Two development channels

1. Trade and investment are two of the main channels through which developed and developing countries interact.
2. Both can raise incomes and build productive capacity in poorer economies.
3. Both can also create dependency, so their effects need to be weighed carefully.

Trade as a route to development

1. Trade lets a developing country specialise according to its comparative advantage and sell to much larger world markets.
2. Exports earn the foreign exchange needed to import capital goods and technology, which raises future productivity.
3. Access to bigger markets lets firms exploit economies of scale, and exposure to competition can raise efficiency.
4. Export-led growth has helped several economies raise incomes rapidly.

Barriers and risks in trade

1. Many developing economies depend on a narrow range of primary commodities, such as Zambia's reliance on copper or Ghana's on cocoa.
2. Primary product prices are volatile, because inelastic demand and supply mean small shifts cause large price swings, making export earnings unstable.
3. The terms of trade for many primary exporters have tended to decline over time, so a given volume of exports buys fewer imported manufactures each year.
4. Developed countries' protectionism, such as tariffs and farm subsidies, can shut developing-country exports out of rich markets.
5. Reliance on a few exports leaves an economy vulnerable, so diversification into manufacturing and services is often needed.

Investment flows between countries

1. Developing economies often have a savings gap, too little domestic saving to fund the investment they need.
2. Foreign investment can add to domestic savings and fund capital projects that raise productive capacity.
3. Foreign direct investment (FDI) brings capital, technology and management skills through a lasting stake in local production, for example Toyota building a plant abroad.
4. Portfolio investment provides finance but can flow out quickly and destabilise the economy.
5. Much cross-border investment is carried out by multinational companies such as Apple or Unilever, which can create jobs and transfer technology.

Weighing trade and investment

1. Trade and investment can raise incomes, employment and productive capacity.
2. But the gains can be uneven, and reliance on foreign capital or a few exports creates dependency.
3. Volatile capital flows and the repatriation of profits to foreign owners can offset the benefits.
4. On balance, trade and investment can drive development, but the outcome depends on diversification, the terms of trade and the strength of domestic institutions.