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Low Income Developing Economies
The term “low income developing economies” refers to regions, countries as well as territories reviewed and updated by the UNCTAD. Whilst there’s no established convention for the designation of “developing” economies in the UN system.
The composition of groupings we address as low-income developing countries include:
South Asia: Afghanistan, Bangladesh, Cambodia, India, Lao, Myanmar, Nepal, Pakistan, Timor-Leste, Vietnam.
West Africa: Benin, Burkina Faso, Cote d’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Sao Tome & Principe, Senegal, Sierra Leone, Togo
East Africa: Burundi, Djibouti, Eritrea, Ethiopia, Kenya, Comoros, Rwanda, Somalia, South Sudan, Uganda, Tanzania, Zambia, Zimbabwe.
Central African Republic: Chad, Congo.
Western Asia: Iraq, Yemen.
Central America: Haiti.
East Asia: South Korea
South Africa: Malawi, Madagascar, Lesotho, Mozambique.
Central America: Nicaragua.
North Africa: Sudan.
Trade to GDP ratios vary greatly, and require careful introspection. Most developed economies rarely export any more than their GDP, as we hope to show, the large value of developing low income nations instead tell a different story.
The correlations we make between openness and growth here are imperfect, as is the argument that taxations imposed on imports act as barriers to trade. There are many determining factors that go into the broad relationships between the openness and growth of an economy beyond just the supply of imports and exports, or any foreign direct investments received, we also have matters of expansionary production policies, currency exchange controls, and corruption that each bear independently important roles.
It must also be noted that infant industries of emerging markets take time to evolve to the level of those with whom production is traditional, despite any willingness to expand strategies of import substitution as is immediately indicative in comparisons between developed and developing nations.
Purpose of this document
As the value of international trade is often expressed relative to the size of a given economy, as measured by its GDP. We attempt to present here the relative size of exports and imports for low income developing economies, and their share of global trade.
Our key findings shown here have been produced by and large through support of the public UNCTAD Secretariat. The data whilst comprehensive and comparable doesn’t perfectly reflect statistical measures of openness or of growth – where the correlation and determination of either isn’t an exact science.
At no point in this document do we assume that we have perfect information. Econometric uncertainty and the endogeneity of policy controls are not covered in this paper. We only attempt to show correlation between openness-growth performance, and not to question their efficacy.
Our empirical strategy involves first assessing the sum of imports and exports of low income developing economies over a fifty-year period, foreign direct investment provided, and tariffs imposed. We them move on to look at the results pooled for growth through GDP, Per capita GDP, GCF, and TVA. Along with human population, and agricultural labour-force as a percentage of the human population, before drawing up a correlation between them to determine whether growth regresses or progresses.
Definition of terms
We define the Gross Domestic Product as the value in monetary terms of all goods and services produced in the economy over a given period of time.
GDP/Per Capita reflects the purchasing power parity value of all the final goods and services produced in a country over a given period, divided by the average population over the same period.
Gross Capital Formation refers only to the accounting value of the additions of non-financial produced assets.
In the national accounts, the expenditure of goods and services used for the direct satisfaction of individual consumption of citizens are recorded on the income account under the transaction of final consumption expenditure.
Gross Capital Formation is
Trade to GDP ratio
We first determine openness of international merchandise trade through the trade to GDP ratio shown as the sum of exports and imports divided by GDP.
This represents the combined weight of trade in a given economy, measuring the degree of dependence of local producers, foreign markets, and the general degree of reliance had on foreign supply.
Foreign Direct Investment
Foreign direct investment acts as a measure of the total level of direct investment at a given time. We deal only with inward flowing FDI which measures foreign investor equity in enterprises of a given economy.
The relationship between tariffs and growth in low income developing economies as we show below, is positive, albeit, often insignificant amongst low income developing economies.
To evaluate the effects of protectionist tariffs, one must study the direct effects it has on domestic producers, foreign producers, domestic consumers and representative governments.
Through comparative advantage, countries are able to increase economic benefit and, produce specialized goods, trading goods they don’t produce domestically with countries that do so inexpensively. Most economists agree that free-trade leads to an increase in total welfare of participating nations. Using this we can form a simple definition that protectionist tariffs are taxes imposed on goods intended to protect domestic producers from inexpensive foreign competition
Pw + t
Pw a b d
Tax Domestic Demand
Imports Before Tax
Increased domestic production Decreased domestic production
In the graph above, we show that if a country chooses to trade with a foreign producer possessing some comparative advantage, it could import goods at a lower world price than it could otherwise produce it. Therefore, the tradeoff would be that the domestic quantity supplied would be lower than the domestic quantity demanded.
Given that we already know that a tariff is a tax on imported goods, and that it increases the price of a good being taxed, we can show the impact of a tariff on a given product by shifting the supply curve upward from through which leads to an increase in the world price added with imposed tariffs. A higher price leads to a fall quantity demanded as shown in and an increase in the price of goods paid by domestic consumers drives an increase in domestic production, as shown in The impact of tariffs on the quantity of imports would thereby lead to a decrease in the quantity of imports.
The effect of protectionism varies widely. We’ve found that domestic producers ultimately become better off at the expense of their consumers as well as foreign producers who ultimately have to sell fewer goods at the same world price.
Tax revenues are generated through tariffs (C) providing additional benefit to the economy, however there is a loss of total welfare (the sum of consumer, producer and government surplus) resulting from the decrease in consumer surplus that isn’t made up for through tariffs imposed (B, and D) - this is known as debt-weight loss.
Since World War II, we’ve seen a massive decline in the amounts of tariffs imposed on imports where the average tariff rate applied by a given country has fallen under 10%. Though, despite this, we find that global non-tariff barriers partially offset any benefit provided to domestic producers, or government tax revenues, retaining inflated consumer spending. Despite this, however, the gains in economic openness over the last few decades have proven to be extremely robust in the face of economic and political shocks.
Using the three aforementioned degrees of openness, we are able to determine the most and least open economies amongst the low-income developing countries by region.
As our data shows, there is a significant positive correlation between foreign direct investment relative to the GDP of low-income developing economies. The GDP rate of growth has averaged at 8% annually across low income developing economies
We see that FDI is a direct driver of GDP where external factors seem to have determined the domestic output of Low Income Developing Economies. And also that higher FDI is indicated by the stable growth GDP had made between 1970 through to 1998. Due to factors that may be assumed to have been global economic crises, FDI slipped, however, it isn’concentrated on traditional resources, but also services and manufacturing, what goes into determining the GDP has expanded over the years as African governments have loosened policies.
Existing literature that has found positive correlations between open trade, and growth makes assumptions based off of imperfect information. During our study, we don’t find tremendous support for this premise – sometimes showing negative correlations. It has been understand that the expansion in world trade has been the driving force of benefits accrued in low-income developing nations, and acts as a determining prerequisite. The results we’ve shown above provide a better understanding of growth and openness true only of the last few decades. More research is necessary in order to fully understand the existence – or lack thereof – of the links that measure growth and openness for both recent and historical periods. in total welfare of participating nations. Using this we can form a simple definition that protectionist tariffs are taxes imposed on goods intended to protect domestic producers from inexpensive foreign competition
As our data shows, there is a significant positive correlation between foreign direct investment relative to the GDP of lo