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International Monetary Fund

, 2007 7. Contribution to Changes in LICs’ Growth Rates 8. Changes in Global Variables–Contributions of BRICs Text Figures 1. LIC Trade with BRICs,1990–2009 2. LIC Trade by Partner,1981–2009 3. Decomposition of LIC Export Growth, 2000–08 4. LICs’ Trade Intensity Index 5. Composition of LICsExports to Trade Partners, 2008 6. Composition of LICs’ Imports from Trade Partners, 2008 7. BRICs: Annual Outward Foreign Direct Investment Flows, 1991–2009 8a. BRICs: Annual Development Financing Flows, 2005–2009 8b. Global Concessional Development

International Monetary Fund

BRICs and the strong economic complementarity between the two groups of countries have underpinned the rapid growth and high intensity of bilateral trade—many LICs in general have a strong comparative advantage in commodities while most BRICs are competitive producers of manufactured goods. BRIC demand for commodities resulted in a significant improvement in LICs’ terms of trade. There is potential to further increase LIC-BRIC trade by lowering tariff and nontariff barriers on both sides, reducing tariff escalation, extending preferential access for LIC exports, and

Yongzheng Yang

hence relative prices of labor-intensive products that LICs export. Such upgrading could also lead to increases in outbound FDI from these two countries, and possibly other countries, to LICs, boosting their productive capacity in the long run. This paper attempts to shed some light on these potential effects. The focus will be on the implications of global adjustment for LICs in the medium and longer term. It is organized as follows. The next section provides a brief overview of the current global imbalances and how LICs fit into this global picture. Section III

Yongzheng Yang
While global rebalancing will mainly involve structural realignment among major advanced and emerging market economies, it could have significant impact on low-income countries (LICs). Simulations using a global general equilibrium model show that a more balanced global economy would tend to improve the current account balance in LICs with limited impact on domestic output. However, there could be adverse terms of trade effects on some LICs as the prices of manufactured goods rise. On the other hand, such prices increases could provide an impetus to export diversification in many LICs, raising growth in the long run. The output and terms of trade effects would be significantly amplified if structural adjustment is impeded by factor immobility and other rigidities.
International Monetary Fund
The emergence of BRICs—Brazil, Russia, India, and China—is reshaping low-income countries’ (LICs) international economic relations. While industrial countries remain LICs’ dominant development partners, LIC-BRIC ties have increased so rapidly over the past decade that BRICs have become new growth drivers for LICs. Trade with BRICs is already close to half of the value of combined trade with the European Union and the United States, and larger than with other emerging market economies. BRIC FDI and development financing are making a significant impact in some key areas despite their relatively small volumes compared with those from advanced countries. Beyond the increased flows of goods and capital, BRICs have brought new dynamics in LICs’ economic relations with the rest of the world, complementing as well as competing with OECD partners. Nevertheless, while potential benefits from the LIC-BRIC ties are enormous, there are challenges and risks in realizing such benefits.