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1
Emerging South: Drivers of the Global Economic Recovery
Project LINK Fall MeetingUnited Nations Conference Centre, ESCAP
Bangkok , Thailand26-28 October 2009
Sudip Ranjan Basu*UNCTAD
and The Graduate Institute, Geneva
*The views expressed in this presentation are those of the author and do not necessarily reflect the views of the UNCTAD Secretariat or its members.
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Emerging South Trade Expansion
Climbing-up Technology Ladder
Determinants of Transformation of Quality of ExportsTrade Policy Challenges
Conclusions
Outline
Don’t expect to reverse basic trends!!• « Ever since the year 1000 A.D., export-led growth has
been the rule whenever an educatable low-wage population has begun to imitate the technology of a more advanced nations, and thus outcompete the industries of the affulent regions. So it was and so it will always be. Whenever a low-wage, educatable population can imitate the technology of a more advanced nations, it will do so. That’s why protectionsim is like a persistent virus, and must be guarded against »
– P.A.Samuelson: ‘Heed the hopeful science’, International Herald Tribune, October 24-25, 2009
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*Merchandise trade for this study!
Emerging South trade* expansion:A big picture view
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• Developing economies’ merchandise exports grew from 1.4 trillion USD in 1995 to 6.2 trillion USD in 2008– Of which, Emerging South is 3.78 trillion USD in 2008– Other South is 2.42 trillion USD in 2008– The transformation of developing countries exports structure has
been diverse leading to a differential level of impact on their national economic growth and development.
• Two key issues:– The proponents of open-global economy and free trade argue that
product diversification help accelerate economic growth and development in countries which favored these set of policies.
– On the other hand, another set of economists argue that a cautious approach in conjunction with good and strategic domestic economic policies can better help countries to obtain fruits of export diversification leading to rising skill/technology content of products help countries to transform their domestic production structure.
Risining Trade and Growth Nexus
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$ billions Percent
Global interdependence
Source: UNCTAD, Project LINK, Bloomberg
Recovery
Crisis begins
Exploring Global Fall and Rise
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$ billionsPercent
Source: UNCTAD, Project LINK, Bloomberg
Recovery
South-South exports: South to North ratio
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South to North ratio(right axis)
Source: UNCTAD
$ billions Percent
LINK factors….
Emerging South grows (Emerging and other developing countries exports to North and South)
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Source: UNCTAD
$ billions
Trade integration….
To North
To South
To South
To North
Emerging South is relative more dependent on North
Emerging South exports: Ratio to North(Developing countries)
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Emerging South to North ratio(right axis)
Source: UNCTAD
$ billionsPercent
Other South to North ratio(right axis)
Transition economies exports: Transition economies to North ratio
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Source: UNCTAD
$ billions Percent
Increasing market share of Emerging South(Developing and Transition economies exports to World)
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Highlights
Source: UNCTAD
Percent
But Regional differences remain high in South(Developing and Transition economies exports to World )
13Source: UNCTAD
Percent Regional exports to WorldRegional exports to World RegionalRegional exports to Southexports to South
Regional reality
Regional exports: Africa, Americas and Asia(Emerging South countries )
14Source: UNCTAD
$ billions PercentEmerging South to RoW ratio (right axis)
LDCs, SVEs, LLDCs and SIDS exports: (Developing countries)
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Note: LDCs: Least developed countries, SVEs: Small and vulnerable economies, LLDCs: Landlocked developing
countries, SIDS: Small island developing countries. Source: UNCTAD
$ billions PercentRegions to RoW ratio (right axis)
Low income and vulnerable economies
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Climbing-up Technology Ladder: Nature of Emerging South Exports
Structural transformation in South exports(Share of countries exports to World)
17Source: UNCTAD
Manufacturing products: Technology and skill Content
Structural transformation in Emerging South(Share of exports to South)
18Source: UNCTAD
A: Primary commodities, B: Labour intensive and resource based manufactures
C: Manufactures with low skill and technology intensity, D: Manufactures with medium skill and technology intensity, E: Manufactures with high skill and technology intensity
F: Energy products, G: Unclassified
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Structural transformation in Other South (Share of exports to South)
A: Primary commodities, B: Labour intensive and resource based manufactures
C: Manufactures with low skill and technology intensity, D: Manufactures with medium skill and technology intensity, E: Manufactures with high skill and technology intensity
F: Energy products, G: Unclassified
Source: UNCTAD
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Primary commodities(% share of share of national exports, developing and transition)
Change: 1995-2007
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Primary commodities: Emerging South(% share of share of national exports)
Change: 1995-2007
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Labour intensive and resource based manufactures (% share of share of national exports, developing and transition)
Change: 1995-2007
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Labour intensive and resource based manufactures: Emerging South (% share of share of national exports)
Change: 1995-2007
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Manufactures with low skill and technology intensity (% share of share of national exports, developing and transition)
Change: 1995-2007
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Manufactures with low skill and technology intensity: Emerging South (% share of share of national exports)
Change: 1995-2007
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Manufactures with medium skill and technology intensity (% share of share of national exports, developing and transition)
Change: 1995-2007
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Manufactures with medium skill and technology intensity: Emerging South (% share of share of national exports)
Change: 1995-2007
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Manufactures with high skill and technology intensity (% share of share of national exports, developing and transition)
Change: 1995-2007
29
Manufactures with high skill and technology intensity: Emerging South (% share of share of national exports)
Change: 1995-2007
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Energy products(% share of share of national exports, developing and transition)
Change: 1995-2007
31
Energy products: Emerging South(% share of share of national exports)
Change: 1995-2007
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China story(% share of share of national exports)
Per cent
33
India story(% share of share of national exports)
Per cent
34
Determinants of Transformation of Quality of Exports: Is it key to recovery?
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Determinants of trade expansion and development (Trade and Development Index)
Index
Identifying constraints
Source: Developing Countries in International Trade 2007: Trade and Development Index.United Nations, UNCTAD, Geneva and New York, 2007
• Prebisch-Singer (1950) hypothesis indicate that (trade) concentration is linked to deteriorating terms of trade, income volatility, shrinking production structure that lead to low-level equilibrium trap.
• Trade (export) diversification and skill/technology content in production process is key for developing countries to overcome domestic economic and structural bottlenecks, especially in Africa
• Welfare impacts: economic growth and employment creations• Sectoral implications: Depending on the institutional linkages and
stages of development, welfare implications tend to be higher inhigh skilled/technology content industries, and new issues related to intensive and extensive margin
• Domestic economic linkages: Forward and backward linkages with domestic firms leading to a productive capacity and expand structure
Classical arguments
• 1940s-1980s:– Harschman (1945), United Nations (1950), Michaely (1958), Massell (1964)
• 1990s-2000:– Grossman and Helpman (1991), Sachs and Warner (1995), Lall (2000)
• 2001 onwards: – Wood and Mayer (2001), – Lederman and Maloney (2003), Imbs and Wacziarg (2003), Hausman
and Rodrik (2003), Collier (2003)– Sachs et al. (2004)– Hausman, Hwang and Rodrik (2005), Melitz and Ottaviano(2005),
Rodrik (2006) – UN Africa (2007) – Cadot, et al (2008) – World Bank (2009) – UNCTAD (2002, 2008 & 2009)
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Some storiesTrade as engine of growth
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• Three key issues: – New database and measures– Exploring importance of institutions along with
economic polices, infrastructure, and geography as determinants of factor intensity differences in developing countries
– These results are robust to different specifications, estimation methods, and additional control variables
– Cross section model– Panel model– 176 countries, whole sample– Period of analysis 1995-2007
Identification Some empirics
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• 176 countries , whole sample – Emerging South: 26, Other South: 99, Transition: 17, North: 34
• Time periods:– 1995 to 2007– Four time periods: 1995-1997, 1998-2000, 2001-2003, and 2004-2007
• Trade database– UNCTAD South-South Trade Information System (SSTIS)– Product Classification at HS-4 digit level
• Institutional Quality, Foreign Market Access, Economic Policy and Geography
• Factor intensity categories: – UNCTAD SSTIS database, HS-4 digit level
• Other data (Economic policy, Infrastructure, Geography etc): – UNCTAD, World Bank, IMF, WTO, HF/Cato, CIRI, and other sources
Exploration Database and measures
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• Harmonised System of trade classification, HS-4 digit level, based on UNCTAD SSTIS
• Factor intensity categories: A to G.
A:Primary commoditiesB:Labour intensive and resource based manufacturesC:Manufactures with low skill and technology intensityD:Manufactures with medium skill and technology intensityE:Manufactures with high skill and technology intensityF:Energy productsG:Unclassified products
Factor intensity Measuring factor intensity
Property Rights, Rule of law, Corruption, Financial measures, investment measures , Business accesses, Trade institutions; Political Rights, Civil Liberties, Measures of, democracy andautocracy, Physical Integrity measures, parliamentary process and political participation; Measures of women’s empowerment, Labour rights, social rights and press freedom
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Measuring quality of institutions
MethodologyMultivariate Statistical Method of latent variable (LV) approach as proposed in
Nagar and Basu (2002), Basu, Klein and Nagar ( 2005)
-A composite weighted average measure of standardized indicators for each country for each period defined, without scaling the final index values
-IQI is a latent variable, and linearly determined by many exogenous variables say, X1, …, XK. -Variation in these variables explain variation in IQI. -Weights are obtained to compute weighted average of IQI
Measuring quality..
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Improving capacity
IRQIRNLBY
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CHN
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MLI
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4060
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ctor
Inte
nsity
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x
50 100 150 200 250Institutional quality index
Non-LDCs LDCsFitted values
High value technology if Factor Intensity Index improves
Exports of primary commodities and Institutions
IRQIRNLBY SYRCHN
UZB
TKMVNMCUBSAU
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4060
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Inte
nsity
Inde
x
50 100 150 200 250Institutional quality index
Non-LDCs LDCsFitted values
High value technology if Factor Intensity Index improves
Exports of labour intensive manufactures and Institutions
IRQIRNLBY
SYR
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Inte
nsity
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50 100 150 200 250Institutional quality index
Non-LDCs LDCsFitted values
High value technology if Factor Intensity Index improves
Exports of low skill/technology and Institutions
IRQIRNLBY SYR
CHN
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50 100 150 200 250Institutional quality index
Non-LDCs LDCsFitted values
High value technology if Factor Intensity Index improves
Exports of medium skill/technology and Institutions
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2040
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nsity
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50 100 150 200 250Institutional quality index
Non-LDCs LDCsFitted values
High value technology if Factor Intensity Index improves
Exports of high skill/technology and InstitutionsIRQ
IRN
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SYR
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Fact
or In
tens
ity In
dex
50 100 150 200 250Institutional quality index
Non-LDCs LDCsFitted values
High value technology if Factor Intensity Index improves
Exports of energy products and Institutions
Institutions and FI categories(Developing countries)
43
• Empirical Model Specification: – Core specification (OLS) in Cross-section analysis– Dep.var: Factor intensity category (A to G)– Indep.Vars: Institutions, economic policies and geography
• Further issues:• Reverse causality:
– Dealing with endogeneity, 2SLS-IV and GMM-IV specification, Choice of appropriate specifications
• Panel data:
– Fixed effects estimates, System GMM
Empirical MethodologySpecifications
iiiiGA GEOGEPOLIQIFI εαααα ++++=− 4321
Cross-sectionPolicy variables
Dependent variable: Factor intensity, national exports share (%), average 1995‐2007 Panel 1 FI_A FI_B FI_C FI_D FI_E FI_F IQI .1548015*** .0683927** -.013472 .0961492*** .0205857 -.3250067*** Geography -.2330471*** -.1260341** .0769746 .1362626*** .0610164* .0696848Human capital -.3754431*** -.1311935* .076027 -.0433331 -.0370929 .4724493*** Infrastructure -.1575253** .0570512 .0602902 .0772891* .0028482 -.0340994 Financial market -.1213637*** -.0708783** -.0458847 .1158475*** .1582788*** -.0428217
R‐squared 0.3909 0.1102 0.0476 0.5672 0.4195 0.2527F‐stat (p‐value) 0.0000 0.0924 0.0924 0.0000 0.0000 0.0000#Countries 132 132 132 132 132 132 Note : Robust SE, Constants are included, ** Sig 1%, ** Sig 5%, *Sig 10%
Cross-section (developing countries)Policy variables
Dependent variable: Factor intensity, national exports share (%), average 1995‐2007 Panel 1 FI_A FI_B FI_C FI_D FI_E FI_F IQI .1806135*** .0819537** .0192549 .0757046** .0303518 -.385443*** Geography -.1276033 -.121688 .1284948 .0743342 .0572822 -.0204501 Human capital -.380162*** -.132828* .0662657 -.0238329 -.031013 .4715819*** Infrastructure -.2079183** .0690251 .0449361 .081749* -.0054168 .0118154Financial market -.098978 -.0756016 .0033213 .0880937** .2055736*** -.1290816
R‐squared 0.3280 0.0964 0.0489 0.2542 0.3469 0.2526F‐stat (p‐value) 0.0000 0.1847 0.2518 0.0000 0.0000 0.0000#Countries 107 107 107 107 107 107 Note : Robust SE, Constants are included, ** Sig 1%, ** Sig 5%, *Sig 10%
46
Trade Policy Challenges
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Market access* and exports: (Developing countries and transition economies)
Threat of “protectionism”
Index value Log(exports)
Exports
*Higher market access implies lower index value
Source: Basu (2009), UNCTAD
48
Market access* and exports: (Emerging South and Other South)
Increase Market Access
Index value Log(exports)
*Higher market access implies lower index value
Source: Basu (2009), UNCTAD
• Trade Multilaterism: – To concluded DOHA ROUND before the end of 2010 as a credible multilateral
policy response to the crisis.– Importance of proactive government policy action to maximize the contribution of
coordinated policy action– Strengthening countries’ resilience to exogenous shocks, in particular through
effective safeguard mechanisms, e.g., agriculture– To retain necessary policy space for developing countries, including their capacity
to confront external shocks.
• Low-intensive protectionism:– Stimulus package may have negative spill-over effects and distort competitive
conditions and decisions about the location of investment and production– small and vulnerable economies should be supported by abolishing all tariff
protection in their main markets– Use of legitimate trade defence instruments like tariffs as well as non-tariff
measures such as safeguards, anti-dumping and countervailing measures may rise– Use of subsidies as a part of national economic stimulus packages may in turn
generate a chain of countervailing measures and increased protection 49
50
Conclusions• Emerging South is taking lead, Asia is the front runner • Emerging South exports factor-intensity content is
changing, with more rising share is coming from medium to high-skilled and technology content products in goods trade.
• Preliminary empirical results identify the positive role of institutional quality and key economic policy measures to improve productive capacities of developing countries and help them to climb up, determine the transformation and quality of exports.
• Targeted stimulus package in sectors of importance can hold key to overcome this ongoing setback and move towards the path of recovery to exports growth and dynamism, but protectionist implications should be underscored and revisited
Summary
