Is 'free' trade hindering the development of poor countries?

Trade is considered by many to be the engine of growth in a nation, acting as a spur for development. Neo-liberalists believe that free trade will lift people out of poverty, a view that is supported by the rapid development of the Newly Industrialised Countries (NICs), with the growth of China and India being particularly strong examples.

However, the view that free trade will lead the development of a nation is a highly controversial one. Strong arguments exist, stating that trade is often unfair to developing countries as stronger economies, firms and organisations control markets by following protectionist strategies such as tariffs and subsidisation and by controlling commodity prices.   

An example of this occurring is in the cocoa industry in Ghana where foreign commodity traders such as buyers for MNCs like Nestle and Cadbury trade in future markets (i.e. they buy supplies now to ensure delivery in 3 to 6 months). A downward pressure is put on cocoa prices due to competition from other exporting nations. Due to this, commodity prices are volatile which results in irregular income for workers and uncertain tax returns for governments of developing nations. 

The prices of commodities are also volatile as a result of their price inelastic demand and supply. A price inelastic demand is caused by most commodities being necessities rather than luxury goods and due to their lack of substitute goods. Commodities also have a price inelastic supply due to their relatively long period of time taken to excavate and the limit to their potential supply. This means that a small change in quantity demanded or supplied can radically affect their price and so make predicting revenue generated from their export difficult. 

In Ghana, as with many other developing nations, much of the nations income therefore depends on the actions of powerful MNCs from the developed world. Such as relationship is described as neo-colonial meaning that countries remain under control of overseas countries indirectly - despite them supposedly being independent. 

Further injustice: how 'free' is free trade?

This seems like a ridiculous question but, unfortunately, as developing countries are pressured into completely liberalising their markets the same is not being done to wealthier and more powerful nations.

In the EU free trade occurs internally. Externally, however, traders are faced with high import tariffs. Most of the processing and packaging of cocoa is completed in Europe as a result of the occurrence of tariff escalation. EU tariff imports are much higher for processed cocoa than for raw cocoa beans and as a result Ghana is forced to export the raw beans and lose out on the value added by processing them, meaning that workers have little opportunity to earn higher incomes. Through this process strong economies are able to maintain poorer countries in a state of under development and prevent large scale industrialisation. Instead high income countries purchase cheap commodities from the developing world and add value to them before exporting them back as high value, manufactured goods. Developing nations can become stuck in the primary sector, a constraint on development. This is known as the resource curse and is considered to be a curse because resources are exhaustible and currently depletion rates are unsustainable.

This supports A.G Frank's Dependency Theory which splits the world into an economically developed core and and underdeveloped periphery. The theory states that developed countries keep developing countries in a state of under development by exploiting its raw materials and selling it costly manufactured goods, technology and credit. Developing countries are exporting low value goods and importing high value goods. This results in a poor terms of trade. As the periphery remains underdeveloped, its most skilled workers move to the developed core creating a brain drain, further exacerbating the problem. 

The role of the World Trade Organisation (WTO)

The purpose of the WTO is to promote global free trade. Despite pressurising developing nations into completely liberalising trade, the WTO has not been successful in removing the EU Common Agricultural Policy (CAP) which discriminates against farmers in developing countries by undermining their natural price advantage and flooding their economies with heavily subsided imports. Critics of the WTO describe it as an organisation that favours the wealthy nations that were responsible for its creation by pressuring poorer nations into unfair trade agreements. 


Referring back to the example of Ghana, in 1995 Ghana joined the WTO in an attempt to increase its global trade. Instead the nation was faced with the joining condition that farms in Ghana should no longer be subsidised by the government (which until then had occurred to encourage farmers to continue supplying food for the country's growing cities). As a result, local farmers lost out to cheaper competition from EU imported goods that had been subsidised in their country of production. 


It cannot be denied that free trade between nations generates wealth, but is the benefit really being felt in the worlds poorer nations or is the liberalisation of markets in fact acting as a constraint to development?