Growing exports, falling incomes

Published : May 01, 2002 00:00 IST

The latest Trade and Development Report from UNCTAD discusses why increasing manufacturing exports may not be good enough for developing countries' income growth.

DIVERSIFICATION of production structures and exports has traditionally been seen as the key to fast development. Indeed, this has been taken so much for granted that for much of the past half century the debate among economists has been not so much about the desirability of this goal, but of the policies required to achieve it. Marketist neoliberal economists have argued that the best way is through liberalisation, deregulation and greater integration of domestic markets with world markets, while structuralist economists have emphasised the need for domestic structural change assisted by trade restrictions that promote industrialisation.

In either case, the need to enter new forms of production, to diversify away from traditional exports, and ideally to enter high-value manufacturing production, has been taken for granted. But some new research (discussed in the latest Trade and Development Report (TDR) produced by the United Nations Conference on Trade and Development (UNCTAD)) suggests that even this may not be as unproblematic as it appears, and that product diversification in itself ensures neither more dynamic exports nor even higher incomes from such activities.

On the face of it, developing countries as a group have achieved an impressive degree of production diversification over the past two decades, and this has also been reflected in export performance. From the early 1980s, merchandise exports from developing countries have been growing much faster (at 11.3 per cent per annum) than the world average of 8.4 per cent.

More significantly, there has been a big shift in developing country exports away from primary commodities (whose share has fallen from 51 per cent in 1980 to 19 per cent in 1998) and towards manufactured goods, which now account for more than 80 per cent of their exports. What seems most promising is that the largest increase has been in the exports of manufactures with high skill and technology intensity, whose share jumped from 12 per cent of total developing country exports in 1980 to 31 per cent in 1998.

Despite all these apparently positive signs, however, there is no evidence of improved income shares for developing country exporters. In fact, the Trade and Development Report 2002 argues that "while the share of developing countries in world manufacturing exports, including those of rapidly growing high-tech products, has been expanding rapidly, the income earned from such activities does not appear to share in this dynamism".

This becomes apparent from a comparison of shares in exports and value-added in world manufacturing. While developing countries as a group more than doubled their share of world manufacturing exports from 10.6 per cent in 1980 to 26.5 per cent in 1998, their share of manufacturing value-added increased by less than half, from 16.6 per cent to 23.8 per cent. By contrast, developed countries experienced a substantial decline in the share of world manufacturing exports, from 82.3 per cent to 70.9 per cent. But at the same time their share of world manufacturing value-added actually increased, from 64.5 per cent to 73.3 per cent.

This means that developed countries moved up the value chain much faster, and that developing country exporters have continued to face problems in translating export volume growth into income growth. The problem is compounded by the fact that developing countries remain net importers of manufactured goods, indeed they have become more so. Imports of manufactured goods have continuously outpaced exports of such goods for developing countries, unlike developed countries. Meanwhile, manufacturing exports have consistently exceeded the value of manufacturing value-added, once again the opposite of developed countries.

HOW can we square this with the evidence on product diversification and entry into dynamic exporting sectors that was mentioned above? After all, developing countries have been increasingly active traders in what are seen as the most dynamic sectors of the world economy: computers and office equipment; telecommunications, audio and video equipment; and semiconductors.

But the point is that international production and trade in these sectors exhibit a relatively new pattern, whereby there is a "vertical disintegration of production" across locations. That is, different parts of a production process are dispersed across different geographical locations, and goods travel across several such locations over the entire process before reaching final consumers. This is also true of the other major dynamic export sector: textiles and clothing.

In such sectors, the total value of recorded trade far exceeds the value-added. But by and large most developing countries are confined to the labour-intensive processes in this overall production. This means it is misleading to look simply at the "high-tech" nature of the final product. Many of these processes involve essentially low-skilled assembly-type operations, in which developing-country locations compete with one another by virtue of their cheap labour rather than any other criterion. This also means that much of the value-added that does accrue in this process is garnered by the multinational corporations that are organising the production in this way, rather than by the economies that are hosting them.

But there are other factors, apart from this firm-based separation and geographical relocation of production, that may have played a role in reducing returns to developing-country exporters. The most important of these is the well-known fallacy of composition: the idea that what may be possible and attractive for an individual exporting country may turn out to have much-reduced or even opposite effects when many countries try to follow the same path.

This problem has been well established for a range of primary products for some time now, but recent evidence suggests that it is also becoming increasingly significant in world trade in manufactured goods. Thus, the slowdown in exports from the East/Southeast Asian region from 1996, which preceded the financial crisis, has been attributed to the same fallacy of composition (Ghosh and Chandrasekhar, Crisis as Conquest: Learning from East Asia, Orient Longman, 2001). As more and more countries in the region entered the world market for office equipment and semiconductor-related items, overproduction meant that prices crashed. Only the People's Republic of China and the Philippines showed very high rates of growth of exports in this category in that year. For all other countries in the region, exports in this sector stagnated or declined.

The electronics sector typifies the problem of overproducing standardised mass products with high import content, which have experienced both higher volatility and steeper falls since 1995. But the same is true of a range of manufactured goods exports from developing countries, which is why there is evidence of a general terms of trade movement against manufactures of the South.

Since more and more developing countries are turning to precisely this strategy and basing their hopes on relocative foreign directr investment (FDI) to achieve it, those already within the loop become vulnerable as well. Thus the pattern of high export volume growth and relatively slow or stagnant income growth has become marked even for middle income "super traders" such as Hong Kong and Mexico.

In addition, developing countries increasingly try to offer fiscal and trade-related concessions to would-be exporters, especially relocative multinational corporations. When this is combined with other conditions currently prevailing in the world economy, such as the increasingly crowded markets for labour-intensive goods, weak aggregate demand growth and protectionist tendencies in the advanced countries, it is not surprising that increased export volumes in these sectors have not translated into higher real revenues.

IRONICALLY, it turns out that some primary products actually performed better in world trade markets than many of these manufactured goods. The most "market-dynamic" agricultural commodities have outperformed most manufactured goods in terms of export volumes and values. These include silk, beverages, cereal preparations, preserved food, sugar preparations, manufactured tobacco, chocolate, fish and seafood. However, apart from silk (in which China has a 70 per cent market share), these other commodities are dominated by developed-country producers. Other primary commodities, which are major exports of most developing countries, have continued to languish.

The lesson from all this should not simply be to despair that nothing seems to work in terms of export focus for developing countries. Rather, this year's TDR serves as an important reminder that the current pattern of export orientation, based either on traditional primary production or relocative FDI-based exports relying on labour-intensive parts of wider manufacturing processes, may not deliver sustained benefits in terms of income growth.

The earlier, more successful, East Asian strategy was based on targeted trade and industrial policies rather than on market-determined processes. While such strategic trade policies may have become much more difficult in the current context, what this report suggests is that some alternative strategy must be found if developing countries are to negotiate their integration into the world economy in a way that actually furthers their development prospects.

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