Why is international trade perceived to have failed to act as an "engine of growth" in many developing countries including India?

Theoretical Benefits of International Trade

The core argument for international trade rests on several pillars:

• Comparative Advantage: Countries specialize in producing goods and services they can produce at a lower opportunity cost, leading to increased efficiency.
• Economies of Scale: Access to larger markets allows firms to achieve economies of scale, reducing production costs.
• Technology Transfer: Trade facilitates the transfer of technology and knowledge, boosting productivity.
• Increased Competition: Exposure to international competition encourages innovation and efficiency improvements.

Reasons for Failure in Developing Countries

1. Unequal Terms of Trade

Developing countries often export primary commodities (agricultural products, raw materials) and import manufactured goods. The prices of primary commodities are notoriously volatile and tend to decline relative to manufactured goods over time – a phenomenon known as the Prebisch-Singer hypothesis (1950). This leads to a deterioration in the terms of trade, reducing export earnings and hindering growth.

2. Lack of Diversification

Many developing countries are heavily reliant on a limited number of export commodities. This makes them vulnerable to external shocks, such as price fluctuations or changes in demand. India, for example, historically relied heavily on agricultural exports, making it susceptible to monsoon failures and global commodity price swings.

3. Supply-Side Constraints

Developing countries often face significant supply-side constraints, including:

• Inadequate Infrastructure: Poor transportation, energy, and communication infrastructure increases production and transaction costs.
• Low Levels of Human Capital: Lack of skilled labor limits the ability to produce high-value goods and services.
• Weak Institutional Frameworks: Corruption, bureaucratic inefficiencies, and weak property rights hinder investment and entrepreneurship.

4. Global Power Dynamics & Protectionism

Developed countries often maintain protectionist measures (tariffs, subsidies, non-tariff barriers) that restrict access to their markets for developing country exports. Agricultural subsidies in developed countries, for instance, distort global markets and disadvantage farmers in developing nations. The WTO negotiations (Doha Round) have repeatedly stalled due to disagreements over these issues.

5. Limited Bargaining Power

Developing countries often lack the bargaining power to negotiate favorable trade agreements. They are frequently pressured to adopt policies that benefit developed countries at the expense of their own development objectives. Regional Trade Agreements (RTAs) can sometimes exacerbate these inequalities.

6. India Specific Challenges

India’s experience highlights these issues. Despite significant economic reforms and trade liberalization since 1991, India’s export basket remains relatively concentrated. While services exports have grown, manufacturing exports have lagged behind. Issues like land acquisition, labor laws, and infrastructure bottlenecks continue to constrain India’s manufacturing competitiveness. The focus on software services, while successful, has created a dualistic economy with limited spillover effects to other sectors.

Addressing the Challenges

To realize the potential of trade as an engine of growth, developing countries need to:

• Diversify their export base: Invest in manufacturing and high-value services.
• Improve infrastructure: Invest in transportation, energy, and communication networks.
• Strengthen institutions: Reduce corruption, improve governance, and protect property rights.
• Invest in human capital: Improve education and skills development.
• Advocate for a fairer global trading system: Push for the removal of protectionist measures and greater equity in trade negotiations.