Economics(Paper-4) - Shivaji University

4) Increase in Domestic Investment : The staple commodities of developing
countries are exchanged with capital goods. As a result, more export used to pay import
price and stimulates the domestic investment for economic development.
5) Educative Effect : Underdeveloped countries are suffering from critical skill
which hinders the economic development. But foreign trade over comes this weakness.
According to Haberler foreign trade helps in the development of developing countries
by faciliting the selective borrowing of ideas, skills and know how from the development
countries. The rapid development of the USA, Japan and Soviet Russia has been the
result of the educative effect of foreign trade.
6) Rise of Foreign Capital : The importation foreign capital in developing country
depends upon the policy of foreign trade. Through foreign trade the foreign capital can
flow from rich to poor countries. Ultimately, volume of trade determines the volume of
foreign trade. It would be much easier to get foreign capital from export increasing
industries rather than import substitution and public utility industries. However, the use
of foreign capital for import substitution, public utilities and manufacturing industries is
more useful for accelerating development than only for export promotion.
7) Healthy Competition : Foreign Trade benefits developing countries by fostering
healthy competition and checking inefficient monopolies. Healthy competition is a
necessary condition for the economic development of such economics. They would
be supportive for inform industry.
B) Bad effects of Foreign Trade :
In above discussion, they set the trend that the foreign trade has acted as a egine
of growth and developing countries. But according to R. Prebisch; H. W. Singer; G.
Myrdal, E. R. Grilli, M. C. Yang and Cairn cross etc. have argued that foreign trade is not
useful for the development of underdeveloped economy.They have putforth views in
the following ways.
1) Strong backwash effects : According Gunnar Myrdal international trade has
strong backwash effects on developing countries. He writes, “Trade operates (as a
rule) with a fundamental bias in favour of the richer and progressive regions (and
continues) and in disfavour of the less developed countries. The rich countries have a
large base of manufacturing industries with strong spread effects. The developing
countries does not get the benefit of foreign trade, due to inelastic demand for their
export of primary products. Thus strong backwash effects are generated in the economy.
2) Less Capital formation : It has been argued that the international demonstration
effect through foreign trade has adversely affected the capital formation in developing
economics.
3) Terms of trade deteriorated : Prebisch-singer thesis argued that terms of
trade of primary commodities has shown a secular deterioration and the terms of trade
48
123456789012345678901234567890121234567
123456789012345678901234567890121234567
123456789012345678901234567890121234567
123456789012345678901234567890121234567
123456789012345678901234567890121234567
123456789012345678901234567890121234567
123456789012345678901234567890121234567
123456789012345678901234567890121234567