The Theory of Trade: Implications for LDCs

By Henry Kyambalesa

February 1, 2025

1.   Introduction

Ordinarily, trade theory and strategy encompass the following—a detailed analysis of which is rendered in a book on this subject by Kyambalesa (2019:11-24): (a) the mercantilist doctrine; (b) views from classical theory; (c) the neoclassical perspective; and (d) the new theories of trade.

The theory of trade analyzes the basis for, the gains from, and the pattern of trade between and among countries. In other words, trade theory attempts to explain why coun­tries tend to specialize in the production and exportation of certain commodi­ties, the gains they eventually derive from trade, and the kinds of com­modities they expo­rt to other countries, as well as those they im­port from such countries.

In general, the different versions and notions of economic thought implicitly prescribe the trade-policy choices of nation-states. For exam­ple, given the fact that the human and technolog­ical capabili­ties of developing countries are more suited to the production of primary commodities than manufac­tured goods, both classical and neoclassical theorists would generally—and almost certainly—advise governments in such countries to concen­trate their efforts on the pro­duction and exportation of primary commodities.

Such commodities—which constitute the bulk of developing countries’ exports—are either semi-processed or are in the form of raw materials, and are generally and essentially destined for use in the production of industrial or consumer goods. Examples include coffee beans, tea, cotton, copper, tin, crude oil, hides, ivory, rubber, timber, sugar, and tobacco.

The same conclusion can be drawn about the implica­tions of the theory of trade for the policies of countries in economi­cal­ly integrated re­gions like the Arab Common Market, the Andean Common Market, ASEAN, ECOWAS, the European Union, the South American Community of Nations, the African Tripartite Free Trade Area, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

This article is designed to discuss the need for less-developed countries (LDCs)—or “developing countries,” to use a term that is perhaps and generally more inspiring, uplifting, and acceptable to citizens and political leaders in such countries—to venture in the production and exportation of manufactures, and the need for such countries to develop trade relations with other developing countries. Also discussed in the article are issues and challenges relating to north-south trade relations, and industrialization strategies.

2.   The Quest for Manufacturing

As experience, obser­vation and common sense have taught us, the trade-policy prescriptions of existing ver­sions and notions of economic thought, if embraced by developing countries, can only serve to perpetuate the backwardness that already exists in such countries.

Con­trary to the implicit policy prescrip­tions of the various versions and notions of trade theory, therefore, government leaders in much of the develop­ing world have now found it necessary to venture in the produc­tion and exporta­tion of manufac­tures.

Their reasoning is clearly rational because, among a host of other impor­tant benefits, the manufacturing industry can:

(a)  Im­prove their countr­ies’ terms of trade (ToT) through stable export prices for, and greater export earnings from, manufactured goods;

(b)  Facilitate the cre­ation of high-wage jobs;

(c)  Induce indigenous-based techno­logical development;

(d)  Faci­litate the creation of strong backward and forward linkages in national econo­mies; and

(e)  Shift re­sources from the production of primary commodi­ties, whose prices are generally very low and unsta­ble, to the produ­ction of the more profit­able manufac­tures.

For examp­le, President Yoweri Museveni of Uganda, quoted by the Denver Rocky Mountain News (2000:46A), articulated this vision just before midnight on December 31, 1999 in the following words: “Africa must make the 21st … [century] the century of industrializa­tion.”

Former South African President, Thabo Mbeki (2002), echoed the growing desire by developing countries to engage more seriously in manufacturing during the launch of the African Union in July 2002 in the following words:

“No longer should Africa be simply an exporter of raw materials to the West. We aspire to … manufacture the highest quality products for our own use and for export.”

The emerging desire for manufacturing is also expressed by The Herald (2007), a Zimbabwean newspaper, in the following words:

“Natural resources in themselves are not necessarily wealth unless they are transformed into finished products. Countries that possess natural resources such as platinum, gold, copper, diamonds, and timber, among others, may, therefore, not necessarily be rich. But what counts is the processing of these natural resources into semi-finished or finished consumer products, which are then exported.”

In May 2009, Zambian President Rupiah Bwezani Banda was reported by Daka (2009) and Chomba (2009) as having called on his country and Zimbabwe to expand their manufacturing industries and increase trade in order to overcome the harsh effects of the global economic meltdown.

Currently, coffee and cocoa beans are exported to Europe, North America and Japan by Ethiopia, Angola, Kenya, and Uganda annually. Timber, tobacco and cotton, among other raw materials, are exported by some African countries to developed nations every year. And platinum, diamonds, copper, gold, uranium, and silver, among other minerals, are exported annually to Europe and North America.

Other parts of the developing world, too, have embraced the need to expand their manufacturing capabilities. During the 1980s, for example, countries in much of Central America, South America and the Caribbean welcomed an effort by the United States government designed to bolster the expansion of light manufacturing (among other things) in their national economies through the Caribbean Basin Initiative (CBI)—which was enacted by the United States Congress in 1982/83.

According to Rodrik (2011),

“[Expanding] … manufacturing industries enables not only improved resource allocation, but also dynamic gains over time. This is because most manufacturing industries are what might be referred to as ‘escalator activities’: once an economy gets a toehold in an industry, productivity tends to rise rapidly towards that industry’s technology frontier.”

For the typical developing country, trade and economic pursuits and endeavors in the 21st century are clearly going to have to be focused largely on what is benign and advantageous to a country rather than on what is convention­ally or theoretically acceptable if they are to culminate in long-term socioeconomic benefits.

This unor­thodox tenet of trade on the part of less-developed countries is conveniently referred to as “the principle of expedi­ency” in this article—a concept first introduced by Kyambalesa (1999).

3.   South-South Trade Relations

In the 21st century, government officials in developing countries should not ex­pect to make any headway in their quest for enhanced socioeconomic deve­lopment if they cannot briskly integrate their countries’ national economies with the economies of other countries.

The development hurdles facing their countries—including limited domestic markets, inaccessi­ble foreign markets, lack of investment capital, and unfavorable terms of trade with industrial­ized nations—certainly call for what may be referred to as “south-south economic cooperation” if they are to save their people from want, misery and destitution.

With respect to the African continent, let us turn to Mistry (2000:570&571) for an observation that provides a general rationale for countries on the continent to relentlessly seek stronger and permanent membership in regional economic blocs, and simulta­neous­ly work to­wards consolidating the operations of the African Union created to replace the OAU:

“African countries no longer have the luxury of avoid­ing the imperatives [associated with] … integration, which is inescap­able for most of them if they are to … [succeed in their socioeconomic pursuits and endeavors]. On their own, they will not be able to arrest and reverse the slide toward marginalization in the global economy … and to realize their potential to become more efficient and competitive economies.”

In a nutshell, meaningful socioeconomic development in developing countries, as African heads of state and government have unanimously concluded, is “contingent upon the integration of [their national] … eco­nomies.”

4.   North-South Trade Relations

It is perhaps important to start this section with a brief survey of the elements of what was referred to as the “new interna­tional economic or­der.” The “new interna­tional economic or­der” or “NIEO” was called for in June 1974 by the Unit­ed Nations General Assembly as a means of redressing the persistent poverty in less-developed countries, the existing and unfavorable terms of trade (ToT), and what was (and is) generally perceived as the unfair working of the global eco­nomy.

Essential­ly, the “NIEO” was a set of several demands on industri­al­ized nations (the North) by less-developed countries (the South), most of which had been made prior to 1974 through various UNCTAD meetings. These demands were as follows:

(a)  Greater access to markets in industrialized nations;

(b)  Expediting the transfer of technology to the developing world;

(c)  Scaling down trade barriers on agricultural pro­duce from less-developed countries;

(d)  Greater relief on out­standing bilateral debt and interest payments;

(e)  Negotiation of commodi­ty agree­ments aimed at improving and stabiliz­ing the prices of less-developed countries’ exports;

(f)  Greater and sustained flows of foreign aid to the develop­ing world; and

(g)  Greater role in decision making on global issues by less-developed countries.

As Amin (1994:34) has pointed out, these demands were more or less unanimously rejected by the North. During the 1990s, however, a host of national and local governments in industrialized nations tended to be more responsive to the needs of the South.

In the 21st century, there­fore, government leaders in less-developed countries will do well to take adva­ntage of the current altruism among some industrialized nations and foster mutua­lly beneficial North-South relations.

The following summi­ts convened by local and national governments in industrialized coun­tries reflect such countries’ greater enthusiasm to participate more actively in redressing the socioeconomic ills facing much of the developing world today:

(a)  The first Tokyo International Conference on African De­velopment (TICAD I) held in October 1993 and its runner-up (TICAD II) held in October 1998;

(b)  The summit of leaders of G-7 countries and Russia’s Boris Yeltsin held in Denver in June 1997 to discuss the prospect of “spreading the wealth” worldwide, among other things;

(c)  The G-7 countries’ annual summit (including Russia) held in Cologne, Germany, in June 1999 to initiate a plan for providing greater and swifter debt relief to poor coun­tries, among a host of other things; and

(d)  Summits convened in several American cities during 1999 by the U.S. National Summit on Africa organization to gene­rate strategies for working with African governments in their quest to improve the quality of life on the economically beleaguered continent.

(Note: A diversity of themes was explored at these summits. The Mountain/Southwest Regional Summit on Africa held in Denver, for example, included the following themes: (a) economic development, trade, investment, and job creation; (b) democracy and human rights; (c) sustainable development, quality of life and the environment; (d) peace and security; and (e) education and culture.)

5.    Industrialization Strategies

An appropriate industrial and trade strategy is a critical element in a country’s quest to create a vibrant economy that is conducive to the success and survival of locally based economic units. This is particularly true for developing countries which have generally failed to create viable, business-facilitating economies thus far.

The remainder of this section is devoted to a brief survey of the alternative industrialization strategies employed by such countries during the 20th century—that is, the “import-substitution strategy” and the “export-oriented strategy”—and also recommends a sequential mix of the two alternative strategies for consideration by developing nations in the 21st century.

5.1   Import-substitution strategy:

The term “import substitution” refers to the local production and/or processing of products which are usually imported into a country in an effort to minimize the demand for foreign exchange to import such products. The term is also alternately used to refer to the process of reducing a country’s dependence on imported production inputs by imposing levies on imports and providing incentives for the discovery and use of local inputs.

Import-substitu­tion industrialization is advanta­geous for a number of reasons. Firstly, the local production of previous­ly imported commodities benefits from an already existing market for such commodities in a coun­try. Secondly, it is usually much easier for a country to protect local sup­pliers of import substitutes from foreign competition and assure them of a stable local customer base than to aid them in gaining access to export markets.

The major drawbacks with an import-substitu­tion strategy include the huge capital out­lays required in setting up local industries to produce import substitutes, the greater unemploy­ment which is likely to be brought about by the capi­tal-intensive nature of the industries that may be set up, and the diseconomies of scale associated with creating indus­trial units to produce for a small and limited local mar­ket.

Moreover, the high de­pen­dence by local producers of import sub­stitutes on im­ported capital and intermedi­ate goods leads to balance of payments (BOPs) prob­lems partly due to the lack of sufficient availability of foreign reserves.

Further, the protection of local suppliers of import substi­tutes from competition can make such suppliers to be lax and complacent, a situation which usually culminates in gross inefficiency in protected “infant indus­tries” (defined at the end of this section) and “senile industries” (also defined at the end of the section.)

Be­sides, the “opportu­nity cost” (defined at the end of this sub-section) that would ordinarily be associat­ed with the concentra­tion of resources on one industry would be very high for a poor country. In fact, import-substitution industrialization can lead to the withering of other impor­tant sectors of a country’s economy if it is pursued to the extreme.

(Note:  An “infant industry” is any new and/or an undeveloped business enter­prise whose financial and competitive positions are weak, making it unable to compete effectively against strong foreign competition in its domestic market and, as such, requiring the protection of the govern­ment until it develops a strong financial and competitive position.

A “senile industry,” on the other hand, is any industry in any given country that is declining and inefficient and, as such, requires significant government subsidies and/or tax inducements to make the firms in the industry to revive themselves. Protection of firms in such industries against foreign competition would be expected to function as an incentive for them to make investments designed to bolster their competitiveness.

And the term “opportunity cost” refers to the cost of a product, program, project, or pursuit estimated in terms of alternatives on which financial and/or material resources could have been applied. This reflects the true or actual cost of a product, program, project, or pursuit.)

5.2   Export-oriented strategy:

The “export-oriented strate­gy,” too, has both advantages and disad­vantages for the typical less-developed country. Its advantages include the economies of scale associated with local business entities having access to a larger and unli­mited potential market, as well as its potential to stimu­late local industries to seek innovative ways and means of producing interna­tionally competitive commodities.

Its major drawbacks emanate from the impermeable nature of the export markets due to trade barriers and, like the import-substitution strategy, the massive capital outlays needed to create a viable export industry, the high oppor­tunity cost associated with the strategy, and the high level of unem­ployment which may result from the capital-intensive nature of an export-orie­nted industry.

There are also other potential problems which can thwart a deve­loping country’s export drive. Muuka (1996) has identified the follow­ing, among others, as being partic­ularly serious: (a) unfavorable country-of-origin image; (b) dependence on expor­ta­tion of primary prod­ucts; (c) ina­dequate transportation infrastruc­ture; and (d) lack of knowledge and infor­mation about export mar­kets.

5.3   A two-phase strategy:

There is a need for a country’s government officials to choose an indus­trial and trade strategy that has the potential to achieve national obje­ctives, while taking into account the merits and draw­backs associat­ed with available alternative strategies. It is of necessity to note, though, that countries which have tried the “import-substitution strategy” have generally been unable to achieve desired results.

“Ex­port-oriented industrialization,” on the other hand, has gener­ally proved to be potent in revamping a country’s econo­my, as evidenced by the success story of newly industrialized countries which have suc­cessfully used the strate­gy—that is, Hong Kong, Singapore, South Korea, and Taiwan.

Therefore, developing countries, as Muuka (1996) has maintained, need to pick a leaf from the tale of newly industrialized countries—commonly referred to as the “four-Asian tigers”—and strive to export their way out of economic stagnation and despair.

It is perhaps even more impor­tant for developing countries consider a sequential applica­tion of the two strate­gies: “import substi­tution” in the initial stage of devel­opment to facilitate the evolvement of a viable local manu­facturing sector, and “export orienta­tion” at a later stage of develop­ment so that local suppliers can, among other things, benefit from the economies of scale and economies of scope associat­ed with having access to the large and unlimited global export mar­ket (see Salvatore, 1990:329).

It would, therefore, be unwise for govern­ments in developing countries to focus their efforts exclusively on “import sub­stitution,” as Chanthu­nya and Murinde (1998:231) have ad­vised. For newly industrialized countries, however, the “strategic trade policy” would function well as a means of enhancing the growth of their burgeon­ing economies.

The term “strategic trade policy” is used in this article to refer to an attempt by an industrialized country to use temporary trade restrictions, tax incentives, subsidies, and cooperative government-industry programs in a deliberate attempt to create a comparative advantage in high-technology industries (such as those pertaining to telecommunications, computers, and semi-conductors) which have the potential to support future economic growth.

The industries targeted in this regard are normally those which have the following characteristics:

(a)  They are subject to very high investment risks;

(b)  They require large-scale production in order to achieve economies of scale; and

(c)  They are likely to give rise to extensive external economies—that is, they have the potential to generate benefits like new ideas, information and/or knowledge which investors in them cannot appropriate to the exclusion of other economic units.

6.   Concluding Notes

In this article, we have discussed the need for developing countries to venture in the production and exportation of manufactures, and the need for such countries to develop trade relations with other developing countries. Also discussed in the article are issues and challenges relating to north-south trade relations, and industrialization strategies.

Developing countries particularly cannot afford to ignore any of these challenges in their quest to improve the livelihoods of the majority of their people. To reiterate, they need to: (a) engage in the production of manufactures; (b) develop strong and lasting trade relations with other developing countries; (c) seek to engage actively in trade with industrialized countries; and (d) generate a viable industrialization strategy.

In conclusion, it is perhaps important to mention that in July 2021, Boris Johnson, then United Kingdom’s (UK’s) Prime Minister, won a House of Commons vote on keeping cuts to UK’s foreign aid budget abolished the Department for International Development, and merged its functions with the functions of the Foreign Office.

In January 2025, the Swiss government, too, announced its decision to allocate less funding for Switzerland’s foreign aid and is destined to end the country’s bilateral development programs with Zambia, Albania and Bangladesh by the end of 2028.

And the United States will probably not be willing to support efforts aimed at reducing poverty worldwide. President Donald J. Trump suspended U.S. development assistance upon his inaugural as the country’s 47^th president on January 20, 2025.

Mr. Marco Rubio, the U.S. Secretary of State, has asserted that the Trump administration’s “America First” policy will only support foreign projects and programs that will make the country “stronger, safer and more prosperous.”

It is clearly important for government leaders in developing countries to realize that the real future of their countries does not hinge on seeking the compassion of, or excessive and protracted reliance on, industrialized nations in matters of socioeconomic development.

They need to take full responsibility for finding viable solutions to their domestic problems, as Akashambatwa Mbikusita-Lewanika, founder and former president of the defunct Agenda for Zambia party, advised his fellow leaders and the citizenry during the early 1990s (see Kyambalesa, 2004:xii):

“Just as we must stop blaming external factors for our socioeconomic problems, we must also stop looking to external intervention for solutions. The fundamental problems facing us, as well as their critical solutions, lie within the grasp of … [our] nation.”

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