The development gap between rich and poor countries has many factors, and although the trading system is one of the largest influences, others can be more important in certain times and places. Trading has relatively few rules and regulations, which can be exploited and whether or not an LEDC is exploited depends upon the government of the LEDC and the company developing inside the LEDC. MNC’s in LEDC’s can help development and stimulation of the economy, or they can cause corruption and further poverty. Some countries which are still considered LEDC’s even though they are economically more powerful than many MEDC’s leading to the answer that the World Trade System cannot be the root cause of the widening development gap otherwise countries like China and India would not be emerging on the world stage.
Title and Abstract
What is development, and how is it affected by the World Trade System?
The Development Gap
World Trade Organisation
Section 1: Fiat S.p.A’s development in Brazil
Section 2: India’s economic growth and expanding group of poor
Section 3: China’s resource race, focusing on Peru’s copper mountain
Page 11: Bibliography
To what extent is an unfair World Trading System the root cause of the widening development gap between very rich and very poor countries
The world trading system is the way in which countries buy and sell their resources to each other, however there is some question as to the fairness of rules and regulations and how they effect both LEDC’s and MEDC’s. The World Trade Agreement, which is updated at the World Trade Organisation Trade Round, is created to ensure that all countries have a say in trade regulations. The current round concerning factors important to all countries has been running for almost 7 years. One of the main problems experienced by world trade is that LEDC’s are developing, but not at a rate parallel to that of MEDC’s which leads to many questions at to whether there is exploitation of LEDC’s by MEDC’s. In this report I will examine case studies as to whether or not there is corruption and exploitation taking place in world trade and how much of a hold it has on the World Trading System.
This development can come at a price however, socially, economically and environmentally. Environmentally, resources of a country can be abused, including the amenities such as water and air pollution, and the environmental impacts to the LEDC are often unconsidered by the MNC’s. The social impacts of the development can be seen as both positive and negative; with the improvements of transport links and the increase of skilled workers, or the fact that many local cultures are westernised and the labour is brought at extremely low rates, and benefits are rarely given. Economically, the country can go one of two ways. The MNC could be paying higher wages, and the development to the countries markets can encourage industry with the investment of foreign currency comes into the LEDC. There is also the other way, where wages could be ridiculously low, and money exported out of the country to the MNC’s. The highest paid positions are rarely taken by locals, and all decisions are usually made by people who’ve never even been to the country. The introduction of a MNC to a LEDC can be either a boosting start to the development of its economy, or can be the beginning of a dependent relationship where all the power is held by the MNC.
The fact of the matter is that depending on the MNC, development can differ. At the moment a MNC is only restricted by the rules the LEDC places upon it, and these restrictions can be very light considering that some MNC’s have more economic and political power than small LEDC’s. In certain cases a LEDC could welcome a MNC with the wish of helping develop the country and allowing its residents a chance of work and money. If a MNC does move into a LEDC, and the country is exploited by the MNC then the reason for this is the lack of rules and regulations concerning MNC movements and dealings. Essentially this is a flaw with them world trade system, as many MNC’s have the power and resources to control trade routes to force LEDC’s into opening their markets. The outcome that a MNC will help a countries economy and society is equally viable, as shown in the case study of Fiat in Brazil, and can be a decisive factor in the battle against poverty.
The level of expansion of MNC’s in LEDC’s has generally been left up to the governments of these countries to decide, with very few rules and regulations. Many MNC’s are even more powerful than whole countries, but in certain cases when a healthy economic relationship is set up the LEDC can profit immensely. Where the money made from this relationship ends up is totally dependant upon the government. Luckily in Brazil the expansion of Fiat has led to the creation of more jobs and economic opportunities, however if corruption is strong within a government all the revenue created by such a partnership will go to those already rich and leave the poor in the worst of conditions, similar to what has happened with the development of India.
India provides us with a unique look at the ranges of reasons a country may not be considered developed compared to others. As mentioned above, the possibility of war with neighbouring countries means that India cannot be taken seriously on the world stage, regardless of its economic power. The reaction to India’s economic growth has not been bad, but this will change as India becomes a bigger part of the global economy. If the government continue its goal of massively expanding their manufacturing sector then India will become a target for developed-country protectionists.
It is important to remember that although India has possibly the largest middle class in the world, it also has one of the largest groups of impoverished people. This is one illustration of the lopsided nature of economic growth in India nowadays. The economic growth has been largely received by the already rich, whereas the poor still struggle to escape from hunger. India is a prime example of a LEDC country who has grown economically, but also one where the inequalities of trade are apparent. India’s economy has been growing at a sustainable rate over the last half a decade, but little of it has gone to the 828 million people who are living on below $2 a day. India shows us that LEDC’s can develop at fast rates, at faster rates than most MEDC’s, however the use of this profit is ultimately up to the government of the country.
If a government is corrupt or the upper classes are in control, then the money will not be used for the betterment of those under the poverty line, which would lead to a development gap within a country, and essentially a growing gap in world development. If a government is legitimate and democratic however, the economic growth displayed by a country like India would be instrumental in closing the development gap, thus proving that even if there is an unfair world trade system, and then it is still possible for a country to develop.
Regardless of the huge economic growth, there is still a very large development gap between India and MEDC’s, generally in factors such as quality of life, human rights and environment. Indian firms have been buying up many major companies, which shows their prominence on the world market, but with this added power comes the responsibilities of equal development; a task which India is not yet achieving. Income inequality in India is increasing, which is worrying considering they’re soon to be one of the most powerful countries in the world. There are no restrictions on what countries spend their money on, and there is nothing to stop India funding their economic expansion and focus of the 43% rate of child malnutrition, which can be compared with how China are spending their revenue on foreign resources, as there is no limit to what they buy providing both countries are happy.
Perhaps if this was the first resource acquisition in foreign areas that China had made it would not come under such criticism, but Mount Toromocho is not the first natural resource that a Chinese company had brought in a LEDC, and many people and governments have a strong dislike for the Chinese bargaining methods. From Canada to Indonesia to Kazakhstan, Chinese firms are buying up oil, gas, coal and metals or paying for the right to explore for them, if not buying up firms that produce them. Ships are queuing off Australia’s biggest coal port to load cargoes destined for China, literally.
At one point last June the line was 79 ships long. The graph to the right shows that in the last 8 years alone the imports of copper ore, and other resources, have rocketed. As mentioned above, there are many governments and people who disapprove of China’s acquiring methods, and apparent lack of regard for LEDC’s and the people who live in them. For example, for Chinalco to start mining it will have to move an entire town, Morococha, across the valley. Morococha is an extremely impoverished area, with the vast majority of its residents living the most basic of lives, but this all comes together to make the offer of resettlement and $2000 hard to resist. The choice of whether to move or not was put to the residents, and last year more than half accepted the resettlement, unsurprisingly.
Those who voted against had different reasons, some wanting to stay where they’d lived for so long, and some who felt that Chinalco was getting too good a deal. The villagers who wanted to stay never had a chance considering the huge reserves of foreign exchange China have to spend on such endeavours, and could simple just raise the money offered. There is also the factor that China is one of the few countries who are looking to expand their search for resources to LEDC’s and actually has the funds to make such purchases which means that what China wants, China gets. It is important to remember that in this particular case, although China will end up making a $57 billion profit if things go well, Peru hasn’t the technology or the revenue to waste trying to produce any of copper ore. To an extremely poor country like Peru, $3 billion is a huge amount for a resource they could not make any use of anyway, but many MEDC’s see the bargain that China is getting and resent the unethical tactics which they have used in their purchase.
“To what extent is an unfair World Trading System the root cause of the widening development gap between very rich and very poor countries”
From my research I have found that there are generally very few rules and restrictions regarding MNC development in LEDC’s. Any economic agreements between a country and an MNC is between the two, so if any corruption is taking place it is very likely that even if the LEDC is profiting greatly, the development gap will not be reduced at all because all the money will go to the already rich and leave the poverty stricken in poor conditions. As with India’s economic emergence onto the global markets, a tiny amount of the profit has gone into any project to help the huge percentage of their people to climb above the poverty line. Being the twelfth largest economic power in the world, India shows us that unfair world trade isn’t the only factor causing a widening development gap and other factors, in this case corruption, are the primary reasons. MNC’s can be a curse or a gift to a LEDC, and in the case of Fiat in Brazil, there has been reasonable economic growth provided.
The militant attitude of the government attracted Fiat, and the strong work ethic means that many jobs have become available and will do so for some time. Brazil, a country where poverty is common and many people work in informal sectors, needs this type of fair development more than most. China is considered a LEDC, but has massive revenues of foreign exchange which has allowed them to begin a resource race buying up raw materials from other less fortunate LEDC’s. In the case of China buying up Peruvian copper, it could be viewed as China paying for a resource that Peru could not develop at a very low price.
There is debate as to whether this low offer that Peru would definitely accept is fair trade, but regardless of that, Peru had $3 billion to use for development, a huge amount for such a small country. The lack of regulations on the World Trading System allows exploitation and corruption to take place, but there are many other factors that are equally important when studying the increasing development gap, which differ with each particular case. Although the unfair system is an important issue other factors such as war, corruption and social development are all vital to consider.