"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 by these countries does not appear to share in this dynamism", concludes UNCTAD´s Trade and Development Report 2002, released today (1). Policy makers at both the domestic and international levels must face up to this challenge if the multilateral trading system is to become more development-friendly.
Rebalancing the trading system
Since the early 1980s, not only have merchandise exports from developing countries (growing at 11.3% a year) outpaced the world average (8.4%), but there has also been a significant shift away from primary commodities to manufactures, which now account for over 80% of non-fuel exports (table 1). And the biggest jump appears to have been into high-tech goods (where nearly a third of world exports come from developing countries), which include some of the most productivity-dynamic products.
So why the concern? In part, taking trade statistics at face value can hide more than it reveals; an increasing number of products, including high-tech exports, are assembled from parts and components produced in different locations. With the notable exception of some Asian newly industrializing economies (NIEs), the goods traded by developing countries remain dependent on the exploitation of natural resources and the use of unskilled labour, the Report finds. And the markets for these goods are becoming crowded, threatening exporters with terms-of-trade losses and retarded productivity growth, which could disrupt development prospects.
The Report concludes that the basic policy issue is not more or less liberalization, but "how best to channel the elemental forces of trade and industry to wealth creation and the satisfaction of human wants". Development issues were, of course, central to the negotiations in Doha. The Report offers a preliminary assessment, repeating earlier calls for comprehensive market access in areas of interest to developing countries. But moving forward also means adapting negotiations to the new realities of the trading system. This, the Report argues, means improving policy coherence between trade, finance and development issues as well as widening the policy space available to developing countries for managing integration into that system.
Trading more, earning less
Of the 225 products examined in the Report, markets have been growing fastest for technology- and skill-intensive products, which also exhibited rapid productivity growth (table 2). Primary commodities, but also some manufactures, have registered sluggish or negative growth. Developing countries have entered the markets for some dynamic products; between 1980 and 1998 the share of all electronic and electrical products in developing country exports rose fourfold, from 5.3% to 22%.
But the idea that greater participation by developing countries in the world economy through trade will automatically bring equally large income gains needs to be qualified. Figures for the period 1981-1996 show some worrying trends between North and South (chart 1):
- Manufacturing value added has consistently exceeded the value of manufacturing trade in developed countries, but the opposite is true for developing countries;
- The ratio of manufacturing value added to manufactured exports fell in the developed countries from 225% to 180%, but the drop was sharper in developing countries - from 75% to 55%;
- Manufacturing imports have outpaced exports in developing countries but not in developed countries; and
- The ratios of manufactured value added and exports to GDP remained broadly unchanged in the developed countries, while the export ratio rose steeply in developing countries, but without a similar upward trend in the value added ratio.
The pattern is particularly pronounced for some "super-traders", such as Hong Kong, China, and more recently, Mexico (chart 2).
Making sense of a system in which many developing countries are vigorously expanding their share in world trade but are not rewarded by a comparable rise in income shares requires some fresh thinking (table 3).
Biases in trade liberalization offer a partial explanation of why exports of some goods have been growing faster than others; high tariffs and tariff escalation in northern markets, along with non-tariff barriers, have reinforced prevailing patterns of market access. But according to the Report, other modalities of participation in the evolving international division of labour are perhaps even more important.
The three product groups where developing countries have been very active traders in recent years - computers and office equipment; telecommunications, audio and video equipment and semiconductors; and clothing - all involve labour-intensive processes in the global production networks of transnational corporations (TNCs). These networks, the Report finds, have encouraged a new pattern of trade where goods travel across several locations before reaching final consumers, and the total value of recorded trade far exceeds the value added; as much as 30% of world exports occur through these channels. However, the high-tech tag on developing country exports in these networks is misleading; cost conditions in low-skilled assembly-type activities determine participation.
Just how much can developing countries expect from participating in these networks? Certainly, there can be advantages from taking any slice of the value chain. But their share in value added is determined by the cost of the least scarce resource and weakest factor, unskilled labour; and with control over strategic productive assets even tighter under these arrangements, gains can be highly skewed in favour of the TNC. The Report notes that even where there have been successes, as is the case in Malaysia and China, an important part of the value dded has accrued to foreign firms as profits. At first glance, a surprising finding in the Report is that fewer dynamic goods appear in the 20 leading exports of the first-tier Asian NIEs (Hong Kong, China; Republic of Korea; Singapore; and Taiwan Province of China) than in some second-tier industrializers. In fact, however, the dynamic exports of most second-tier NIEs are derived from low-level assembly activities.
Worrying signs of the trading times
What a country earns from its participation in the trading system will depend on the global supply and demand for the goods it exports and imports. When many exporters crowd into markets, prices can fall sharply; and where imports are high, falling export prices and terms of trade can entail resource losses even if increasing volumes more than compensate for the lower prices.
As a result of increased participation of several highly populated low-income countries, the share of low-skilled workers in the total labour force participating in world trade has been rising (and currently includes seven of every 10 workers), and there are still large untapped labour reserves waiting to enter (chart 3).
In most cases that labour would be entering markets which have become steadily more competitive; the Report documents this trend in such areas as clothing and electronics products, where developing countries have been building export capacity in recent years. And the pressures are further compounded by flexible wages in developing countries, which allow firms to compete on the basis of price without hurting profits.
The "fallacy of composition" is a familiar parable for economists and it is one that needs to be taken seriously: the combination of crowded markets for labour-intensive goods, weak growth, high unemployment and protectionist inclinations in the advanced industrial countries, and difficulties for middle-income countries in upgrading and diversifying their export structure, can mean that what might be good for an individual exporter might not be good for all exporters. This trend is reinforced with more and more developing countries offering increasing fiscal and trade-related concessions in order to compensate for shifts in competitiveness.
The dangers of overproducing standardized mass products with a high import content are typified by the electronics sector, in which export prices for developing countries have been subject to higher volatility and steeper falls since 1995 than those experienced by developed country producers. But the Report also provides evidence of a more general terms-of-trade movement against southern manufactures.
With a growing number of developing countries, including some with large unskilled labour reserves, turning to export-oriented strategies, the Report finds that middle-income Latin America and Asian economies are among the most vulnerable to these trends in the trading system.
The Report suggests three key areas where measures are needed to help developing countries get more from the trading system:
- Faster growth in more advanced economies will be needed in support of improved access to their markets for labour-intensive manufactures;
- Improved access to finance and technology will be required in middle-income developing countries, both to improve their own growth prospects and to help free up markets for lesser developed country entrants; and
- There will be greater reliance on domestic and regional sources of growth, particularly in larger developing countries whose outward orientation should decline as their home market matures.