/ M.Com / international business environment /
What are the major problems faced by developing countries in promoting their exports?

What are the major problems faced by developing countries in promoting their exports?

Course: M.Com

1 Answer

The major problems faced by developing countries in promoting their exports are:

Low Income Elasticity of Demand: Developing countries produce primarily foodstuffs such as tea, coffee, tea, cocoa etc., which are characterized by low income elasticity of demand. Low income elasticity means that the rate of change in demand for a certain rate of change in income is low. It implies that growth in incomes in developed countries has not been followed by a proportionate increase in demand for foodstuffs. It is due to the fact that consumption of foodstuffs has reached saturation levels in most developed countries.

Growth of Services Sector: Since the beginning of the 1970s, role of the services sector has increased at the cost of primary products. Services sector has also affected manufacturing sector leading to reduction in demand for raw-materials.

In elasticity of Supply: It has been observed that some countries could not meet the demand of importing countries due to uncontrollable factors like weather, lack of storage facilities etc.

Competition from Substitutes: A number of major export items like coffee, tea and cocoa are facing inter-se competition, i.e. competition among constituents of the same group as well as competition from substitutes. It is due to change in tastes and dietary habits. Cocoa, Coffee and tea are threatened by other chemical and biological processes like enzymes and fermentation technology. Further, can sugar is being fast replaced by artificial sweeteners. Industrial raw materials such as rubber, jute, cotton and steel face severe competition from synthetics. In the engineering and construction industries, engineering plastics has replaced structural steel.

Technological Developments: Introduction of new technologies has led to economies in the use of raw materials. For example, demand for iron-ore has declined due to recycling of metal scrap.

Price Fluctuations: Wide fluctuations in the prices of primary commodities have led to uncertainties in export earnings of developing countries. According to UNCTAD, the fall in the prices of commodities resulted in a gain of over 100 billion dollars to developed countries in recent years. Although UNCTAD has initiated various international commodity agreements and compensatory financing facilities, the response has not been encouraging.

Protectionism: Many developed countries have resorted to the policy of protectionism to protect their domestic sectors from the competition of developing countries. protectionism takes two forms:

  • Subsidies.
  • Tariff and non-tariff barriers.

Subsidies are director indirect financial assistance from the government to make the products of domestic producers competitive to imported items. These subsidies reduce the demand for imported products. Tariff barriers are in the form of taxes imposed by a government on imported goods. Tariff barriers restrict the market access to the products of developing countries by increasing the landed cost of imported goods. Non-tariff barriers are in the form of quotas, total ban on imports etc. According to the confederation of Indian industry, Indian primary products attract a number of non-tariff barriers in the European Union in the form of export subsidies, labeling standards, testing, labeling and Certification, procedures, health and sanitary regulations, technical standards, child labor guidelines and anti-dumping measures. In spite of GATT agreements, developed countries are increasingly using export restraint arrangements.

Managed Trade: Many countries have preferred the formation of regional and sub-regional groupings and bilateral and counter-trade agreements to multilateral trade.

Non-trade Issues: Developing countries have suffered a setback due to recent practices of developed countries to emphasize non-trade issues with trade. Some of the important issues are as follows:

  • Child labor.
  • Environmental protection.
  • Arms spending.
  • Human rights record.
  • Labour standards.
  • Commitment to democracy.
  • Good governance.
  • Health and sanitary conditions.

Multinational Corporation’s Influence: Multinational corporations have influenced the global production and marketing of a number of products of export interest to developing countries. MNCs have influenced the policies of developing country governments. According to UNCTAD, as a result of MNCs influence, exporter countries have received only 20% to 40%, of the final price of the products such as tea, coffee, citrus fruit and jute.

March 12, 2019