Trade, aid and economic development - A comparative analysis between Georgia & Latvia

Inhalt

Introduction

1. International trade and economic development
1.1. Latvia’s trade profile
1.2. International trade in Georgia
1.3. Differences and analogies in terms of international trade

2. Aid and economic development
2.1. Aid and Latvia
2.2. Georgia’s aid profile
2.3. Similarities and diversities on the topic of foreign aid

Conclusion

References

Introduction

My paper focuses on international trade and foreign aid in relationship with economic development comparing two former Soviet Union states: Latvia and Georgia. Communism divided the economic world into two different camps, with countries characterized by centrally planned economies and others with a free market economic system. After the Soviet Union was dissolved in 1991, now capitalism equally separated the former Soviet nations. On one side countries adjacent to the high developed countries of Europe, like Latvia, were able to transform their economies very quickly, reaching high ratios of integration into the world economy. On the other side the members of the CIS (Commonwealth of Independent States), including Georgia, had more difficulties transforming its economies into free market economies. Those are now far behind in terms of international trade in both quality and quantity.

The paper consists of two parts. The first concentrates on the issues of international trade linked with economic development. The investigation of characteristics regarding trade relationships of Georgia and Latvia will be based on a comparative analysis of their balance of payment accounts and the most significant trade indicators on one hand and openness to trade with economic growth on the other to identify similarities and differences in their development performance.

The second part considers the role of foreign aid in relationship with economic development. Focused on ongoing foreign aid indicators the paper will identify diversities in terms of aid dependence, privatisation and institutional reforms in linkage with economic development in both countries.

1. International trade and economic development

More openness towards international trade is an important issue in the recent decades in linkage with improvements in economic development especially in terms of economic growth. Although a lot of scientists argue that trade liberalisation will augment growth and lead to higher income, others claim that more openness will increase income inequality and LCD’s dependence on developed nations. On one side the theory of Neoclassical Counterrevolution justifies economic development through freer markets, open economies and the privatization of public owned enterprises. Non- development is a cause of government failures in terms of wrong and too much interference of the economy. On the other side the dependence theories predict that the best course to gain economic development is to become dependent at little as possible with developed countries, and as an alternative building on strategies enhancing import-substituting production with a minimum of international trade (Todaro and Smith, 2006).

The project will initially analyze the Latvian issues in terms of international trade, than concentrate on Georgian data and finally report and interpret differences and or analogies among those countries.

1.1. Latvia’s trade profile

Latvia is one of the fastest growing economies in Europe. It joined the European Union in 2002 and the WTO in 1999 what left a constructive impact on its economic development. In 2004 Latvia had a population of 2,3 million producing a GDP (PPP adjusted) of US$ 27,740 million, that counts for a GDP per capita (PPP adjusted) of US$ 12,060 thousand. The GDP growth rate was 6.1% on average from 1997 till 2003 (WTO, 2005).

Considering this impressive economic growth it is significant to examine the changes in Latvia’s recent trade history. Its exports have grown annually between 10 - 17% from 2000 to 2003. Influenced by the appreciating common European currency, what had positive repercussions on Latvia’s exports, the export to EU have grown by even more than 20% in 2003. The leading export industries are the wood industry, metal processing and the machine building sectors.

Latvia’s imports expanded similarly. Its imports increased with annual growth rates over 20%, also mostly with its crucial trading partners, such as the EU and CIS (Commonwealth of Independent States). The major import industries are as well metal processing and the machine building sectors that underlines a significant growth of intra-industry trade (Latvian Investment and Development Agency, 2006).

Focusing on trade indicators, on one side Latvia’s total exports augmented from US$ 1,679 million in 1994 to US$ 5,098 million in 2004. On the other side its total imports increased from US$ 1,906 million in 1994 to US$ 6,470 in 2004. Agricultural products counted for 31.3% of all exports and 14% of all imports, fuels and mining products for 8.1% of exports and 13.6% of imports and manufactures for 57.6% of total economy’s exports and 69.8% of its imports. The resulting trade deficit in 1994 was US$ -227 million and US$ -1,372 in 2004. Its current account balance respectively US$ -86 million in 1994 and US$ -1,210 million in 2004. The ratio of Latvia’s exports to GDP (export dependence) was 46% in 1994 and 38% in 2004. Latvia’s external debt situation worsen significantly since 1994 (US$ 374 millions compared to US$ 10,728 in 2004). Consequently its Total Debt to GDP ratio enlarged from 8.1% in 1994 to 78.7% in 2004 (World Bank, 2006).

[...]