Global Policy Forum

By Tom Salfield

Last month, UNCTAD released their annual Trade and Development Report. The report addressed the following question: why are developing countries trading more, yet earning less?

The report notes that over the past two decades we have observed a massive increase in openness to trade in developing countries. Indeed, trade volumes in developing countries have grown faster than the world average over the period since the early 1980s. Developing countries now account for a third of world merchandise trade, and much of the increase in trading volumes has been in manufactures.

However, the UNCTAD report notes that this massive increase in the volume of exports has not added significantly to developing countries income. And, while there has been a steeply rising ratio of manufactured exports to GDP, this has not been accompanied by a significant upward trend in the ratio of manufacturing value-added to GDP.

Some developing countries have managed to shift production into technology-intensive manufactured exports, notably electronic and electrical goods. However, with the exception of a few newly industrialised economies (NIEs) in East Asia, which were already closely integrated into the global trading system, developing country exports are still concentrated on products derived essentially from exploitation of natural resources and the use of unskilled labour. It is of considerable significance that none of the countries that have rapidly liberalised trade over the past two decades are in the group that have managed to shift production into technology-intensive products.

Moreover, though statistics suggest that exports of technology-intensive goods from developing countries (other than the NIEs) are growing, this may give an exaggerated impression of the trends in technology in developing countries and the geographical breakdown of value-added. It is often the case that trans-national corporations have imported semi-manufactures with technology already embodied. The value-added in the developing country may then be due to low skilled labour and consequently create relatively little income per capita. When the completed product is exported it is counted as a technology-intensive export, but very little technology has been employed in the country and consequently very little value-added.

Trends in developing country exports

Why then have developing countries not benefited from increased openness to trade, the same openness which has been encouraged by developed countries - and is in many cases a condition for assistance from multilateral institutions such as the World Bank and the IMF?

One reason is the trends in their export markets. Many countries have been unable to shift production out of primary commodities such as agriculture and natural resources. These markets have been stagnant and the general trend in prices has been downwards over the past two decades (with the exception of fuel).

Those who have shifted production from primary commodities to manufactures have done so by focussing on resource based, labour-intensive products, which generally lack dynamism in world markets and have a lower value-added. This reliance on exports of labour intensive manufactures to galvanise growth in the face of declining commodity prices has been a common policy amongst developing countries. This has led to simultaneous export drives, causing falling prices and intense competition for foreign direct investment, and hence a weakened bargaining position for developing countries. As a result, developing countries end up competing on the basis of wage levels. Meanwhile, there is still excess labour in these countries. More worryingly, these trends are occurring even while some of the larger countries, including China, are yet to be fully integrated into the trading system.

This tendency has been compounded by slow and insufficient trade liberalisation in developed country markets for clothing, textiles and other labour intensive manufactures.

The involvement in production of skill- and technology-intensive products which has occurred in a number of developing countries has been largely confined to the labour intensive, assembly-type processes that yield little value added. Some of these countries actually saw a fall in their share of world manufacturing income, while for others increases in manufacturing income lagged behind their recorded shares in world trade.

Foreign direct investment

Along with trade liberalisation, the last two decades have also witnessed substantial increases in flows of foreign direct investment (FDI). However, success in attracting large amounts of FDI has not necessarily resulted in greater growth. Mexico, for example, has experienced massive foreign direct investment over the last few years and a corresponding increase in exports. However, GDP per capita has not risen in response. In contrast, Taiwan has seen lower levels of FDI and has been selective and more focussed on building domestic investment. Here we have seen growth in exports and a corresponding growth in GDP over the past two decades.

Conclusion

The report concludes that the liberalisation of trade and foreign direct investment should no longer be the sole focus of development agencies. Instead, developing countries, and the development agencies that impose conditionalities on them, should ensure that trade policies are designed in such a way as to maximise domestic growth and development - which may not involve reducing external barriers. In addition, the process of designing export oriented policies in developing countries needs to take into account the probability of oversupply in the markets for labour-intensive manufacturing exports from other countries.

It is important to note that the findings of this report, in relation to trade and national income, run against the conventional wisdom of the Washington Consensus and it neo-liberal economic doctrines. For decades, the World Bank and IMF have be forcing countries to open up their economies to free trade as a condition for new loans and, more recently, debt relief. The rationale behind these conditions has been that countries will not develop in the long-term if they do not open to trade. Now, at a time when developed countries appear reluctant to open their own markets to free trade, this report suggests that the World Bank and the IMF have been basing their conditions of assistance on deeply flawed assumptions.

For more information on the work of UNCTAD, or a full text of the UNCTAD Trade and Development Report 2002', please see http://www.unctad.org

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