IGNOU : M.COM : IBO 1 : UNIT 9 : Q - 2. What are the major problems faced by developing countries in promoting their exports? What are your solutions to these problems?

 

Ans. PROBLEMS OF DEVELOPING COUNTRIES

Demand Elasticity : It has been noticed that foodstuffs such as tea, coffee and cocoa are characterized by low income elasticity of demand. This means that growth in incomes in developed countries has not been followed by a proportionate increase in demand for foodstuffs. In fact, in many cases, the consumption of foodstuffs has reached or is reaching saturation levels in most developed countries.

Competition from Substitutes : Another problem faced by items like coffee, tea and cocoa is related to inter-se competition and competition from substitutes due to changing tastes and dietary habits. For example, in UK, it has been calculated that, while about two decades back, six cups of tea were drunk for every one cup of coffee, today the ratio is 2:1. Besides, carbohydrate drinks are posing competition to coffee and tea.

Technological Developments: Introduction of new technologies has led to economies in the use of raw materials. It is no longer required to use as much raw material as in the past to manufacture one unit of the finished product. This means that increased production of a number of manufactured items has not resulted in a proportionate growth in demand for raw materials which are used as inputs in the manufacturing process. For example, the use electric are furnaces in making steel has meant depressed demand for iron ore and its price since electric furnaces use metal scrap and not iron ore in the production process. Japan’s demand for iron ore due to growth of recycling is expected to decline further in future.

Inelasticity of Supply : While, on the one hand, the developing countries are facing uncertain demand conditions for their major export products, on the other, they are finding it difficult to adjust their supply base in respect of many primary commodities, due to uncontrollable factors like weather and also on account of insufficient storage facilities in their countries. Particularly for perishable items.

Price Fluctuations : On account of the above problems, developing countries find that Prices of their primary commodities, which are their main export items, are subject to wide fluctuations leading to uncertainities in export earnings thereby affecting their development plans. In the last 10 Years, developing countries are estimated to have lost US $ 225 billion on account of fall in primary commodity prices.

Protectionism : While the commodity structure of the export basket of the developing countries has not been of much help to them in raising the level of their export earnings, the commercial policies of the developed countries have also contributed, to some extent at least, to limit the capacity of the developing countries to earn foreign exchange. Many developed countries, for one reason or the other, insulate their domestic sectors from competition from the main exports of developing countries. Protectionism takes two forms: (a) subsidies to domestic production mainly in the agricultural sector and (b) tariff and non tariff barriers to imports.

Subsidies : It refers to direct or indirect financial assistance from governments to companies for making them competitive. Countries make direct payments to producers to compensate them for losses incurred from selling abroad. Several types of assistance are provided to make their products cheaper or more profitable for companies to sell abroad. These subsidies not only reduce the demand for imported products but also lead to export surplus in developed countries affecting the imports from developing countries in other markets.

Tariff and Non-tariff Barriers : The tariff and non-tariff barriers raised by the developed countries on imparts from developing countries also restrict market access to the products of developing countries. Decades of Multilateral Trade Negotiations commencing with the Geneva Round, under which Multilateral Agreements have been concluded, have seen substantial reduction in import tariffs on industrial products, although  tariffs on agricultural products still remain high. Though the average rate of import duty levied by the developed countries on finished industrial products has come down substantially over the years. Problems of tariff peaks and escalation still remain. These tariff peaks tend to be concentrated on the main export items, such as textiles, clothing and footwear, of most developing countries.

Terms of trade : The total export realization/import payment of a country is the combined effect of the quantum of export/import and the unit value realization/payment. It now remains to be seen as to how much of the trends in export trade was governed by the volume of trade, and, how much, by the unit value realization and what has been the trend in import trade. Annexure 11 indicates the world trade indices, in terms of both volume and unit value, for exports and imports. It will be noticed from the Annexure that (a) while the volume index of exports of non-oil exporting developing countries increased by 381 points between 1980-96. that of the unit value actually declined by 9 points during the same period indicating that the rise in total export earnings of this group of countries is due more to the growth in the volume of their exports than to the rise in unit value realization, (b) in the use of the petroleum exporting countries volume index has increased and unit value of exports have declined. (c) in the case of developed countries, both have grown but volume growth in exports is more than unit value growth.

It will also be noticed from Annexure 11 that as far as imports are concerned, the rise in volume index is more, as compared to the rise in unit value index, in the case of developed market economies and non-oil exporting developing countries, whereas in the case of the petroleum  exporting countries. both volume index and the unit value index have improved.

The opposite vends exhibited by the unit value index of exports and the unit value index of imports during 1980-96 ,i.e the former declining and the latter increasing, has led to deterioration in the terms of trade of the developing countries, both of the petroleum exporters and the non oil exporting countries, the former suffering the maximum.

Multinational Corporation's Influence : The overwhelming influence of multinational corporations an global production and marketing of a number of products of export interest to developing countries is also a factor to be reckoned with in the export performance of the developing countries. MNCs succeed not only in fixing prices but also in influencing the policies of developing country governments. According to UNCTAD, the export prices received by the producer countries for their tea, coffee, cocoa, citrus fruit and jute account for only 20 % lo 40% of the final price of the products: for bananas, it is a mere 11%. A very small no. of MNCs control:

a) 85-90% of international trade in tobacco, coffee, cotton, jute, cocoa and forest products (5-6 firms).

b) 70-75% of international trade in bananas and rubber (three firms).

c) 85.90% of international trade in raw cotton (15 firms).

d) 60% of international trade in sugar