14. Developing a developing country

There are many ways that developing countries can overcome difficulties when trying to compete with developed countries.

1. The first way is to concentrate on producing what they have a) an absolute advantage in and b) produce what they a comparative advantage in. (explain and define these terms in your answer). This means that they would continue producing the raw materials that they could export to the developed countries that have either run out of those raw materials (natural resources like iron ore, copper, platinum, and even timber) or never had in the first place (oil to Germany).

2. The second way is to start beneficiating these products if economically viable to do so. This can be done by increasing the skills base and developing the capacity to do so by importing the skills and technology - this will help to improve ones competitive advantage on home ground. Competitive advantage can be improved by upskilling the local population - so that they gain the needed advantage. They can do this by making it easier to attract foreign skills (by not placing barriers in the way to do so), attract foreign direct investment (by lower tax regimes) and importing technology (by not placing onerous tariffs and levies on imported capital equipment)without unduly worrying about foreign exchange imbalances. The idea is similar to a start up business having to obtain external finance to get going.

3. The third way is to capitalise on the lower cost of labour that is usually present in most developing countries (not in SA because of the fact that unions have gained political pull and are able to make SA labour costs uncompetitive in terms of labour productivity). Labour costs can however be reduced by not placing tariffs on basic foodstuffs (like the 80% chicken tariff) which pushes up the cost of living for SA labourers, which in turn affects cost inflation and salary demands; and makes local production not able to compete with other developing countries.

4. In developing countries where there are high levels of unemployment minimum wages tend to keep labour costs artificially high. Labour rates should be allowed to go down and find their levels where all resources are fully employed. This will be at lower levels than the controlled minimum wage levels and have a dramatic effect on the county’s ability to compete in the international marketplace. This is especially important for developing countries that are far away from major markets such as the US, Europe and Japan.

5. Developing countries can form alliances such as BRICS, SADC to reduce obstacles in trade between such markets.

6. One reason that developing countries do not fare well is a lack of infrastructure. Here Fiscal policies could be redirected from consumer spending (social grants) to infrastructure development through capital projects (but also not in the way that China tried to do it under Mao in the Great Leap Forward and Stalin in his attempts to industrialise Russia - the key lies in freeing up the economy to private initiative and reducing the heavy hand of the state when it comes to taxes and regulations.

7. Developing countries can also reduce the cost of doing business – by reducing the cost of governance – in other words extract less tax from the productive sector of the economy to fund unproductive government initiatives. This will place such a country in a more competitive relationship to others. Mauritius is an example in this regard.

8. Some developing countries have had tremendous success in establishing Free Trade Zones where all onerous employment regulations, tough foreign trade requirements and capital restrictions as well as high tax levels have been reduced or completely eliminated. Much of China’s growth has been because of the liberalisation of these policies, including the protection of private property rights.

Charl Heydenrych charl.heydenrych a t mancosa co .za