Vinod Anand | 10 Aug 2013

REGIONAL TRADE GROUPINGS [Vinod Anaand] There is a proposal is a new substitution policy within regional trade groupings of less developed countries. Such preferential trading areas could discriminate in favour of industrial exports from partner countries, and discriminate against exports from developed countries. A logical extension of policies of import substitution, these groupings, by extending the size of the home market, allow scope for economies of scale and specialization on the basis of comparative advantage. Customs unions or free trade areas established between less developed countries cannot be assessed in terms of static analysis because the main aim is to facilitate economic growth. An OECD report has indicated the importance of agreed regional investment policy to be implemented and endorsed by all member governments, and/or the need for schemes to compensate member countries left with less than a fair share of the overall benefits. Kojima has developed a theory of ‘agreed specialization within regional trade groupings, showing how a rational direction of investment resources can avoid duplication of production plant. Although this approach appears to be dirigiste, Kojima suggests several ways in which such objectives can be achieved within a system of private enterprise through operations of multinational firms. In Latin America — in LAFTA and the Central American Common Market — complementarity agreements have achieved several successes, and the OECD report includes an assessment of existing schemes of integration among less developed countries. The authors conclude that even the most advanced integration schemes in the developing world are still far from reaching their objectives. Policies of agreed specialization, investment co-ordination and the setting up of institutional machinery involve a considerable sacrifice of political sovereignty. The plea ‘trade not aid’ became a catch-phrase in the l960s. Since fostering economic development in less developed countries depends upon a transfer of resources from the advanced countries to the less developed countries, there is little sense in making general comparisons between alternative ways of achieving the transfer without referring to the details. Trade policy can be employed by developing countries to accelerate their economic development, provided the policies operated by other countries, especially developed countries, do not obstruct this objective. Equally, financial aid is often closely linked with trade policy. ‘Tied’ aid represents an aspect of trade policy by developed countries. ‘Untying’ aid might allow less developed country recipients to use a given volume of aid more effectively, but from the viewpoint of producers and exporters in donor countries this might represent an unacceptable loss. Similarly, protectionist policies in less developed countries can be employed to attract foreign private investment in specialized manufacturing activities that would not occur without such policies. Finally, official aid flows play a vital role in creating economic infrastructures which contribute to general economic development, including export activities.