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 only 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 increased 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, some
new research (discussed in the latest Trade and Development Report 2002
(TDR) produced by UNCTAD) suggests that product diversification in itself
ensures neither more dynamic exports nor even higher incomes from such
activities. The report 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
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; 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 each other 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 which
are hosting them.
But there are other factors, 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 and export volumes
increased much more than the value of exports in all countries in the
region except the People's Republic of China and the Philippines which
showed very high rates of exports.
The electronic sector typifies the problem of overproducing standardised
mass products with high import content, which have experienced both higher
volatility and steeper falls since 1995. Since more and more developing
countries are turning to this strategy, and basing their hopes on relocative
FDI to achieve it, those already within the loop become vulnerable as
well. Thus the pattern of high export volume growth and 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
MNCs. When this is combined with other currently prevailing conditions,
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 preparation, 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 be simply 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.