” Journal of Economic History, 12 1964 (Vol. 24, No. 4), pp. 609–628CrossRefGoogle Scholar.

7 Ibid., p. 625.

8 C. P. Kindleberger concludes his historical discussion of British and French experience by noting that “the relationships between foreign trade and growth are varied and complex” and that “occasionally they are remote.” (“Foreign Trade and Economic Growth: Lessons from Britain and France, 1850 to 1913,” Economic History Review, 12 1961 [Second Series, Vol. 14, No. 2], pp. 289–305CrossRefGoogle Scholar.) However, his effort to classify actual cases in accordance with three models in which trade acts as either a leading, balancing, or lagging sector in the economy is somewhat forced and unconvincing. (Kindleberger, C. P., Foreign Trade and the National Economy [New Haven, Conn: Yale University Press, 1962]Google Scholar.)

9 See Myint, H., “The ‘Classical Theory’ of International Trade and the Underdeveloped Countries,” Economic Journal, 06 1958 (Vol. 68, No. 270), pp. 317–337CrossRefGoogle Scholar.

10 A noteworthy exception is Gottfried Haberler. See his International Trade and Economic Development (Cairo: National Bank of Egypt, 1959), p. 14Google Scholar.

11 SirSalter, Arthur, Foreign Investment (Essays in International Finance No. 12) (Princeton, N.J: International Finance Section, Department of Economics, Princeton University, 02 1951)Google Scholar.

12 $3,534 million out of a total of $5,748 million. Data are from United States Department of Commerce, Office of Business Economics, Survey of Current Business, 09 1966 (Vol. 46, No. 9)Google Scholar.

13 Husain, S. Shahid, “Export Fluctuations and Debt Servicing Problems: Relationship between the Fluctuations in Export Earnings and Direct Investment Income Payments—A Statistical Test,” Essay I in Volume III of Dragoslav Avramovic and others, Economic Growth and External Debt (Baltimore, Md: Johns Hopkins Press, 1964), pp. 119–124Google Scholar. Husain also points out that in developing countries where foreign capital has moved into industries producing for the local market the stimulus to growth “has been accompanied by an increase in the short-run rigidities in the balance of payments.…” (Ibid., p. 124.)

14 One of the earliest and most forceful expositions of this point of view is in Singer, H. W., “The Distribution of Gains Between Investing and Borrowing Countries,” American Economic Review, 05 1950 (Vol. 40, No. 2), pp. 473–485Google Scholar.

15 Ibid.

16 See Linder, Staffan B., An Essay on Trade and Transformation (New York: John Wiley & Sons, 1961), pp. 87–93Google Scholar. Also see Lockwood, William W., The Economic Development of Japan (Princeton, N.J: Princeton University Press, 1954Google Scholar), Chapters 6 and 7.

17 For an elaboration of this point in respect to UNCTAD see Frank, Isaiah, Foreign Affairs, Vol. 45, No. 3, pp. 536–540Google Scholar.

18 Hirschman, Albert O., The Strategy of Economic Development (New Haven, Conn: Yale University Press, 1958), Chapter 6.Google Scholar

19 Rostow, W. W., The Stages of Economic Growth (London: Cambridge University Press, 1961), pp. 54–55Google Scholar.

20 Lockwood, pp. 338–339.

21 Pincus, John, Trade, Aid and Development (New York: McGraw-Hill, 1967), p. 74Google Scholar. Pincus' figures relate to the period 1950–1952 to 1961–1964. Exports are also assigned a key role in Lamfalussy's analysis of the differential growth performances of the United Kingdom and the countries of the European Economic Community (EEC) in die period of 1953–1961. Indeed, he regards the faster growth of the Six as export led and as centering on the effect of exports on savings and investment. (Lamfalussy, A., The United Kingdom and the Six [Homewood, Ill: Richard D. Irwin, 1963], p. 111CrossRefGoogle Scholar.)

22 International Bank for Reconstruction and Development, The Commodity Problem (Washington, 1964, mimeographed)Google Scholar, Annex 1, Charts 2 and 3.

23 World Economic Survey, 1963 (United Nations Publication Sales No: 64.II.C.1 [UN Document E/3908]) (United Nations, 1964), Vol. I: Trade and Development: Trends, Needs and Policies, pp. 29–41Google Scholar.

24 Balassa, Bela, Trade Prospects for Developing Countries (Homewood, Ill: Richard D. Irwin, 1964)Google Scholar. Sec also Maizels, Alfred, Industrial Growth and World Trade (Cambridge: Cambridge University Press, 1963)Google Scholar; and United States Agency for International Development, Development Policies and Assistance Requirements (Washington, 12 1964, mimeographed).Google Scholar

25 Avramovic, pp. 137, 139.

26 World Economic Survey, 1963, Vol. 1, p. 37.

27 Hla Myint, “The ‘Widening Trade Gap’ of the Developing Countries: A Critical View,” an unpublished paper prepared at die Yale Growth Center, November 1965, pp. 8–9. In the light of Myint's reference to import-substitution possibilities through the expansion of domestic agriculture it is interesting to note that the percentage increase in food imports into developing countries between 1953 and 1960 exactly paralleled the rate of increase of imports of machinery and transport equipment.

28 World Economic Survey, 1964 (United Nations Publication Sales No: 65.II.C.1 [UN Document E/4046/Rev.1]) (United Nations, 1965), Part I: Development Plans: Appraisal of Targets and Progress in Developing Countries, Chapter 4Google Scholar.

29 Ibid., p. 81.

30 “Review of International Trade and Development 1966, Part One, Trends in International Trade and Development” (UN Document TD/B/82/Add.1, July 20, 1966), p. 58.

31 UNCTAD Commodity Survey 1966 (United Nations Publication Sales No: 67.II.D.9 [UN Document TD/B/C.1/23/Rev.1]) (United Nations, 1967), Chapter 4.

32 Ibid., Chapter 1.

33 The President's Materials Policy Commission, Resources for Freedom, 5 vols. (Washington: United States Government Printing Office, 1962), Vol. 1, p. 1Google Scholar.

34 World Economic Survey, 1964, Part I, p. 75.

35 Nurkse, Ragnar, Patterns of Trade and Development (New York: Oxford University Press, 1961), p. 36Google Scholar.

36 The figures refer to UN indexes constructed by combining country indexes. (International Monetary Fund, International Financial Statistics, Supplement to 1965–1966 Issues; and February 1967 [Vo1. 20, No. 2]Google Scholar.)

37 Lipsey, p. 17.

38 The need to protect against fluctuations through carrying excessive inventories or through hedging operations imposes a cost on the user of primary products.

39 See, for example, Commodity Trade and Economic Development (United Nations Publication Sales No: 1954.II.B.1 [UN Document E/2519, November 25, 1963]) (United Nations, 1954); International Compensation for Fluctuations in Commodity Trade (United Nations Publication Sales No: 61.II.D.3 [UN Document E/3447, April 1961]) (United Nations, 1961); and Proceedings of the United Nations Conference on Trade and Development, Geneva, 23 March–16 June 1964 (hereinafter cited as UNCTAD Proceedings), Vol. III: Commodity Trade (United Nations Publication Sales No: 64.II.B.13 [UN Document E/CONF.46/141, Vol. Ill]) (United Nations, 1964).

40 UNCTAD Proceedings, Vol. III, p. 85.

41 Mikesell, Raymond F., “International Commodity Stabilization Schemes and the Export Problems of Developing Countries,” American Economic Review, 05 1963 (Vol. 53, No. 2), p. 76Google Scholar.

42 UNCTAD Proceedings, Vol. III, p. 86.

43 The need to be explicit as to the distinction between the behavior of export prices and proceeds is illustrated by a comparison of the results of the investigations by Michaely and Massell. One of Michaely's major conclusions is a close association between commodity concentration and the amplitude of fluctuations of a country's export prices. Massell, however, finds only a tenuous relationship between instability of export earnings and commodity concentration. These results are not mutually inconsistent but they clearly illustrate the necessity of being quite explicit as to what one means by “instability of exports.” (Michaely, Michael, Concentration in International Trade [Amsterdam: North Holland Company, 1962]Google Scholar; and Massell, B. F., “Export Concentration and Fluctuations in Export Earnings: A Cross-Sectional Analysis,” American Economic Review, 03 1964 [Vol. 54, No. 3], pp. 47–63Google Scholar.)

44 Blau, Gerda, “International Commodity Arrangements and Policies,” UNCTAD Proceedings, Vol. III, p. 142Google Scholar.

45 MacBean, Alasdair I., Export Instability and Economic Development (Cambridge, Mass: Harvard University Press, 1966)Google Scholar.

46 See, for example, Johnson, Harry G., Economic Policies Toward Less Developed Countries (Washington: Brookings Institution, 1967), pp. 143–144Google Scholar; and Pincus, , Trade, Aid and Development, p. 285Google Scholar.

47 Sundrum, R. M., “The Measurement of Export Instability,” a preliminary unpublished paper prepared for the International Bank, 06 9, 1967Google Scholar.