The Hindu : Export patterns

Online edition of India's National Newspaper
Saturday, May 11, 2002

Opinion

Opinion - Leader Page Articles

Export patterns

By C. Rammanohar Reddy

The developing countries should not attempt to engage with the global market by just offering cheap labour.

INDIA IS not the only country going through a rough patch in exports. Last year was bad for global trade as a whole. The World Trade Organisation has prepared a sombre report on developments in global trade in 2001 and, notwithstanding the signs of a recovery in the U.S. economy, it is less than optimistic about the prospects for 2002. World merchandise trade, in volume terms, fell by one per cent last year, and, in value terms, contracted by 4 per cent. This was the largest decline in nearly two decades. There was no respite either from trade in services such as tourism, travel, banking and telecom; all of which together witnessed a contraction by one per cent. If that was the past, the best projection the WTO seems to be able to offer to the economy this year is a `marginal' recovery from 2001. The developing countries as a group were hurt more than most in 2001. Their total merchandise exports contracted by 6 per cent and the non-oil exporting countries saw their global sales falling by 5 per cent.

There is, however, some good news too for the developing countries from the WTO. Over the long-term, from the late 1960s onwards, these countries have been gradually shaking off their traditional role of being mainly exporters of metals and agricultural (food and non-food) commodities — "primary commodities" — and becoming exporters of manufactured goods. In 1968, 103 out of 111 developing countries earned more than half their export income from primary commodities. (Even then India was an exporter of mainly manufactured goods. In 1968-70, 52 per cent of its exports were of this kind, a figure which now stands at 71 per cent.) In 1998, 76 of these 111 developing countries were still dependent on export of primary commodities. But while 80 per cent of total developing country exports in 1970 was of primary commodities, the figure had fallen to less than 30 per cent in 2000. Moreover, the 35 countries which, in 1998, were mainly exporters of manufactured products constituted more than three-fourths of the population in all developing countries. And even if India and China were excluded from this group, those more dependent on export of manufactured goods still accounted for more than one-half of the population in the developing world.

A reliance on export of primary products is considered unhealthy because the global demand for these products is volatile, supply (especially of agricultural commodities) fluctuates from year to year and, as incomes rise and technology changes in the main export markets the demand for these "natural-resource" commodities gradually begins to fall off. Traditional wisdom simultaneously holds that developing countries are better off focussing on manufactured products where demand grows and the opportunities for income generation (what is technically called `value-added' in the process of production) are substantial. But is that really so? The United Nations Conference on Trade and Development, in the 2002 edition of its flagship publication, the Trade and Development Report, questions this blind faith in export of manufactured goods and the more current emphasis on participation in global production networks.

The complex arguments put forward in the TDR can be distilled into essentially two. The first is that what matters more for a developing country is the kind of manufactured goods it focusses on for exports. Countries which have placed an emphasis on `dynamic' products which see a steady growth in consumer demand, are skill/technology intensive and whose production has witnessed productivity growth benefited the most in the past and are best equipped to deal with the future as well. Examples here are medium/high technology products in electronics, automotive and computer industries. This means that countries which engage with the global market by merely producing products which are labour and resource-intensive and that have only a transient demand may benefit for a while but will eventually be marginalised. The most obvious examples of such products are clothing and textile apparel.

The second argument offered by UNCTAD is that it is not enough to be part of a global production network (either as a base for multinational companies or as a sub-contractor) if the developing country's main function is to assemble imported components or engage in simple processing of imported-intensive products. These may even be high-technology products, but as long as the extent of value-addition is limited, the host economies are unlikely to acquire the technological capability to move to the next rung of sophistication. This is necessary because there will always be other economies waiting to offer a pool of low-wage, semi-skilled/skilled labour that can do the same job — at a lower cost. One critical factor then is how the export sector is linked to the larger domestic economy

The TDR classifies developing countries into four groups, depending on the kind of export strategy they have pursued. First, the developing countries which have not been able to move out of export of primary commodities. Although these have not been named these are presumably the least developed countries of sub-Saharan Africa. Second, those economies which have focussed on labour-intensive and natural resource-based products that do not possess the long run dynamism in world markets. India with its export basket loaded with agro-based products such as textiles and marine products would belong to this category, so too Bangladesh with its re-processing of imported clothing for export. Third, economies which have seen rising export of skill and technology-intensive products, but where the participation (other than a few exceptions) is restricted to assembly-type processes. Finally, there is the small number of economies — primarily the first tier newly industrialised economies exemplified by South Korea and Taiwan — which have seen their value-added in manufacture grow along with their trade intensity. These countries shifted to export-oriented production after considerable industrialisation.

A problem with such a categorisation of developing country export experience is that the biggest exporter — China — cannot be fitted into any group. It basic strength lies in labour-intensive exports, but its export industries are also present in some strength in skill and technology-intensive products. Moreover, China more than any other economy is an example of a country shifting to exports after considerable domestic industrialisation.

But the larger lesson is perhaps just that. The developing countries should not attempt to engage with the global market by just offering cheap labour. The situation could then end up with, as the TDR argues, the labour of developing countries competing with each other to sell themselves cheap to producers and consumers in the developed country market. To successfully engage with the world market over the long-term and at the same time generate considerable value-addition in manufacturing, the developing countries should instead follow a mix of strategies which include development of the domestic market, independent technological upgradation (rather than complete reliance on whatever little global firms make available to domestic subsidiaries), and export of dynamic products that are manufactured and not merely assembled with imported inputs.

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