Two Paths to Development

Developing countries face two fundamental obstacles in trying to encourage development:

> Adopting policies that successfully promote and sustain development.

> Finding funds to pay for development.

To promote development, developing countries choose one of two models: self-sufficiency or international trade. Each has important advantages and challenges.

Self-Sufficiency Path

In the self-sufficiency model, countries encourage domestic production of goods, discourage foreign ownership of businesses and resources, and protect their businesses from international competition. Key elements of the self-sufficiency path to development include the following:

Import limits. Barriers limit the import of goods from other places. Three widely used barriers include setting high taxes (tariffs) on imported goods to make them more expensive than domestic goods, fixing quotas to limit the quantity of imported goods, and requiring licenses in order to restrict the number of legal importers.

Insulation. Fledgling businesses are nursed to success by being isolated from competition with large international corporations. Such insulation from the potentially adverse impacts of decisions made by businesses and governments in developed countries encourages a country’s fragile businesses to achieve independence.

Equal investment. Investment is spread as equally as possible across all sectors of a country’s economy and in all regions.

Equal income. Incomes in the countryside keep pace with those in the city, and reducing poverty takes precedence over encouraging a few people to become wealthy consumers.

International Trade Path

In the international trade model, countries open themselves to foreign investment and international markets. For most of the twentieth century, self-sufficiency, or balanced growth, was the more popular of the development alternatives. International trade became more popular beginning in the late twentieth century.

The international trade model of development calls for a country to identify its distinctive or unique economic assets. What animal, vegetable, or mineral resources does the country have in abundance that other countries are willing to buy? What product can the country manufacture and distribute at a higher quality and a lower cost than other countries? According to the international trade approach, a country can develop economically by concentrating scarce resources on expansion of its distinctive local industries. The sale of these products in the world market brings into the country funds that can be used to finance other development.

Rostow’s International Trade Model

A pioneering advocate of the international trade approach was W. W. Rostow, who in the 1950s proposed a five-stage model of development. According to Rostow’s international trade model, each country is in one of these five stages of development:

1. Traditional society. A traditional society has not yet started a process of development. It contains a very high percentage of people engaged in agriculture and a high percentage of national wealth allocated to what Rostow called “nonproductive” activities, such as the military and religion.

2. Preconditions for takeoff. An elite group initiates innovative economic activities. Under the influence of these well-educated leaders, the country starts to invest in new technology and infrastructure, such as water supplies and transportation systems. Support from international funding sources often emphasizes the importance of constructing new infrastructure. These projects will ultimately stimulate an increase in productivity.

3. Takeoff. Rapid growth is generated in a limited number of economic activities, such as textiles or food products. These few takeoff industries achieve technical advances and become productive, whereas other sectors of the economy remain dominated by traditional practices.

4. Drive to maturity. Modern technology, previously confined to a few takeoff industries, diffuses to a wide variety of industries, which then experience rapid growth comparable to the growth of the takeoff industries. Workers become more skilled and specialized.

5. Age of mass consumption. The economy shifts from production of heavy industry, such as steel and energy, to consumer goods, such as motor vehicles and refrigerators.

World Trade Organization

To promote the international trade development model, countries representing 97 percent of world trade established the World Trade Organization (WTO) in 1995 . The WTO works to reduce barriers to international trade in two principal ways.

World Trade Organization Headquarters, Geneva, Switzerland

Sculpture by James Vibert is called “Human Effort.”

Reduce Restrictions

Through the WTO, countries negotiate reduction or elimination of international trade restrictions on manufactured goods, such as government subsidies for exports, quotas for imports, and tariffs on both imports and exports. Also reduced or eliminated are restrictions on the international movement of money by banks, corporations, and wealthy individuals.

Enforcement

The WTO also promotes international trade by enforcing agreements. One country can bring to the WTO an accusation that another country has violated a WTO agreement. The WTO is authorized to rule on the validity of the charge and order remedies. The WTO also tries to protect intellectual property in the age of the Internet. An individual or a corporation can also bring charges to the WTO that someone in another country has violated a copyright or patent, and the WTO can order illegal actions to stop.

Critics have sharply attacked the WTO. Protesters routinely gather in the streets outside high-level meetings of the WTO. Progressive critics charge that the WTO is antidemocratic because decisions made behind closed doors promote the interests of large corporations rather than poor people. Conservatives charge that the WTO compromises the power and sovereignty of individual countries because it can order changes in taxes and laws that it considers unfair trading practices.

Pause & Reflect 10.3.1

Top WTO officials meet every two years in a ministerial conference. Where was the most recent conference held? Use the Internet to search for “WTO ministerial conference protest” to see if there were protests at the conference.

International Trade Examples

When most developing countries were following the self-sufficiency approach during the twentieth century, two groups of countries chose the international trade approach:

The Four Dragons

Among the first places to adopt the international trade path were South Korea, Singapore, Taiwan, and Hong Kong, known as the “four dragons.” Singapore and Hong Kong, British colonies until 1965 and 1997, respectively, were large cities surrounded by very small amounts of rural land and had virtually no natural resources. Lacking many natural resources, the four dragons promoted development by concentrating on producing a handful of manufactured goods, especially clothing and electronics. Low labor costs enabled these countries to sell products inexpensively in developed countries.

Petroleum-rich Arabian Peninsula States

The Arabian Peninsula includes Saudi Arabia, the region’s largest and most populous country, as well as Kuwait, Bahrain, Oman, and the United Arab Emirates. Once among the world’s least developed countries, they were transformed overnight into some of the wealthiest countries, thanks to escalating petroleum prices beginning in the 1970s. Arabian Peninsula countries used petroleum revenues to finance large-scale projects, such as housing, highways, hospitals, airports, universities, and telecommunications networks (Figure 10-42). Their steel, aluminum, and petrochemical factories competed on world markets with the help of government subsidies. The landscape of these countries has been further changed by the diffusion of consumer goods, such as motor vehicles and electronics. Supermarkets in Arabian Peninsula countries are stocked with food imported from Europe and North America.

Development Through International Trade

Dubai, United Arab Emirates (UAE). The UAE has used revenue from the sale of oil to develop a city of modern high-rises.