The use of trade is the most important tool to achieve economic growth in LEDCs
With approximately half the world living on less than $2. 50 per day and 1. 7billion people living in absolute poverty, development in order to improve living conditions and provide people with at least the basic necessities is a top international priority. There are 3 widely accepted methods of achieving economic growth: Reducing/Canceling debt, Improving trade and International Aid. All of them are important tools, but the potential profits and self-dependency of trade makes it the most favourable tool.
LEDCs are almost solely dependent on primary industry, in particular exporting grown produce though agriculture. Trading raw materials is the first step on the ladder for countries to develop, so as a result it is the most important tool to achieve economic growth. Promoting trade in LEDCs brings many benefits. Ultimately trading brings in revenue, which enables infrastructure to be built/improved, enabling even more production and thus more trade, which leads to more imports and exports. Promoting trading helps to make an LEDC more self-sufficient, and not reliant upon international help.
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This is a long-term solution to the development issues currently plaguing many countries, as it helps puts the infrastructure in place to allow a similar period of industrialisation like in Britain at the end of the 19th century. However, there are critics who doubt that that trade is the answer. They believe that less developed countries cannot be competitive in the global market because of the great difference in wealth between them and the developed countries, as they cannot invest in industrial and technological development at the same rate as richer countries.
Many poorer countries also depend on agricultural exports which have experienced significant drops in price, as the market has been flooded with similar products from LEDCS across the globe. And finally, they believe that trade only benefits the wealthy members of society and that the wealth doesn’t ‘trickle down’ to the majority of the population, resulting in the gap between rich and poor widening. Whilst trade must be promoted in LDCs, it is just as, if not more important, to preach free trade and fair trade in developed countries.
Many farmers in developing countries are struggling to make profits as influential trading blocs restrict them. The most significant examples are the trading blocs of the EU and NAFTA. For example the EU subsidises local sugar beet farmers (the European Common Agricultural Policy) and as a result sugar cane farmers in LDCs lose out, and the USA subsidises its own cotton farmers so that cotton growers in Mali can’t compete.
Similarly, the EU heavily taxes importing finished products compared to the crops or raw materials, this enables countries within the EU to make profits by manufacturing the final products. A good example of this is pineapples. Fresh pineapples imported to the EU attract a duty of 9%, whereas canned pineapples attract a duty of 32%. The solution to this is to make markets as open as possible, the ideology of neoliberalism, which was adopted by Thatcher in the 1980s.
Although trade is the most important tool to achieve economic growth, free trade is needed, therefore it is clear that free trade is the most important tool. Similarly the scheme of Fair trade is a necessary part of trade for it to be an important tool. The scheme aims to promote ‘fair’ and higher prices for commodities produced in LEDCs. It focuses on exports of coffee, cocoa, sugar, tea, bananas, chocolate, flowers and cotton. In June 2008, Fairtrade Labelling Organizations International estimated that over 7. million producers and their families were benefiting from fair trade funded infrastructure. In order for any trade to be significant in achieving economic growth, it is important that the farmers are receiving a fair price for their produce, which is turns enables them to improve their productions techniques, increasing trade. Trade relies on the country already having a certain degree of infrastructure in place in order to produce goods to be traded. In some cases the country doesn’t have the provisions in place for this to be possible, in which case then Aid is necessary.
Aid is less significant in achieving economic growth than trade because it only provides the means for growth, trade is what actually causes the profits which defines economic growth. There are three main types of Aid: Bilateral (government to government), Multilateral aid (government to international organisations such as WHO and UNESCO) and Non-governmental organisations (NGOs, charities such as Oxfam). Bilateral aid is often criticised heavily as it is ‘top-down’ and tied aid, and as a result it isn’t that important as a tool to achieve economic growth.
A good example of tied aid is a dam built in Malaysia in the 1990s which was funded by international aid, most notably Britain. The plan was controversial for several reasons. It cost Britain i??234million and the results of the dam, a minimal number of jobs and very little of the revenue reaching the poorest parts of society, to justify such a large expenditure. It was also tied-aid, as Malaysia had to agree to purchase British-made frigates and Hawk fighter aircraft in a deal worth approximately $1billion.
Finally it was very harmful to the environment, the reservoir behind the dam destroyed huge areas of rainforest. This sort of aid does little to help developing countries and often is more beneficial for the donating countries and aid does not always reach those who need it most as a result of corruption Multilateral aid and charity aid are significantly better than bilateral aid as they are often ‘bottom-up’ schemes. These schemes can be part of an emergency response, such as the Haiti earthquake in 2010, where NGOs give aid in the form of food, medicines, emergency shelters and water.
Whilst these are very important in the short term, they are insignificant in the long term trying to achieve economic growth. The most useful aspects of aid in achieving economic growth is NGOs funding local scale projects. By educating the local people and providing them with the tools and/or seeds for farming, it enables them to make a living for themselves and which in turn will help the country to achieve economic growth. The charity Actionaid takes this approach. They fund long term projects and aim to make sure that everyone has their basic rights to education, health and shelter.
They are particularly active in agriculture by funding seed banks and tree nurseries, as well as giving local famers irrigation systems, equipment and storage. In order to help even more, 85% of paid staff come from developing countries. By doing this it is giving local people the chance to do things for themselves and not be reliant upon others in the long term. This combats one of the more prevalent criticisms of aid, that people become aid dependent and will not be able to achieve economic growth without continuous charitable help.
Long term aid projects such as this are very important in achieving economic growth as they give the local people the means to produce goods, however in order to make a profit the commodities have to be sold worldwide, and thus fair and free trade is the most important tool to achieve economic growth. The debt which plagues many developing countries severely restricts their economic growth. Many, if not all, LEDC countries have huge loans, which the governments can’t even afford the pay the interest on. Approximately one third of all aid is used to repay interest on loans.
As a result of huge debts, organisations such as the IMF and World Bank force countries to restructure their spending so they can afford the payments. This has disastrous effects on the economies of LEDCs as they can’t then afford to spend money to put the necessary infrastructure in place to achieve economic growth. Similarly to aid, canceling debt for developing countries would give countries the means to improve their economies, albeit through other means such as trading goods. In the majority of LEDCs there is no easy answer to achieve economic growth.
Many countries do not have the necessary infrastructure and skilled workforce necessary, thus aid is very important to ‘get the ball rolling’. However, aid can only help so much and the country has to be able to be self sufficient and support themselves without external assistance. By advocating fair and free trade in developed countries and promoting international trade in LEDCs, they can enjoy economic growth. Therefore, the use of trade is the most important tool in achieving economic growth in LEDCs.