Trade and Development

In the previous chapter we attempted to establish the role of foreign borrowing in the development process. Using dual-gap analysis, it was shown that foreign borrowing can be used to bridge either a domestic investment-saving gap or a foreign exchange gap, whichever is the larger. We saw that the policy issue is the decision on how far borrowing should go. How large can the import surplus be without leading to too great a dependence on imported capital and to severe future balance-of-payments difficulties in the form of large outflows of debt repayments and profits? The empirical evidence is overwhelming that the conflict is very real between maintaining an adequate growth rate and preserving a reasonable balance on international payments. The ultimate solution must lie in improving the balance of payments through trade. The growth rates of individual developing countries since 1950 correlate better with their export performance than with almost any other single economic indicator. The export performance of the developing countries, however, has continued to lag behind that of developed, industrialised countries. From 1965 to 1985 the volume of exports from developing countries grew at a rate of approximately 4 per cent per annum compared with 7 per cent for developed countries. The discrepancy in rates of growth was even wider in value terms, causing the developing countries’ share of the total value of world trade to fall from 30 per cent in 1965 to 20 per cent in 1985. The rates of growth of exports and imports for individual countries, and the terms of trade, which measures the real buying power of exports over imports, are shown in Table 14.1 for the two decades 1965 to 1985.