A developing country can follow alternative strategies of economic growth. Depending upon the strategy to be adopted, the role of foreign trade will change. Broadly speaking, these strategies are:
Prosperity through exports of manufacturers: This was the strategy pursued by the by the United Kingdom. The strategy involved increasing production and exports of manufactured products. The export demand provided the necessary impetus for additional investment in the domestic economy. The export expansion caused the national income to record a high growth rate through export multiplier.
The success of this strategy worked extremely well for the British economy in the 19th and early part of the 20th century depends upon,
1. Expanding export markets with complete freedom of entry. Great Britain could export more and more during that period because the markets were provided by former colonies, such as India, Canada and Australia where British goods could enter without facing any substantive trade restrictions.
2. Little or no competition in exports from other countries. Because of the early start the UK enjoyed due to the fact that industrial revolution originated there, British manufactures were faced with hardly any competition in the earlier years.
Subsequently, some other countries, Japan, South Korea, Hong Kong and Singapore, noticeably among them, followed this strategy successfully. The basic reason behind the emergence of these countries as leading exporters is that during the period of their most rapid export expansion â€“ the decades of 1950s and 1960s â€“ the world economy was going through the longest uninterrupted phase of economic prosperity which resulted in a sustained expansion in the volume of world trade.
The world economic and trading environment unfortunately has, however, undergone a total transformation since the mid-1970s. The continued stagflation in the major developed countries for more than a decade has destabilized the world economy. Growth rate of world trade has gone down. In fact, has become negative in some years. Emergence of newly industrialized countries such as Brazil, Mexico, Yugoslavia and South Korea, have intensified the degree of competition in the world market for manufactured products. To protect domestic employment and industry, most developed countries have created walls of tariffs and non-tariff barriers against imports of manufactures from the developing countries, such as textiles, leather, and several light engineering articles.
The present world economic scenario, therefore, is not favorable for following the British strategy, at least in its totality.
Staple Export Strategy: A country can also try to take advantage of its staple exports, as its comparative advantage lies in that sector. Canada and Australia, both of which are continental countries, enjoy a large surplus of wheat. It was possible to develop large scale export of wheat, which generated subsequently resources for industrializing. Staple exports can speed up the process of economic growth by opening the interiors of the economy by developing modern transportation and communication infrastructure. Export demand for staples would increase the requirements of inputs for the export sector, which would push up the domestic investment. Increased income in the export sector on the other hand, would lead to additional investment to satisfy the increasing consumption needs.
The basic problems associated with the strategy are:
1. The demand for most raw materials including food items is significantly price and income inelastic. Agricultural imports also are rigidly controlled in most developed countries. Possibilities of substantial export expansion are, therefore, rather limited.
2. Prices of most raw materials fluctuate widely in the world market causing uncertainty and instability in the sectors concerned.
3. The forward and backward linkages which are strong in the manufacturing sector relatively weaker in the primary sector.