World Trade

During the late twentieth century and into the twenty-first century, most countries embraced the international trade approach as the preferred alternative for stimulating development. Long-time advocates of self-sufficiency, such as India, converted to international trade at that time.

International Trade Triumphs

Trade increased more rapidly than wealth (as measured by GDP) during the late twentieth and early twenty-first centuries. This is a measure of the growing importance of the international trade approach . Optimism about the benefits of the international trade development model was based on three observations:

1. Other countries’ success. Developed countries in Europe and North America were joined by others elsewhere in the world, such as Japan and South Korea, during the late twentieth century. If they could become more developed by following this model, why couldn’t other countries?

2. Resource riches. Developing countries contain an abundant supply of many raw materials sought by manufacturers and producers in developed countries. In the past, European colonial powers extracted many of these resources without paying compensation to the colonies. In a global economy, the sale of these raw materials could generate funds for developing countries with which they could promote development.

3. International competitiveness. A country that concentrates on international trade benefits from exposure to the demands, needs, and preferences of consumers in other countries. To remain competitive, the takeoff industries constantly evaluate changes in international consumer preferences, marketing strategies, production engineering, and design technologies. Concern for international competitiveness in the exporting takeoff industries can filter through other sectors of the economy.

International Trade As A Percentage of GDP

International Trade: Diamond Mining, Sierra Leone, Africa

Shortcomings of Self-Sufficiency

International trade was also embraced because of perceived shortcomings of self-sufficiency. Self-sufficiency was rejected for a number of reasons:

Inefficient industries. Businesses could sell all they made, at high government-controlled prices, to customers culled from long waiting lists, so they had little incentive to improve quality, lower production costs, reduce prices, or increase production.

1. Lack of competitiveness. Companies protected from international competition were not pressured to keep abreast of rapid technological changes or give high priority to sustainable development and environmental protection.

2. Corruption. A large, complex bureaucracy administered rules and processed documents for permits. The system gave unmonitored power to bureaucrats, thus encouraging abuse and corruption.

3. Black market. Ambitious businessmen found that struggling to produce goods was less rewarding than illegally importing goods and selling them at inflated prices on the black market.

India under Self-Sufficiency

For several decades after it gained independence from Britain in 1947, India was a leading example of the self-sufficiency strategy. Policies included limiting foreign companies from importing into India and exercising strong control over companies operating in India.

Here are some of the ways that India controlled imports:

1. Licenses. To import goods into India, most foreign companies had to secure a license, which was a long and cumbersome process because several dozen government agencies had to approve each request.

2. Import limits. A company holding an import license was severely restricted in how much it could actually import into India.

3. Taxes. Heavy taxes on imported goods raised the prices that consumers had to pay.

4. Nonconvertible currency. Indian money could not be converted to other currencies.

Here are examples of the ways that India controlled its own companies:

1. Permits. A business needed government permission to sell a new product, modernize a factory, expand production, set prices, hire or fire workers, and change the job classification of existing workers.

2. Subsidies. An unprofitable business received government subsidies, such as cheap electricity or elimination of debts.

3. Government ownership. The government itself owned not just communications, transportation, and power companies, which is common around the world, but also owned businesses such as insurance companies and automakers, which are owned by private companies in most countries.

Self-Sufficiency in India: Bureaucracy

Government official works at an outside desk, Kolkata, India.

India under International Trade

India is an example of a country that adopted international trade during the 1990s. The government dismantled its formidable collection of barriers to international trade:

1. Permits. Foreign companies were allowed to set up factories and sell in India with an easier permit process.

2. Taxes and quotas. Tariffs and restrictions on the import and export of goods were reduced or eliminated.

3. Competition. Monopolies in communications, insurance, and other industries were eliminated.

With increased competition, Indian companies have improved the quality of their products. For example, during the self-sufficiency era, India’s auto industry was dominated by Maruti-Udyog Ltd., which was controlled by the Indian government. Nursed by import duties that rose from 15 percent in 1984 to 66 percent in 1991, Maruti captured more than 80 percent of the Indian market by selling cars that would be considered out-of-date in other countries. In the international trade era, the government sold control of Maruti to the Japanese company Suzuki, which now holds only 45 percent of India’s market.

Under self-sufficiency, India’s GDP per capita increased modestly, from $80 in 1960 to $300 in 1990. After converting to international trade, India’s GDP per capita increased to $1,900 in 2017. Worldwide, GDP per capita increased more than 4 percent annually in countries strongly oriented toward international trade compared with less than 1 percent in countries strongly oriented toward self-sufficiency.

Per Capita Change in India

India’s per capita GDP has grown more rapidly since the country converted from the self-sufficiency path to the international trade path.

Pause & Reflect 10.3.2

Many countries that have adopted the international trade model are relatively small states (see Chapter 8). Why might a nation’s size be a factor in the early adoption of the international trade path?