The International Economy Essay Example | Topics and Well Written Essays - 1750 words

The International Economy - Essay Example According to the World Bank reports, the net capital flows to developing countries have increased tremendously from $ 28 billion in 1970s to $306 Billion 1997 (World Bank 2001: 110). This has led to increased investments and economic growth of those countries. However, the performance of a nation depends on its structural characteristics, resource endowment and policies or the investment climate. Though developing countries account for a third of world trade, most of its trade is to other developing countries and mainly depends on primary commodity exports. Trade liberalization in these countries therefore has not been able to stimulate economic growth and exports (Parikh 2007). For economic growth to be realised, developing countries need to engage in trade of manufactures and services. If developing countries still remain underdeveloped and the gap between developed and developing countries continues to widen, what then is the role of trade liberalization and investment in the econ omic growth of third world countries? To answer this question, the paper will discuss trade liberalization, investment liberalization, economic growth, and the reasons why there is a wide gap between developed and developing countries. Trade Liberalization There has been a tremendous growth of the world trade for the past 20yrs. The International Monetary Fund (IMF) puts the growth rate at six percent per year (IMF 2001). This has been made possible by various rounds of multilateral trade agreements under GATT which later formed the world Trade Organization (WTO) in 1995. The WTO is entrusted with the role of regulating world trade and settling disputes among trading nations and is guided by several principles. The Most favoured Nation (MFN) and national treatment principles guard against any form of discrimination. The trade is also supposed to freerer by removing trade barriers through rounds of negotiations. The trade is also competitive as unfair practices such as damping of pro ducts at cheap prices are not encouraged. The trading partners are guided by the WTO rules hence cannot change trade policies arbitrarily thus the trade is predictable. Another principle of the world trade is that it is to be beneficial to less developed countries. As such, various rounds of negotiations have been going on to decide on how to make trade favourable to developing countries especially by allowing them more time to implement tariff reduction. As a result, most developing countries have opened their economies to trade and are enjoying the benefits. According to Blandford (2007), 2/3 of the current 148 members of WTO are developing countries. Despite opening the economies to trade, most developing countries continue to put restrictions to trade to protect domestic industries. Furthermore, as Parikh (2007) notes, most developed countries continue to put restrictions of access in areas of export interest to developing countries and are also experiencing slow growth hence do not import a lot from those countries. This affects many developing countries that rely on primary commodities for export as their imports outweigh exports resulting in unfavourable terms of trade. Most beneficiaries of trade liberali