The Importance of International Trade and Finance Aid In Helping the Least Developed Countries

As the wave of neo-liberalism becomes strong, the inequality of wealth and income distribution among countries becomes bigger. Some might argue that it is the responsibility of the governments of poorer nations to take care of their citizens. However, aid from wealthy nations can be of great help to the least developed countries (LDCs). In this paper, I am going to discuss the reasons why this aid is so important and how it can be implemented effectively.

First of all, we need to understand the nature of poverty in the LDCs. Absolute poverty is pervasive throughout the society in those countries. According to United Nations the Least Developed Countries Report 2002, 81 per cent of the population lived on less than $2 a day. 50 per cent lived on less than $1 a day and their average consumption was just 64 cents a day.

Moreover, the incidence of extreme poverty is increasing in most LDCs. The number of people living in extreme poverty has doubled over the last thirty years. It is estimated that 307 million people live on less than $2 a day in the 1990s. The situation is more severe in African LDCs while Asian LDCs are getting better slowly.

The major reason why LDCs cannot get out of extreme poverty lies in the international poverty trap. We say that absolute poverty is generalized in LDCs in the sense that the majority of population live at or below income levels which are sufficient to meet their basic needs. Poverty is pervasive and persistent in those nations. This generalized poverty acts as a major constraint on economic growth.

For example, we can observe that most LDCs export non-oil primary commodities instead of manufactured products. A large amount of investment is required to accumulate capital and build factories at the outset. However, because the major part of GDP must be devoted to the procurement of the necessities of life in LDCs, LDCs simply cannot afford any finance investment. They must sell their primary commodities instead. This is called the vicious cycle of generalized poverty.

Because domestic resources are limited, it is difficult to finance new investment from domestic resources. Under these circumstances, international economic relationship can play a vital role in helping LDCs. However, the current form of globalization and neo-liberalism are enhancing the cycle of generalized poverty and economic stagnation.

However, well-implemented international economic relationships can certainly help LDCs to break out of the domestic vicious cycle which causes generalized poverty to persist. In a broad sense, there are two types of international economic relationships in helping LDCs.

Firstly, access to foreign savings can play a catalytic role. The problem of LDCs is the chain from low incomes, to low savings to low investment. Foreign savings can provide enough resources to accumulate initial capitals which are required to start manufacturing. Once growth starts, foreign savings also induce a faster rate of growth of private consumption.

Secondly, opening international markets is a key factor. Due to low national demand, there are no national markets at the outset. They must find markets in other countries, so openness of international markets determines the fate of the newly-born manufacturing industry of LDCs.

Moreover, increased access to modern technologies enables latecomers to gain significant productivity increases. Imports of machinery and transport equipment can be a channel for technology transfer. Foreign direct investment is another channel for technology acquisition.

On the other hand, food and education are not so effective. This type of aid is not strong enough to cut the vicious cycle. People in LDCs can get a short relief from daily food and some smart people can get education. However, if LDCs cannot accumulate enough resources for investment, pouring in this kind of aid is useless. Food has just a one shot effect and cannot change the situation.

In solving the poverty and growth problem of LDCs, the form of integration matters. The current form of integration, which includes weak export capacities such as food and education, is not supporting sustained economic growth and poverty reduction. External trade and financial aid are an integral part of the solution to the poverty trap.

So far it is clear that helping LDCs can rescue them from absolute poverty. However, there is another question pending. What are the benefits to donors? The answer comes from the classic economic theory of comparative advantages. Currently, the trade between LDCs and developed countries is quite small because LDCs take up a very small portion of the world trade. However when the productivity is increased in LDCs, both LDCs and developed countries can get benefits.

In conclusion, helping LDCs is not a charity but an effective way to get mutual benefits. Increased trade among countries always brings us a higher standard of living. The concept of sustainable growth is nothing new. For economic growth, we need to pull other nations up and help those nations to push us. The most effective way of helping other nations is through financial aid and international trade. Note that this is the new way of living in the era of the new economy.


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