Trade policies and development of less-favoured areas: evidence from the literature

Abstract

The links between international markets and production and consumption decisions in less-favoured areas (LFAs) often appear rather loose. Hence, it may be questioned whether international trade and economic growth effects trickle down to LFAs. This paper explores the evidence in the literature in which direction and to what extent trade policy may effect the development of LFAs. The literature on modern trade and growth theory spell out conditions of sustained economic growth that are, nearly by definition, opposite to the conditions that hold for LFAs. Although the institutional economics literature is very much focused at the country level, it is clear that for LFAs with inadequate institutions and infrastructure, the effects of trade-led growth is often irrelevant. Further trade liberalisation will entail small or even detrimental effects for LFAs, with an exception for products suffering from tariff escalation and/or peak tariffs. The prevailing problem seems to be the lacking supply response to (international) price changes. The literature contains evidence that long-term growth strategies for less-favoured areas require the development of institutions and infrastructure.