The Challenges of International Trade and Investment for Developing Countries

By | January 15, 2018

We all know the fact that the world divides between the developed and developing countries – in which, as less widely known, some of these developing countries fall so far behind in terms of the size and shape of their economies.

According to the United Nations Conference on Trade and Development (UNCTAD), which in 1971 had devised a category of the Least Developed Countries (LDCs); as of today, there are 135 of them. Their problems, as reported by the World Economic Forum (WEF), are ‘among the most intractable development challenges facing the international community.”

What’s even more alarming is that only four countries have “graduated” or have progressed from low-income to middle- and upper-income from the LDC status: Botswana in 1994, Cabo Verde in 2007, Maldives in 2011, and Samoa in 2014 – a poor record that had prompted the UN, in 2011, to “establish a dedicated programme of action with the target of enabling at least half of the LDCs to ‘meet the criteria of graduation’ by the end of this decade.”

But despite the challenges, some countries will shed LDC status in the coming years – such as Equatorial Guinea, Vanuatu, and Angola. Meanwhile, others have been found to be “pre-eligible” for graduation – such as Bhutan, Nepal, São Tomé and Principe, Solomon Islands, and Timor-Leste. The great news is that these countries have shown that they have fared better or at least did not go worse.

However, still, these are far from the set target of halving the number of LDCs.

Trade and investments, for many developing countries, is where the progression of status heavily rests – successful trade provides a source of foreign currency to help balance payments, increased employment in export industries, and a way of financing imports. But it has its disadvantages and risks too that pose the following significant challenges.

The economic vulnerability has not diminished significantly.

Many LDCs are highly dependent on commodity exports. As a matter of fact, in a press release of the UNCTAD in October 13, 2017 titled “Commodity Dependence Worsens For Developing Countries”, “nine more developing economies became dependent on commodity exports between 2010 and 2015” – making a total of 91 or about two-thirds of the total number of the developing countries.

Too much commodity dependence can have negative effects on human development indicators such as life expectancy, education, and per capita income.

“…developing countries will struggle to achieve the Sustainable Development Goals unless they break the chains of commodity dependence.”, said UNCTAD Secretary-General Mukhisa Kituyi.

Also, aside from this, LDCs are heavily exposed to economic and natural shocks like climate change – challenges that cannot be dealt with yet by these countries all by themselves as they are far less equipped and are still unprepared.

A 2014 report from the Norwegian Refugee Council and the Internal Displacement Monitoring Centre finds that more than nineteen million people around the world were severely affected by the natural disasters. In developing countries where inadequate water supply and sanitation services are compounded by the strikes of natural disasters, lives of billions of people are underscored.

Many countries view “graduation” as a threat rather than an opportunity.

Transitioning from low- to upper-income status means being independent and losing unilateral preferential market access and reduction in aid levels.

Although some countries are already eligible for graduating from the LDC on the grounds of better social indicators and improved economic resilience, their dependence on international trade and investment (i.e., preferential market access) cannot be cut immediately. This is primarily because some serious risks beyond their control might happen anytime which might render them difficulties in a lot of different areas like education and healthcare.

These reasons have made the European Union, in 2008, to offer and extend the “preferential, duty-free, quota-free access” for the LDCs to the EU market for three years after graduation – as part of the preparation to facilitate a smooth transition to post-LDC status.

Besides relying heavily on trade and investments, LDC countries also reap the benefits of foreign aids – that is, from the world’s most developed countries. It was reported that in 2014, three of the world’s economic giants had donated significant amounts, with the United States and Japan contributing both 0.19 percent of their national income. Among other big spenders are United Kingdom, Portugal, Sweden, Luxembourg, and et cetera.

However, while economic assistance is beneficial and is necessary, it could mean a lot of things and has a number of implications. First, other than the willingness to help, “the growing and continuous dependence on external funding means that the beneficiaries of such help are both economically and politically tied to the donors.” Best examples are Japan and China, which don’t like each other for a number of reasons reaching back to World War II, Nanjing massacre, and over territorial disputes – turning countries into something of an economic assistance battleground.