Specialisation is the concentration of resources concerning human capital, technology, and fund to a limited portfolio of activities. Countries base their specialization on factors of production that provides a high comparative advantage over the others.
Economic threats to other economic sectors
Specialization can, however, leads to economic threats to the less specific sectors in the economy. Ignoring other sectors provide a loophole for foreign investors to enter the economy and rival both the small and established local companies. The fact that an economy has over specialized on a limited range of products indicates that a majority of essential goods and services are subject to external economic forces (Brothers et al. 1736).
A developing country will have to import products and services to satisfy or meet the demands of the citizens. Excess imports compared to the exports of limited products will result in a negative balance of trade which reduces the gross domestic product of a nation. A low or decreasing gross domestic outcome suggests that a country has limited resources to enable economic growth.
Overspecialization may lead to strategic dependency on developed countries. A developing nation will depend on other nations if most of products and services are imported. The economy will be dependent on the other countries rather than be self-sustainable. Developing countries will be subject to the political environment, exchange rate factors and business laws of the developed countries.
Volatile Commodity Prices
Developing countries are synonymous with exporting raw material and unprocessed commodities. Changes in the global market as a result of a change in demand-supply affect the prices of products and consequently impact economies of developing countries (Brothers et al. 1736). For instance, if the demand of products goes down, prices will fall and extends the exported products, thereby incurring an opportunity cost of the reduced demand and therefore export less of the products. Currencies of developing countries have lower values that of developed countries. Therefore, volatility in prices most of the times leads economy of developing countries to suffer as a result of exchange rate losses.
Trade Protection in more Developed Countries
Developing countries mostly export raw materials and agricultural produce. Trade protection actions such as entry barriers suggest that developing countries will be restricted from exporting their products to certain developing countries. The restriction will lead to low gains from exports and result in a surplus of certain commodities in the local markets. A surplus in supply has an effect of reducing the prices of the products to attract buyers.
Trade restrictions act has a double effect on the economy of a developing country because there will less export, and the surplus products sold at low prices in the local markets. The major effect, however, occurs in unfavourable balance of trade where the imports will be more than the exports (Brothers et al. 1738).
Import Substitution Policy and Export Promotion Strategy
Trade and Economic Policies
Substitution of imports and promotion of export mechanisms are both trade and economic policies. For instance, import substitution is meant to stimulate trade locally by encouraging local production whereas export promotion is meant to improve trade externally concerning exports. The two strategies have a positive impact on the economy to some extent (Sodersten and Geoffrey 409).
The government has to initiate, stimulate and manage both strategies. For instance, in import substitution, the government has to come up with programs that encourage local manufacturing while the government has to come up with incentives that encourage exports in export promotion strategy.
Effect on the Flow of Currency
Import substitution aims at reducing imports and encouraging local production for local consumption. The policy affects the reduction in the purchase of products using foreign currency and encourages the use of local currency for circulation in the local markets. Export promotion, on the other hand, is meant to improve exports and as a result, increase receipt of foreign currency (Sodersten and Geoffrey 410). The strategy is meant to try and appreciate the local currency against the currency of already developed countries.
Impact on the Economy
Import substitution has a holistic effect on the economy. Emphasis on local production leads to a reduction in unemployment which equates to increase in national income, an improvement on local services and regular flow of money in the economy. Export promotion, on the other hand, is limited to the balance of trade aspect of the economy (Sodersten and Geoffrey 410).
Diversification and Economic Growth
Diversification in a developing country suggests that a country has a wide range of product and services portfolio in which it has a comparative advantage. The major positive aspect of diversification is the fact that there are various sources of revenue for the county to count on. Numerous revenue sources equate to high national revenue. A diversified economy provides a platform for growth in various sectors as not all the diversified sectors will have been utilized fully.
Diversification brings about job creation about various human skills. Jobs provide the employed population with high purchasing power resulting in an improved circular flow of products and services in an economy which boosts the economy.
Diversification cushions an economy of developing countries against external shocks such as global changes in demand and supply. An impact of risk will not be significant as the performance regarding revenues of other sectors will nullify a risk in one or two sectors.
Brothers, Dwight S., Harry G. and Johnson. "Economic Policies toward Less Developed
Countries." Southern Economic Journal, vol. 35, no. 1, 1968, pp. 1735-1739., doi:10.2307/1056664
Sodersten, Bo, and Geoffrey Reed. "Import-Substitution versus Export-Promotion."
International Economics, 1994, pp. 404-436., doi:10.1007/978-1-349-23320-5_19.
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