This chapter explores the various dimensions of trade competitiveness in developing countries. After discussing various definitions of competitiveness, the importance of trade competitiveness is discussed in the context of developing countries with reference to the existing literature. Subsequently, major constraints that affect trade competitiveness, particularly macroeconomic conditions, institutional and business environments, and infrastructure, are discussed. Finally, recent empirical findings on trade competitiveness are summarized.
TopBackground
Trade policy and its potential to enhance growth has been at the center of the economic debate since the Mercantilist view in the 17th century. Since that time, views have changed dramatically. In the early days, trade policies favoring “import substitution” were predominantly believed to achieve growth prospects. However, after the 1970s and 1980s saw the failure of import-substitution strategies, export promotion and outward oriented policies became popular instead.
Trade is a major element of economic growth and poverty reduction. In fact, the idea that trade is an engine for growth dates back to Adam Smith and David Ricardo. Adam Smith considers trade to be a positive-sum game. During the trading process, if countries specialize in the production of goods in which they have absolute advantages, all parties win (as cited in Moon, 2000). The other famous classical economist, David Ricardo, in his famous work “On the Principles of Political Economy and Taxation” also stressed the role of free trade in promoting efficiency and productivity in the economy. Ricardo, by building on Smiths’ absolute advantage theory, claimed that all countries gain from free trade by producing what they are best at in comparison to other countries.
During the 17th and 18th centuries, before the free trade argument, mercantilism was the dominant economic philosophy. During this time, a large number of development economists favored the protectionist view with the aim of protecting domestic industries and jobs from foreign competition. Throughout this period, protectionist trade policies in the form of import substitution were dominant. In the context of this import substitution type of industrialization, it was argued that a country should attempt to reduce its reliance on imported goods through the domestic production of industrialized products. Proponents of this view strongly believed in the protection of infant industries; nascent domestic industries that need protection against international competition until becoming mature and competitive. In this regard, foreign imports are replaced by local production.