Over the past two decades, liberalisation of trade and investment flows has dominated policy reforms in the developing world, in the belief that rapid and full integration into the global economy would create more favourable conditions for growth. However, both theory and empirical evidence suggest no automatic linkage between trade liberalisation and growth.

This paper explains why this is so and, in this light, addresses the basic policy challenge facing most developing countries: how to establish a broad and robust industrial base as the key to successful

development, and how best to channel trade and investment to this end. The author finds that, while developing countries' share in world manufacturing exports - including high - tech products - appears to have been expanding rapidly, incomes earned from such activities by these countries do not share in this dynamism.

To be able to progress further along the development path, therefore, these developing countries need to undertake industrial upgrading and graduate from labour-intensive to higher-value-added production, thereby also allowing still-less-advanced countries to participate in manufacturing by taking over their activities. This paper explores possible solutions to this problem, setting out policy suggestions as to how developing countries can orient their participation in international trade and production systems towards promoting economic development.

About the Author
Dr. Yilmaz Akyuz was the Director of the Division on Globalisation and Development Strategies and Chief Economist at the United Nations Conference on Trade and Development (UNCTAD) until his retirement in August 2003. He was the principal author and head of the team preparing the Trade and Development Report, and UNCTAD coordinator of research support to developing countries (the Group of 24) in the IMF and the World Bank on international monetary and financial issues. Before joining UNCTAD in 1984 he taught at various universities in Turkey, England and elsewhere in Europe. He has published extensively in macroeconomics, finance, growth and development. Since retiring from UNCTAD, he has held the Tun Ismail Ali Chair in Monetary and Financial Economics, University of Malaya. His current activities include policy research for international organisations, and advising governments on development policy issues, and the Third World Network on research in trade, finance and development.

Contents

1 Introduction

2 Trade Liberalisation: Issues at Stake

3 Trade Liberalisation and Economic Growth

4 Trade Liberalisation and Balance of Payments

5 Trade and Industrialisation
a. Manufactured exports and value-added
b. A stylised picture of diversity in trade and industrial development

6 Pros and Cons of Participation in International Production Networks

7 Competition and the Fallacy of Composition

8 Policy Challenges

References

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