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Unfair trade: commodity producing poor countries lose out

'Industrialised and developing countries do not benefit equally from international trade and investment.' This was the argument Prof Hans Singer put forward in 1950. He argued that poorer countries became locked into exporting primary products (food and raw materials) to support industrial advance in richer countries. This resulted in a long-term transfer of income from poor to rich countries.

In this classic paper Prof. Singer shows that developing countries' terms of trade (the price received for exports relative to the price paid for imports) has been steadily worsening over time. Developing countries have specialised in the production and export of food and raw materials (such as copper) to industrialised countries. Because export prices for these have fallen compared to those for manufactured goods, poor countries have to export more just to keep financing imports at the same level.

But poorer countries cannot always make up for the lower export prices simply by selling more. Higher standards of living in industrialised countries result in increased demand for manufactured goods relative to primary products. Demand for food is 'inelastic' (or limited); people with higher incomes will only spend a limited share of their extra money on more food. Demand for raw materials also tends to stagnate or fall: advances in technology reduce the amount of raw materials needed to make the same amount of goods.

Most export production in developing countries is owned by foreign firms. These production facilities have very limited linkages with the rest of the economy. The benefits associated with investment (for example, better technology, more jobs, higher incomes and economic growth) tend to go to the country where the investment came from rather than to the developing country.

Key arguments include:

• International trade is very important to the small and fragile economies of many poor countries.
• Developing countries have been encouraged to specialise in activities (agriculture and the production of primary commodities) that offer less potential for growth and development.
• Poor countries gain little from foreign investment in their export oriented production facilities.
• The relative price of primary exports from developing countries is falling, undermining income growth in these economies.
• The relative price of manufactured goods from industrialised countries is growing, supporting income growth in these countries.

Poor countries are disadvantaged by international trade and investment flows. They are producing low-value primary products to support industrial development and economic growth in rich countries.

Key recommendations include:

• International trade and investment should be explicitly designed to help reduce the inequalities between rich and poor countries.
• Technical assistance to developing countries should be expanded.
• Poor countries should keep a much larger share of the gains from their export activities; either by the reinvestment of profits or by the taxation of profits with increased government revenues spent on development.
• Polices should be introduced that can help raise wages and encourage the development of domestic manufacturing industries.
  

Original work by:
Hans Singer

Further Information
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University of Sussex
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Source(s)
'The distribution of gains between investing and borrowing countries', American Economic Review 40.2, pages 473-485, by Hans Singer, 1950

July 2006

See also
Professor Hans Singer (1910 - 2006): A brief biography and archives on the British Library for Development Studies (BLDS) website

Sir Hans Singer: The Life and Work of a Development Economist by D. John Shaw

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