Trade Policy in Developing
Countries
So far we have analyzed the instruments of trade policy and its objectives
without specifying the context—that is, without saying much about the
country undertaking these policies. Each country has its own distinctive
history and issues, but in discussing economic policy, one difference between
countries becomes obvious: their income levels. As Table 11-1 suggests, nations
differ greatly in their per-capita incomes. At one end of the spectrum are
the developed or advanced nations, a club whose members include Western
Europe, several countries largely settled by Europeans (including the United
States), and Japan; these countries have per-capita incomes that in some cases
exceed $40,000 per year. Most of the world’s population, however, live in
nations that are substantially poorer. The income range among these developing
countries1 is itself very wide. Some of these countries, such as South Korea, are
now considered members of a group of “newly industrialized” nations with de
facto developed-country status, both in terms of official statistics and in the way
they think about themselves. Others, such as Bangladesh, remain desperately
poor. Nonetheless, for virtually all developing countries, the attempt to close the
income gap with more advanced nations has been a central concern of
economic policy.
Why are some countries so much poorer than others? Why have some countries
that were poor a generation ago succeeded in making dramatic progress, while
others have not? These are deeply disputed questions, and to try to answer them—
or even to describe at length the answers that economists have proposed over the
years—would take us outside the scope of this book. What we can say, however, is
that changing views about economic development have had a major role in determining
trade policy.
For about 30 years after World War II, trade policies in many developing countries
were strongly influenced by the beliefs that the key to economic development
was the creation of a strong manufacturing sector, and that the best way to create
1Developing country is a term used by international organizations that has now become standard, even though
some “developing” countries have gone through extended periods of declining living standards. A more descriptive
but less polite term is less-developed countries (LDCs).
CHAPTER 11 Trade Policy in Developing Countries 257
TABLE 11-1 Gross Domestic Product Per Capita, 2009 (dollars,
adjusted for differences in price levels)
United States 46,008
Germany 36,163
Japan 34,167
South Korea 28,443
Mexico 15,130
China 8,383
Bangladesh 1,747
Source: Conference Board Total Economy Database.
that manufacturing sector was to protect domestic manufacturers from international
competition. The first part of this chapter describes the rationale for this
strategy of import-substituting industrialization, as well as the critiques of that
strategy that became increasingly common after about 1970, and the emergence in
the late 1980s of a new conventional wisdom that stressed the virtues of free trade.
The second part of the chapter describes the remarkable shift in developingcountry
trade policy that has taken place since the 1980s.
Finally, while economists have debated the reasons for persistent large income
gaps between nations, since the mid-1960s a widening group of Asian nations
has astonished the world by achieving spectacular rates of economic growth. The
third part of this chapter is devoted to the interpretation of this “Asian miracle,”
and its (much disputed) implications for international trade policy.
LEARNING GOALS
After reading this chapter, you will be able to:
• Recapitulate the case for protectionism as it has been historically practiced
in developing countries, and discuss import-substitution-led industrialization
and the “infant industry” argument.
• Summarize the basic ideas behind “economic dualism” and its relationship
to international trade.
• Discuss the recent economic history of the Asian countries, such as China
and India, and detail the relationship between their rapid economic growth
and their participation in international trade.
Countries
So far we have analyzed the instruments of trade policy and its objectives
without specifying the context—that is, without saying much about the
country undertaking these policies. Each country has its own distinctive
history and issues, but in discussing economic policy, one difference between
countries becomes obvious: their income levels. As Table 11-1 suggests, nations
differ greatly in their per-capita incomes. At one end of the spectrum are
the developed or advanced nations, a club whose members include Western
Europe, several countries largely settled by Europeans (including the United
States), and Japan; these countries have per-capita incomes that in some cases
exceed $40,000 per year. Most of the world’s population, however, live in
nations that are substantially poorer. The income range among these developing
countries1 is itself very wide. Some of these countries, such as South Korea, are
now considered members of a group of “newly industrialized” nations with de
facto developed-country status, both in terms of official statistics and in the way
they think about themselves. Others, such as Bangladesh, remain desperately
poor. Nonetheless, for virtually all developing countries, the attempt to close the
income gap with more advanced nations has been a central concern of
economic policy.
Why are some countries so much poorer than others? Why have some countries
that were poor a generation ago succeeded in making dramatic progress, while
others have not? These are deeply disputed questions, and to try to answer them—
or even to describe at length the answers that economists have proposed over the
years—would take us outside the scope of this book. What we can say, however, is
that changing views about economic development have had a major role in determining
trade policy.
For about 30 years after World War II, trade policies in many developing countries
were strongly influenced by the beliefs that the key to economic development
was the creation of a strong manufacturing sector, and that the best way to create
1Developing country is a term used by international organizations that has now become standard, even though
some “developing” countries have gone through extended periods of declining living standards. A more descriptive
but less polite term is less-developed countries (LDCs).
CHAPTER 11 Trade Policy in Developing Countries 257
TABLE 11-1 Gross Domestic Product Per Capita, 2009 (dollars,
adjusted for differences in price levels)
United States 46,008
Germany 36,163
Japan 34,167
South Korea 28,443
Mexico 15,130
China 8,383
Bangladesh 1,747
Source: Conference Board Total Economy Database.
that manufacturing sector was to protect domestic manufacturers from international
competition. The first part of this chapter describes the rationale for this
strategy of import-substituting industrialization, as well as the critiques of that
strategy that became increasingly common after about 1970, and the emergence in
the late 1980s of a new conventional wisdom that stressed the virtues of free trade.
The second part of the chapter describes the remarkable shift in developingcountry
trade policy that has taken place since the 1980s.
Finally, while economists have debated the reasons for persistent large income
gaps between nations, since the mid-1960s a widening group of Asian nations
has astonished the world by achieving spectacular rates of economic growth. The
third part of this chapter is devoted to the interpretation of this “Asian miracle,”
and its (much disputed) implications for international trade policy.
LEARNING GOALS
After reading this chapter, you will be able to:
• Recapitulate the case for protectionism as it has been historically practiced
in developing countries, and discuss import-substitution-led industrialization
and the “infant industry” argument.
• Summarize the basic ideas behind “economic dualism” and its relationship
to international trade.
• Discuss the recent economic history of the Asian countries, such as China
and India, and detail the relationship between their rapid economic growth
and their participation in international trade.
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