Y2/IB 17) Policies to Promote Trade and Development - Markets, Trade Agreements and Diversification

Summary

This video discusses trade policies for economic development, focusing on the Washington Consensus, free trade agreements (FTAs), and preferential trade agreements (PTAs). The Washington Consensus advocates for market liberalization, fiscal discipline, and trade liberalization to promote sustainable growth. However, critics argue it can lead to poverty and income inequality. FTAs and PTAs encourage regional integration and specialization, potentially boosting market access and foreign investment. Yet, they risk trade diversion and increased production costs. Lastly, industrial diversification is presented as a strategy to move away from agricultural dependence and primary product exports towards manufacturing and technology, offering long-term growth but facing challenges like tariff escalation and skill shortages.

Takeaways

• 🌐 The Washington Consensus is a set of policies aimed at freeing up markets and reducing government intervention to promote fiscal discipline, market liberalization, and trade liberalization.
• 📈 The goal of these policies is to achieve better resource allocation, reduced risk of market failure, and sustainable economic growth through market efficiency.
• 💹 Advocates of the Washington Consensus believe in a trickle-down effect, where wealthier individuals' spending will generate income for the less wealthy, reducing income inequality over time.
• 📉 Critics argue that free-market policies have led to increased poverty, income inequality, and exploitation of workers by multinational corporations in countries with lax regulations.
• 🌳 There are concerns that fiscal discipline, in the form of government spending cuts, can have negative impacts on development, education, and healthcare systems.
• 🔄 Moving away from the Washington Consensus, bilateral and preferential trade agreements are seen as a way to encourage regional integration and free trade, promoting market access and specialization.
• 🌍 In Africa, preferential trade agreements (PTAs) could improve intra-continental trade by reducing tariffs and non-tariff barriers, making countries more competitive.
• 📊 The risk of falling into the trap of exporting similar products, known as the coincidence of wants, is a concern with PTAs, as it could lead to increased production costs and limited export opportunities.
• 🌱 Diversification is a policy aimed at moving developing countries away from dependence on primary products towards manufacturing and technology to achieve sustainable growth.
• 📉 The fluctuating prices of primary products and the resource curse are seen as hindrances to long-term economic development, making diversification an attractive strategy.
• 🚩 Tariff escalation is a challenge for countries trying to diversify into manufacturing, as finished products often face higher tariffs, reducing their competitiveness.

Q & A

What is the Washington Consensus?

The Washington Consensus is a set of ten policies established by the World Bank, the IMF, and others to open up markets and allow them to operate freely without government interference. It promotes fiscal discipline, market liberalization, deregulation, privatization, and trade liberalization.

What are the intended benefits of the Washington Consensus?

The Washington Consensus aims to promote better allocation of resources, reduce the chance of market failure, and achieve sustainable growth by attaining allocative efficiency. It also seeks to promote macroeconomic stability, investment, foreign direct investment, and higher incomes and jobs.

What are the potential downsides of the Washington Consensus policies?

The downsides include increased poverty and income inequality due to exploitation by multinational corporations in less regulated markets, destruction of local environments, and fiscal cuts that can negatively impact development and education.

What is the difference between free trade agreements and preferential trade agreements?

Free trade agreements promote regional integration and free trade among member countries, while preferential trade agreements provide specific benefits to certain countries or groups of countries, often with the aim of reducing trade barriers between them.

How can preferential trade agreements benefit African countries?

PTAs in Africa can improve market access, reduce transportation costs, make countries more competitive, and potentially increase foreign investment, trade, jobs, and overall economic development.

What is the risk of falling into the trap of the coincidence of wants in Africa with PTAs?

The risk is that African countries might export similar goods, making intra-African trade less beneficial. This could lead to increased production costs due to higher tariffs on imports from non-PTA countries and limited export opportunities due to external trade barriers.

What is diversification as a trade policy?

Diversification is a policy aimed at moving away from dependence on primary products and towards developing a manufacturing base and advancing technology to ensure more sustainable economic growth.

What are the benefits of diversification for developing countries?

Diversification helps countries avoid the resource curse and fluctuating prices of primary products, promotes new technology and varied goods and services, and can lead to increased profits, income, and job creation.

What challenges might countries face when trying to diversify their economies?

Challenges include dealing with tariff escalation, which makes finished products less competitive due to higher tariffs, and the need for a highly skilled workforce, which might not be available if the country's education system is not sufficient.

How does the Washington Consensus view income inequality in the short term?

The Washington Consensus acknowledges that there may be income inequality in the short term but argues for a trickle-down effect where wealthier individuals' spending will generate income for the less wealthy, reducing inequality in the long run.

What is the trade diversion argument in the context of bilateral trade agreements?

The trade diversion argument suggests that bilateral trade agreements can lead to a shift in trade patterns, causing countries to import more expensive goods from within the agreement rather than cheaper alternatives from outside, potentially increasing costs and reducing competitiveness.