The politics surrounding economic policy reforms have majorly affected the distribution of wealth in many of the developing countries. This phenomenon applies more in domestic politics but also in international politics. For instance, the one of the economic policy reform that was formulated to assist developing nations is the regulation of trade policy. According to Rodric (2006) one of the changes introduced in this policy was changing it from protection to openness. Such form of shift and its reverse was associated with many changes in the world of trade. It therefore resulted to the distribution of gains and losses across sectors of the economy, classes of people and across different ethnic communities. The trade shift resulted to the disruption of the economies of the developing countries which are characterized with internal conflicts, corrupt political leaders and large disparities in wealth distribution. As a result, in form of liberalization or even trade takes place in a place that is polluted with bad politics. There are specific factors that determine the nature of trade policy reforms in especially in respect to liberalization. Such factors are responsible of the rate at which developing countries overcome their debts.
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Factors that determine the trade policy reforms
- Country size
Small countries are likely to respond to liberalization faster that bigger countries. An example of such countries is Sri Lanka which was the first country to be liberalized in Asia before the ethnic conflicts had affected it. Some of the African countries which stood out the ethnic conflicts were: Mauritius and Botswana. According to Tommasi & Velasco (2006) the economic and political reforms of a small country are considered to be easier than large countries because these countries do not depend on the world economy. As a result, the interests of the countries are considered to be in-looking and protectionist inclined. Reforms in large countries are had to be instituted due to nature of the land size and when instituted, they are done sluggishly. However, China is an exemption in this category because it is the most populated country in the world yet it has the highest record of economic performance among the world’s large countries. Other large countries like Brazil, South Africa, Russia, Egypt, and India have low economic reforms when compared with small countries that are in or close to their regions.
According to Robinson (2008) large developing countries have policies that fail to bear in mind the interests of the people who live in marginalized areas of the respective countries. This problem is very common in Africa where the marginalized communities are very few and therefore lack the power to vote the leaders to represent them in the government. The marginalized communities live in areas which are endowed with resources like rich agricultural land and minerals. Such areas can be very productive if they are exploited ell or provided with water for the case of agricultural land. However, due to poor politics and weak economic policies, such areas remain under-developed since they people are not well represented in the government. On the contrary, the community that has the majority people benefits more from government resources since such a community is able to elect its people to represent them. The end effect of political move is that the marginalized communities remain poor and depend on the large communities for help. This leads to such a country having a low gross domestic product. Such a country cannot be able to clear its outstanding debts since most of its resources are allocated to assisting its poor people.
Institutions are the governing bodies that are responsible of formulating formal and informal rules. The different forms of rules considered in the case of economic reforms are those that deal with: corporate governance, financial market regulation and competition. According to Wood (2007) there are also informal laws which deal with norms and traditions that influence the world of business and the government too. Institutions and policies are interconnected in that it is not possible to have good institutions if the policies are not good. Institutions are responsible of governing the trade policies in both developing and developed nations. The policies in the developed world have made such countries to be more liberalized and have made them to join the globalised world easier than the developing nations. Such nations have reduced trade and Foreign Direct Investment barriers (FDI), and their trading sectors perform better as compared to the developing nations. In addition, the judiciary, the public administration sectors perform fairly well due to reduced levels of corruption.
The developing countries that have strong institutions are for instance Chile in Latin America, South Africa, Mauritius and Botswana in Africa and some few countries in North Eastern Asia. However, large developing countries like India, Indonesia and Brazil have weak institutions making them to be listed among mentioned countries. According to Wood (2007) the business climate indicators by the World Bank indicate that there are huge policy and institution difference among the developing nations. The indicators also indicated that generalizing the linkage between the political and economic policies of reform is a difficult task. The developing world has witnessed globalization taking place in both democratic and authoritarian environments. China is an example of such country that underwent reform from the early 1990 during the short term authoritarian regime. In other nations like Russia, the growth economic reforms reversed during the authoritarian regime of President Putin.
- Factors Endowments
When mentioning policies for economic reforms, it is worth to mention factors such as land, capital and labor. These factors are called the factors of production aand they determine because they determine the level of production in any economy. According to Tommasi & Velasco (2006) the developing countries which have shown high rates of economic reforms are those found in East Asia. However, most of these countries had a slow start in economy growth. In later stages, labor became abundant and was utilized in various labor-intensive manufacturing activities leading to the production of export goods. These activities were very successful to the extent that they became the center for economic growth which in turn led to poverty reduction and improved the lives of the people. This whole exercise was not easy without the availability of the right policies and institutions to facilitate it. That was the reason why some parts of south Asia remained in poverty because the right market based policies were not adopted in spite of it having similar conditions as the East.
On the contrary, countries in Latin America have land imply that there are abundant resources but there is no labor. However, due to the lack of import substitution policies, countries like Brazil, Chile and Argentina remained in the agricultural production sector and depended on commodities manufactured in China. This implied that in the 21st century there were comparative trade gains for the western countries which had abundant capital, East and South Eastern countries which have adequate labor and other countries which had abundant land. According to Wood (2007) the political economy has had numerous impacts on factor endowments. Structural disadvantages have therefore affected countries that have abundant land than those that have abundant labor. Activities that are labor intensive have the ability of attracting DFI and any technology or skill associated with it. This results into the FDI being fed into the process of reducing poverty, improving the welfare of the people and better infrastructure. On the contrary, nations that have abundant land require to expensive labor and which is not affordable thus eliminating them in the export market which is mainly dominated by China.
The thesis for this paper was focus on the role played by the political environment in creating huge differences in per capita income among developing countries. It has been established that politics play a major role in determining the economy of a country. It has been found out that the economic reform policies like open trade did not guarantee that the developing countries would in a better position to settle their debts. Most of the countries in Latin America and Africa still remained in debt crisis that had affected them since the 1980s. On the contrary, countries in East Asia felt the economic reforms and were able to repay most of their debts. As a result, there is a big a per capita difference among the developing countries today. The paper has discussed the factors that lead to the different sizes of the economy of developing countries and how polities play a role in determining these factors.
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