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TRADE AND ECONOMIC DEVELOPMENT

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TRADE AND ECONOMIC DEVELOPMENT Powered By Docstoc
					TRADE AND ECONOMIC DEVELOPMENT
Brief: Economic development will be defined. The role of trade in efficient allocation of resources will be presented with special reference to the international division of labor. Concepts of export-led growth versus demand-led growth strategies with their diverse implications will be discussed. Global commodity chain framework will also be presented. Reading Material:
Akyüz, Y. (2003) Developing Countries and World Trade: Performance and Prospects, UNCTAD: Geneva. pp. 1-32 Gereffi, G. (1999) “A Commodity Chains Framework for Analyzing Global Industries”, http://www.sjsu.edu/upload/course/course_775/gereffix1x.pdf Kokko, A. (2002) “Export-led Growth in East Asia: Lessons for Europe’s Transition Economies” European Institute of Japanese Studies Working Paper Series, No:142.

Economic growth constitutes the central focus of economic development. Growth is universally expressed as the increase in the total product of a country aggregately measured in the market prices of goods and services, and corrected for the changes in the price level for the concerned period. This very roughly defines the increase in the productive capacity of the country, the fluctuations the capacity utilization as well as possibility of unemployed resources being assumed away. Modern economic system is totally dependant on growth. Growth is not simply a positive and desired outcome of the operations of the economy but it is also the necessary condition for the system to sustain its basic course of operation. Growth of an economy is principally constrained by the productive capabilities of its productive resources. The factors of production, usually summarized in the categories of labor, capital and nature in economic theory constitute the productive resources of the country. The levels of productivity these factors possess is not certainly static. The productivity of the labor force, or the productivity of the capital equipment can be enhanced in many different ways. One most apparent and basic way to do so is to develop capacity to labor for specific areas or design capital equipment and tools that are most appropriate for specific industries. Namely the increased division of labor will eventually result in increased productivity. Besides, enhancing specialization in the factors of production, given that certain industries and certain sectors are more adequate for the employment of principally one factor to others, specialization may take the form of enjoying the advantages of having one specific factor abundant and inclining more to the development of those sectors that would largely employ these factors. This constitutes the basis of international division of labor. It has long been argued that countries, by specializing in the industries that specifically employ the most abundant factor of production that is available to them would altogether benefit from the increased productivity due to division of labor. But the precondition for that is the existence of extensive trade between these countries. Otherwise, Each country will end up with a specific product in their hands in quantities that is way over their own need on the one hand and others in extreme scarcity.

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In this line of thought, trade is thought to facilitate the fruitful possibilities of specialization, that will in turn enhance the productivity. In other words, the total resources will be allocated efficiently among nations. The productivity increase will be eventually translated into economic growth. On the other hand, by specializing in certain industries, prices of all goods will be lowered through trade, and this will cause the total welfare to rise significantly. This approach has been challenged since 1940s, by the actual experiences of the developing countries. The difficulties arising due to the static position of the less developed countries in the international division of labor, forced them to seek answers to their balance of payment problems. The basic problem was that the world prices of different set of commodities showed different systematic trends. On the one hand the prices of manufactured goods with the increasing world demand was escalating, on the other the prices of primary commodities stagnated. Hence the countries who have specialized in the production of the former were systematically gaining in the expense of the others who have specialized in the production of the latter. The agenda for the less developed countries in 1950s and 1960s was to “create new external conditions for accelerating the rate of growth” (Akyüz, 2003). These conditions included:  New positions in world trade that would guarantee price stabilization (against the unstable prices of less developed country exports – primary commodities).  Improved market access for primary exports.  Greater policy space for developing local industries and reduction of the barriers to their exports.  Reduction of the burden of debt services. The following period of protected internal demand-driven growth experiences throughout the developing world proved that the comparative advantage among economies due to factor abundancy principle is not static but dynamic. Namely, by appropriate external conditions and policy incentives, the position of a country in the world division of labor can be persistently altered. By the 1970s, however, these experiments showed mixed results, the reasoning of which is still a big debate. While a number of countries in South East Asia have managed to promote their economies into strong industrial bases and switch relatively smoothly to export-promotion, others suffered from inadequate industrial structures that are still weak in world competition and dependant on extensive market protection. The eventual debt crisis, which is due to the deficiency in the capacity of the developing countries to service their debts in the wake of interest rate surges, opened a new bitter scene in the world economy. Today, although there has been many developments in the world market, the agenda for the less developed countries is more or less same as it was in 1950s. The general developments can be summarized as follows (Akyüz, 2003):  From the 1980s onwards the exports of developing countries have grown faster than the world average and at the beginning of 21st century account for almost one third of world merchandise trade.  Much of the growth has been in manufactures. However, growth in trade in several primary commodities has been as rapid as in some manufactures, and

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countries which successfully entered such sectors have experienced a significant expansion in their exports and incomes. Many developing countries appear to have succeeded in moving into technologyintensive manufactured exports (electronic and electrical goods) However, with the exception of few East Asian first-tier economies, developing country exports are still concentrated on products derived essentially from the exploitation of natural resources and the use of unskilled labor. “[The] considerable expansion of technology-intensive, supply-dynamic, highvalue-added exports from the developing countries is misleading… In reality, those countries often involved in the low-skilled assembly stages of international production chains organized by transnational corporations. Most of the technology and skills are embodied in imported parts and components, and much of the value added accrues to producers in more advanced countries…” (Akyüz, 2003: XIII). “…[W]hile the share of developing countries in world manufacturing exports, including those of rapidly growing high-tech products, expanding rapidly”, their share in the manufacturing value added does not seem to share the same dynamism and most of the time stagnates.

As can be observed from the above discussion what you export is very important. Impact of trade on the economic growth is largely dependant on the specific specialization of the country in means of international division of labor. Moreover, trade has also new implications in means of being organized within what is called „the global production networks‟. Before introducing the concept of global production network, it is wise to present the dynamic products in world trade: According to the World Trade and Development Report 2002 defines the market dynamism of the products as the high average annual export value growth. Given that between 1980 and 1998, the total value of world exports (except fuel) grew at a rate of 8.4 percent annually. The products whose export value grew from 11.5 % to 16.3 (almost double the average) are classified as the most dynamic products among a total of 225 products. The top products are transistors and semi conductors, computers, parts of computers and office machines, optical instruments. These are obviously high-tech products. The total list is given in table 1 (table 3.1 in TD Report 2002, p.55). It is also argued that the most of these dynamic products fall into three specific product groups: - Electronic and electrical goods - Textiles and labor-intensive products, particularly clothing - Finished products from industries that require high R&D expenditures and are characterized by high technological complexity and/or economies of scale - Primary commodities including silk, non-alcoholic beverages and cereals When it comes to the most-dynamic agricultural products the list is given in table 2 (table 3.3 in TD Report 2002, p.61). The reasons behind why some commodities are more dynamic in world trade than others are various and can be summarized as follows: 1. World income and composition of demand. The growing world income is the basic source behind increasing trade. Higher income signifies higher demand in world markets. This phenomenon is summarized in the concept of income

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elasticity of demand, which measures the sensitivity of quantity of goods demanded to a change in income level. Income elasticity differs from commodity to commodity and it also changes for an individual commodity during the course of economic growth. While at the first stages of economic development income elasticity for resource-based primary commodities is high, it gradually decreases as the income grows. However, still certain primary commodities do better than others. 2. Market access. Application of several Non-Tariff Measures (tariff Rate Quotas, Anti-dumping measures, Voluntary Export Restraints) arbitrarily applied, specially by developed countries, during the course of long WTO negotiations since 1994 Uruguay Round create incentives for developing countries to switch from certain exports to others. 3. Global production networks. The transnational companies by outsourcing certain stages of production and marketing, impose the production of certain set of export commodities. On general, “product groups with the fastest and most stable growth rate… [since 1980s]… are also the ones most effected by the globalization of production processes through international production sharing” (Akyüz, 2003). Global production network, or with a different terminology, the global commodity chain “… refers to the whole range of activities involved in the design, production, and marketing of a product” (Gereffi, 1999). All these are organized in scattered and differentiated stages in geographically different parts of the world. It is argued that there are two kinds of such chains according to the leading actor in creation and supervision of the chains (Gereffi, 1999): 1. Producer-driven commodity chains: “Producer-driven commodity chains are those in which large, usually transnational, manufacturers play the central roles in coordinating production networks (including their backward and forward linkages). This is characteristic of capital- and technology-intensive industries such as automobiles, aircraft, computers, semiconductors, and heavy machinery” (ibid.). 2. Buyer-driven commodity chains: “Buyer-driven commodity chains refer to those industries in which large retailers, marketers, and branded manufacturers play the pivotal roles in setting up decentralized production networks in a variety of exporting countries, typically located in the third world. This pattern of trade-led industrialization has become common in labor-intensive, consumer goods industries such as garments, footwear, toys, housewares, consumer electronics, and a variety of handicrafts. Production is generally carried out by tiered networks of third world contractors that make finished goods for foreign buyers. The specifications are supplied by the large retailers or marketers that order the goods” (ibid.). The foreign direct investment in the context of global production networks will be discussed in the session on trade and FDI. One last point in the linkage between trade and economic development is the role of state in export promotion. The most successful countries that have implemented

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export-led growth strategies as argued above are the East Asian countries. Although they have historical and geographical peculiarities, their common experience shows the necessity of active state policy during the course of export-led growth strategy. “Some general guidelines for what is required in this process are provided by the long term growth experiences of the richer EU countries. These include a central role for the private sector, free markets and prices for the efficient allocation of resources, appropriate incentives for entrepreneurship, and participation in the international economy, but also an important role for the public sector. Sustainable development requires a strong state to maintain competition and protect property rights, and to provide infrastructure, education, and social services in those cases where the market outcomes are not satisfactory” (Kokko, 2002). It is argued that export promotion does not mean simply to provide market orientation and firmly establish free market principles, but it also includes a clearcut industrial policy accommodating the opening up of the domestic markets. Industrial policy includes competition policy as well as industrial rationalization. The common elements of the Asian experience can be roughly summarized as follows:  “Governments invested heavily in infrastructure. At the early stages of development, efforts focused on transportation networks – roads, railroads, port facilities – while investments in electricity and telecommunications were more important at later stages of the process. Investment in education was particularly important, and countries where human capital accumulation was slow have become trapped into low wage and low value added sectors”.  Exporters were given access to inputs and capital goods at world market prices.  Exporters were given preferential access to capital and foreign exchange. In many cases, credit was also provided at lower interest rates.  Various kinds of fiscal incentives, ranging from tax holidays to accelerated depreciation allowances, were used to encourage investment in new export areas. These measures are likely to be most important at the early stages of export development programs.  Governments played an active role in developing new markets by establishing institutions specialized in marketing and research, and by disseminating information about foreign markets.  Governments were concerned about enhancing the reputation of the country‟s exports, and established regulations and licensing procedures to guarantee high quality.

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