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Economic Development - Can Sri Lanka trade its way back to prosperity?

Graham Watson

3rd February 2023

A nation close to my heart, where many friends still live; the fate of Sri Lanka will always affect me, and the latest Newsnight coverage of the island's financial crisis is salutary.

Despite agreeing, in principle, an IMF bailout, this is contingent upon restructuring billions of dollars of bilateral debt, with India and China, and even then, the economy has a myriad structural issues to tackle.

A trade imbalance, such that the trade deficit is currently running at 6% of GDP per year, and there's a pressing need to export more is the root cause of much of the misery, although there's also a seeming lack of coherent policy initiatives to tackle the issue. Factor in heavily protected domestic markets, in large part to protect vested interests, and there's probably a need to liberalise the economy is there's to be light at the end of the tunnel.

Please read: Can Sri Lanka trade its way back to prosperity?

Background: Explain why trade can be important for economic development in low-income countries

Trade can be important for economic development in low-income countries for several reasons:

  1. Access to new markets: Trade allows low-income countries to access new markets for their goods and services, which can increase demand and boost economic growth. For example, the EU might grant favoured access to the exports of low income countries.
  2. Increased competition: By opening up to trade, low-income countries are exposed to competition from other countries, which can drive innovation and improve the quality of goods and services.
  3. Diversification of economy: Trade can help low-income countries diversify their economies, reducing dependence on a few primary goods and enabling them to tap into new industries and sectors.
  4. Transfer of technology and knowledge: Through trade, low-income countries can access new technologies, best practices and management techniques that can improve productivity and competitiveness.
  5. Attraction of foreign investment: Trade can create opportunities for foreign investment in low-income countries, which can provide capital, technology, and skills that are crucial for economic growth.

Whilst not without risks, overall, trade has the potential to be a key driver of economic growth and development in low-income countries, helping to raise living standards and reduce poverty.

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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