Trends in Developing Countries’ Commodity Terms-of-Trade since 1970

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Trends in Developing Countries' Commodity Terms-of-Trade since 1970

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10.1177/0486613404264044ARTICLEReview of Radical Political Economics / Spring 2004Ram / Trends in Commodity Terms-of-Trade

Trends in Developing Countries’Commodity Terms-of-Tradesince 1970

RATI RAM

Economics Department, Illinois State University, Normal, IL 61790-4200, USA

Received May 15, 2002; accepted Oct. 5, 2002

Abstract

Trends in commodity terms-of-trade since 1970 are estimated for a sizable sample of countries. Thepredominant pattern for developing countries is that of negative trends, but there is some improvementsince 1980, and an increase in the share of manufactures in exports appears helpful. The estimates seemgenerally supportive of the spirit of Prebisch-Singer hypothesis. Establishment of an international organi-zation to generate and disseminate technology for developing countries might mitigate their disadvan-tage in international exchange.

JEL classification: F2; O19

Keywords: terms-of-trade; Prebisch-Singer hypothesis; developing countries

1. Introduction

Movements in the terms-of-trade of developing countries are of obvious importancesince these constitute one indicator of the gains of these economies from external trade andopenness. Although conventional economic theory suggests that international trade shouldbenefit all countries, including developing nations, there is an important asymmetry in thepatterns of trade by developed and developing countries. Most of the trade of developedcountries is with other developed countries and is thus a trade among “equals.” On the otherhand, most of the trade of developing countries is with developed countries, and may beperceived as trade among “unequals.”1 It is, therefore, possible that while trade and open-

241

Author’s Note: Perceptive comments on an earlier version by Michael Keaney and Behzad Yaghmaian aregratefully acknowledged. The usual disclaimer, however, applies. E-mail: [email protected] (R. Ram).

Review of Radical Political Economics, Volume 36, No. 2, Spring 2004, 241-253DOI: 10.1177/0486613404264044© 2004 Union for Radical Political Economics

1. For example, World Bank (2002: 336) shows that about 73 percent of the trade of high-income countriesis with other high-income countries, but about 70 percent of the trade of low-income and middle-income coun-tries is with high-income countries. Moreover, oil may constitute a significant part of the trade between develop-ing countries.

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ness benefit developed countries, unequal trade may not be as beneficial for developingcountries.2 Such a scenario was suggested some fifty years ago by Prebisch (1950) andSinger (1950), which was refined later by Singer (1975).

The Prebisch-Singer hypothesis has been subjected to an extensive debate. Besidesmany earlier discussions, Spraos (1980), Sapsford (1985), Grilli and Yang (1988), Balassa(1989), Powell (1991), Sarkar and Singer (1991, 1993), Athukorala (1993, 2000), Bleaney(1993), Bleaney and Greenaway (1993), Lucke (1993), Bloch and Sapsford (2000), Maizels(2000), and Sarkar (2001) have provided or discussed evidence on the question. Almost allthese studies considered trends in the terms-of-trade between (1) primary products andmanufactures, (2) imports and exports of manufactured goods by developing countries, or(3) exports of manufactures by developing and developed countries. The last two pairs havebeen studied because, as Sarkar and Singer (1991) noted, developing countries are export-ing an increasing amount of manufactures, and it is not enough to limit the analysis toterms-of-trade between primary products and manufactures to get an idea of the trends inthe terms-of-trade of developing countries relative to developed countries.

While studies of trends in terms-of-trade across primary products and manufactures andacross imports and exports of manufactures by developing countries are useful, the basic is-sue is really about movements in the terms-of-trade faced by developing countries that trademostly with developed countries. This article conducts an exercise in that direction and re-ports trends in commodity (net barter) terms-of-trade of developing countries for about thepast thirty years since 1970. The trends are reported for individual developing countries thathave usable data and also for (a) the entire group of nonoil developing countries and (b) thegroup of industrial countries.

2. Data, Estimating Equation, and the Main Results

The basic data are taken from indices of unit values (prices) for imports and exports asreported in International Financial Statistics Yearbook.3 Almost all information is takenfrom the Yearbook for 2000 (International Monetary Fund 2000: 140–3). Although theYearbook includes a large number of countries, usable data for at least ten years are avail-able only for twenty-six developing countries.

The primary focus of the study is on terms-of-trade trends over the thirty-year periodfrom 1970 to 1999, which is reasonably long and during which there has been a substantialdiversification of developing-country exports. However, trend estimates have also been re-ported for the period from 1980 to 1999.

Since the main objective is to make an assessment of the trend, or the average rate ofchange, in the terms-of-trade over the period, the following semilogarithmic equation,which has been used extensively in the literature, is specified:

ln(TOT)it = ai + bi(t) + uit, (1)

242 Review of Radical Political Economics / Spring 2004

2. Of course, the perception is that developing countries are the “weaker” partner in this unequal exchange.3. These are indices of unit values (prices) in terms of U.S. dollars with 1995 = 100.




where TOTit denotes commodity (net barter) terms-of-trade for country i in year t and is de-fined as the ratio of export-unit-value (price) to import-unit-value (price) for that countryand year, t is the “year” of observation, uit is a random disturbance term, and ln denotes natu-ral logarithm of the variable. The “trend” or the average annual rate of change in terms-of-trade for country i over the period is approximated by bI.

4

The equation is estimated by ordinary least squares (OLS) procedure, which is supple-mented by maximum-likelihood estimates based on the error term being first-order auto-regressive (AR1).5 Since the time variable is nonstochastic, the distribution of ui reflects thedistribution of Yi. Although scholars focusing on time-series econometrics might have somereservations, the model and the use of OLS and AR1 procedures are consistent with thecareful consideration of the topic by Canjels and Watson (1997).6 They contrasted asymp-totic results for cases where the autoregressive parameter is less than unity and where itequals one. It was shown by them that the most useful asymptotic approximations obtainfrom modeling the parameter as “local to unity” and that feasible Prais-Winsten procedureyields the preferred estimator. Since maximum-likelihood estimator in SAS is almost thesame as Prais-Winsten, and since the autoregressive parameter may be small in some cases,it seems appropriate to consider both OLS and AR1 estimates. This approach is also consis-tent with, or supported by, Spraos (1980: 109), Sarkar and Singer (1991, 1993), Athukorala(1993), Bleaney (1993), and Kakwani (1997).7

Table 1 contains the estimated trends for each country and period, and both OLS andAR1 estimates have been shown. Table 2 provides a summary of the signs of the trend esti-mates. Table 3 indicates similar trend estimates for the entire group of nonoil developingcountries and for the group of industrial countries. The following points may be noted fromthe reported estimates:

1. For the thirty-year period during which considerable diversification of developing-country exports has

taken place, the picture is one of a predominantly negative trend. For twenty-one of the twenty-six

countries, the sign is negative, and carries statistical significance in most cases.8

2. In addition to the predominance of the negative trends, the rate of deterioration is large in most cases. If

one may consider the simple mean of the country-level trends, it is of the order of 1 percent per year in

Ram / Trends in Commodity Terms-of-Trade 243

4. A slightly more accurate estimate would be [exp(bi) – 1], but bi is reported so that ordinary test statisticscan be used.

5. All computations have been done on SAS for Windows (version 8).6. Athukorala (2000) and some other scholars have cited Nelson and Kang (1984) or some other similar

work to justify a different procedure. However, the papers by Canjels and Watson (1997) and Kakwani (1997)seem much more relevant and recent. It is interesting to note that while Athukorala’s (1993) critique raised noobjection to the conventional model and estimation procedure used by Sarkar and Singer (1991), his study(2000) for Sri Lanka discards that model to avoid the “spurious regression” problem. By the magic of a differentprocedure, a significantly positive “long run” trend of 1.56 percent per year is shown in Sri Lanka’s barterterms-of-trade for total exports over the period 1978 to 1998, although estimates based on my data indicate thetrend to be (insignificantly) negative.

7. Kakwani’s (1997) discussion seems particularly insightful in showing that different procedures for esti-mating the overall rate imply different weights on the rates of change for each year. For GDP per capita, he sug-gests a procedure that is explicitly based on welfare considerations.

8. As Canjels and Watson (1997: 192) note, t-statistics need to be used cautiously if the autoregressive pa-rameter is large and the sample size is small.




terms of both OLS and AR1 estimates.9 This is evidently a substantial deterioration over a thirty-year

period.

3. If estimates for the shorter period are considered, the position looks better. Over the twenty-year period

from 1980 to 1999, fourteen trends are negative and twelve are positive, and the means are somewhat

smaller negative numbers.10

4. Trend estimates in Table 3 for the entire group of nonoil developing countries indicate a scenario that is

broadly similar to that suggested by Table 1 and Table 2. For the thirty-year period, the trend estimate is

negative, and is quantitatively substantial at about half a percentage point per year. For the shorter pe-

riod, the position is better.

5. Since developed countries constitute the main trading partners of developing countries, the terms-

of- trade trends reported in Table 1 and Table 2 and the first part of Table 3 can be regarded as a

rough approximation to movements in the developing countries’ terms-of-trade relative to devel-

oped countries.11 Since developed countries trade mostly with other developed countries, terms-

of-trade trends for them do not have a similar interpretation. However, it may still be useful to look at

the developed-country terms-of-trade trends. The second row in Table 3 shows the trends for the group

of industrial countries. It is evident that the trend is positive in every case despite the fact that indus-

trial-country trade is largely intragroup.12 In particular, it is interesting that, for the thirty-year period

from 1970 to 1999, while nonoil developing countries experienced a sizable terms-of-trade deteriora-

tion, the trend for industrial countries is positive. The large positive terms-of-trade trend for industrial

countries during the 20-year period from 1980 to 1999 is also significant.

6. By way of a methodological point, it is easy to see that OLS and AR1 estimates yield an almost identical

pattern at the individual-country level as well as for each group.

7. The terms-of-trade data used here are based on merchandise trade and do not include services. Since

services are becoming an increasingly important part of international exchange, the position shown by

the reported estimates is incomplete and might understate the deterioration in developing countries’

terms-of-trade.13

3. Some Further Observations on the Reported Trends

1. Four stylized facts characterize developing countries’ trade structure. First, despite aremarkable diversification of their exports into manufactures, most developing countrieslargely export primary commodities. As the WTO (2002: 21) observed, for about two-thirds of the developing economies, prices of primary commodities remain a major determi-nant of their merchandise export earnings as they still export more primary products thanmanufactures. Second, as reported by the World Bank (2002: 226), manufactures constitute71 percent of total imports of low-income and middle-income economies, and these comemainly from developed countries. Third, fuels are also a substantial part of developing


9. The simple means are –0.92 and –0.87 for ordinary least squares (OLS) and first-order autoregressive(AR1) estimates.

10. The simple means are –0.63 and –0.66 for OLS and AR1 estimates.11. As stated in footnote 1, about 70 percent of trade of developing countries is with high-income economies.12. Recall again that 73 percent of trade of developed countries is with other developed countries.13. The World Bank (2001: xv) points out that services are the fastest-growing component of the

global economy, and trade and foreign direct investment in services have grown faster than in goods over thepast decade.





Table 1Commodity Terms-of-Trade Trends in Developing Countries since 1970

Trend Estimate, 1970-99 Trend Estimate, 1980-99

Country OLS AR1 OLS AR1

1. Argentina (1990-98) 2.16** 2.13** 2.16** 2.13**(4.96) (4.16) (4.96) (4.16)

2. Bangladesh (1978-91) –1.39 –1.39 –1.52 –1.60(–1.59) (–1.44) (–1.31) (–1.24)

3. Brazil (1970-96) –2.75** –2.71** –1.51** –1.71*(–8.40) (–5.05) (–2.48) (–1.90)

4. Burkina Faso (1970-96) –2.71** –2.81** –4.71** –4.71**(–7.92) (–4.54) (–9.21) (–7.63)

5. Colombia (1970-99) –0.66* –0.42 –1.09** –1.12(–1.78) (–0.62) (–2.34) (–1.57)

6. Cote d’Ivoire (1971-87) –1.24 –1.29 0.55 –1.15(–1.38) (–1.01) (0.20) (–0.31)

7. Cyprus (1970-87) –0.43 –0.37 2.02** 2.12**(–1.63) (–1.04) (3.39) (2.93)

8. India (1970-97) 0.70* 0.65 2.80** 2.79**(1.74) (0.83) (7.11) (5.91)

9. Jordan (1970-99) 0.79** 0.76** 1.62** 1.63**(3.54) (2.50) (8.12) (8.13)

10. Kenya (1970-98) –2.41** –2.34** –0.70 –0.84(–6.87) (–3.34) (–1.31) (–0.92)

11. South Korea (1970-99) –0.27 –0.59 0.17 0.02(–1.21) (–1.28) (0.49) (0.03)

12. Liberia (1971-87) –1.95** –2.06** –3.18** –2.94**(–5.22) (–4.20) (–4.65) (–5.70)

13. Malawi (1970-89) –4.14** –4.12** –4.36** –3.57**(–11.70) (–8.89) (–3.82) (–2.19)

14. Malta (1970-89) –0.88** –0.64 2.39** 2.20*(–2.38) (–0.78) (3.86) (2.32)

15. Mauritius (1970-98) 1.03** 1.24* 2.88** 2.86**(2.73) (1.74) (7.34) (4.46)

16. Morocco (1970-98) –1.07** –0.93** –1.62** –1.48**(–3.79) (–2.12) (–3.82) (–2.50)

17. Pakistan (1970-99) –0.61** –0.54 –0.05 0.13(–2.40) (–1.35) (–0.12) (0.19)

18. Philippines (1970-91) –3.10** –3.00** 0.62 0.35(–6.43) (–3.26) (0.96) (0.39)

19. Senegal (1970-87) –0.33 –0.32 2.56** 2.48**(–0.68) (–0.63) (2.24) (2.61)

20. Singapore (1974-99) –1.27** –1.03** –1.40** –1.32**(–12.53) (–4.56) (–18.62) (–10.72)

21. South Africa (1970-98) –1.41** –1.45** 0.60** 0.51**(–5.26) (–2.35) (3.75) (2.14)

22. Sri Lanka (1970-97) –1.07** –1.11 0.88* 0.93(–2.79) (–1.60) (2.02) (1.51)

23. Syria (1970-97) –3.43** –3.15** –4.76** –4.83**(–7.42) (–3.97) (–5.69) (–4.10)

(continued)




countries’ imports. Fourth, despite the remarkable success of a few developing countries inexporting some high-value items, the WTO (2002: 3, 21) observes that among manufac-tured goods, the textiles and clothing group is the biggest export earner for many develop-


24. Thailand (1970-99) –2.17** –2.14** –1.01** –1.05**(–10.02) (–5.54) (–5.73) (–4.98)

25. Trinidad and Tobago (1970-90) –1.44* –0.89 –8.04** –7.45**(–1.81) (–0.59) (–6.55) (–4.47)

26. Tunisia (1970-87) 6.13** 5.84** –1.62 –1.47(7.52) (4.05) (–1.61) (–1.20)

Note: The estimates are based on equation 1 of the text, and all data are taken from International MonetaryFund (2000: 140–3). OLS and AR1 denote, respectively, ordinary least squares estimates and those yieldedby the maximum-likelihood procedure premised on a first-order autoregressive error. Related t-statistics arein parentheses.*Significant at the 10 percent level. **Significant at least at the 5 percent level.

Table 1 (continued)

Trend Estimate, 1970-99 Trend Estimate, 1980-99

Country OLS AR1 OLS AR1

Table 2Terms-of-Trade Trends of Developing Countries since 1970: Summary Results

1970-99 1980-99 Total

OLS AR1 OLS AR1 OLS AR1

Number of negative signs 21 21 14 14 35 35Number of positive signs 5 5 12 12 17 17Total 26 26 26 26 52 52

Note: Based on Table 1. OLS and AR1 denote, respectively, ordinary least squares estimates and thoseyielded by the maximum-likelihood procedure premised on a first-order autoregressive error.

Table 3Terms-of-Trade Trends for Nonoil Developing Countries and Industrial Countries

1970-99 1980-99

OLS AR1 OLS AR1

Nonoil developing countries –0.44** –0.61** 0.47** 0.29(–3.26) (–2.07) (3.15) (1.17)

Industrial countries 0.19 0.04 1.21** 1.05**(1.16) (0.11) (6.64) (3.20)

Note: Based on equation 1 of the text and the data reported by the International Monetary Fund (2000: 140–3,lines 201 and 110). OLS and AR1 denote, respectively, ordinary least squares estimates and those yielded bythe maximum-likelihood procedure premised on a first-order autoregressive error. Related t-statistics are inparentheses.**Significant at least at the 5 percent level.




ing countries, and processing zones have played a crucial role in increasing exports of man-ufactures. Given these four facts, Table 4 sheds light on major factors underlying theobserved terms-of-trade trends. Based on World Bank data, it reports trends in the prices of(1) nonenergy primary commodities, which constitute the bulk of exports of most develop-ing countries; (2) exports of manufactures to developing countries by five major (G5) in-dustrialized economies (France, Germany, Japan, the United Kingdom, and the UnitedStates), and (3) petroleum, which is a significant item in imports of nonoil developing coun-tries. Also, on the basis of UN data, preliminary estimates are reported of trends in prices(unit values) of exports of manufactures by developing countries. It can be seen that the pre-dominantly negative terms-of-trade trends over the thirty-year period are likely to be due toa large fall of 2.3 percent per year in the nonenergy primary commodity prices; a steep in-crease of more than 4 percent per year in the prices of manufactures imported by developingcountries from the G5, which increase is considerably higher than that in the prices of man-ufactures exported by developing countries; and a small increase in petroleum prices. Ofcourse, there is substantial cross-country diversity in the trends because of large variationsin the relative importance of these groups of goods in different countries. Table 4 also helpsone understand reasons for the improved position from 1980 to 1999. Although nonenergycommodity prices fell at the same rate as over the entire period, the gap in the price trendsfor imports and exports of manufactures by developing countries is smaller, and there is adramatic fall in petroleum prices.

2. The terms-of-trade scenarios are broadly supportive of the Prebisch-Singer hypothe-ses. The predominant picture of a deterioration in developing countries’ terms-of-trade isconsistent with their propositions since most of this trade is with developed countries. Theobserved deterioration in developing countries’ terms-of-trade despite a sharp increase in


Table 4Estimates of Trends in International Prices of Several Groups of Goods

1970-99 1980-99

OLS AR1 OLS AR1

Nonenergy primary commoditiesa –2.38** –2.30** –2.29** –2.57**(–8.55) (–5.10) (–5.30) (–3.52)

Exports of manufactures from G5 4.34** 4.36** 2.25** 1.55**to developing countriesa (11.99) (4.60) (6.78) (2.34)

Petroleuma 1.27 3.70 –6.11** –5.83**(0.98) (1.14) (–6.31) (–3.88)

Exports of manufactures from 2.74** 1.31**developing countriesb (7.49) (4.25)

Note: OLS and AR1 denote, respectively, ordinary least squares estimates and those yielded by the maxi-mum-likelihood procedure premised on a first-order autoregressive error. Related t-statistics are in parenthe-ses.a. Based on annual data supplied by the World Bank’s Development Prospects Group, parts of which are re-ported in World Bank (2002: 342).b. Rough estimates based on data from various issues of Monthly Bulletin of Statistics of the United Nations(December 1983, December 1988, June 1992, March 1993, September 1995, December 1997, March 2000,and June 2002); information for the years 1971 to 1974 is missing and only OLS estimation is done.**Significant at least at the 5 percent level.




the export of manufactures by them is consistent with Singer’s (1975) extension of the orig-inal proposition. In that broader framework, Singer (1975: 379) suggested that the devel-oped countries’ near-monopoly in technology, innovation, and relevant information, andthe power of multinational corporations in regard to production and pricing, generate an un-equal bargaining situation that will affect all relations between developing and developedcountries through trade, investment, technology transfer, aid, and technical assistance.Therefore, increased share of manufactures in developing countries’ exports will be only oflimited help. The price trends in Table 4, which underlie the terms-of-trade trends, also sup-port the Prebisch-Singer propositions. The big fall in the prices of nonenergy primary com-modities is a direct reflection of their original hypothesis and is perhaps an aggravation ofthe earlier trend.14 The steep rise in the prices of imports of manufactures from the G5 by de-veloping countries, relative to the prices of the their exports of manufactures, is a reflectionof Singer’s (1975) extension in which he expressed pessimism about developing countriesbeing helped much through increased exports of manufactures.15 The effect of petroleumprices is, however, not relevant to their propositions since it is an item that constitutes a partof trade between developing countries.

3. One may wish to consider the extent to which historical events during the periodmight have affected the trends. Such a consideration, however, is likely to be incompletesince the events may have a short-term effect on terms of trade and the enduring effectsmight be uncertain. Nonetheless, one may first consider the oil shocks of 1973 and 1979.These greatly increased petroleum prices between 1970 and 1980 and probably also causeda small increase over the entire period and may thus have increased nonoil developingcountries’ import prices. An oil price shock of the opposite kind occurred in the mid-1980ssince the World Bank’s petroleum price index fell from 164.78 in 1985 to 75.64 in 1986.16

That led to the large negative trend in petroleum prices during 1980 to 1999 and partly ac-counts for the improvement in developing countries’ terms-of-trade over that period. Theeffect of stagflation in developed countries during the 1970s and early 1980s is not easilyidentified in the terms-of-trade trends, but the phenomenon might have affected adverselythe volume of exports from developing countries. The debt crisis after 1982 may have, asBleaney (1993) suggested, pushed some countries into desperate steps to earn foreign ex-change and may have contributed to terms-of-trade deterioration of these countries due tothe real devaluation of their currencies. The imposition of structural adjustment programson developing countries may have increased their openness, but the effect on terms-of-tradetrends is not easily identified. The end of the cold war brought many “transition economies”into world trade after 1990, but it seems too early to judge its effect on developing coun-tries’ terms-of-trade. A similar remark applies to the global restructuring of the 1990s that


14. For example, Todaro and Smith (2003: 524) observe that in the 1990s prices of nonoil commodities rela-tive to manufactures reached their lowest point in ninety years.

15. Todaro and Smith (2003: 524) also note that increased exports of manufactures have not brought as manybenefits to developing countries as they had hoped. They point out that over the past quarter century, prices ofbasic manufactured goods exported by poor countries fell relative to the advanced products exported by richcountries, that the price of textiles fell especially precipitously, and that low-skilled electronic goods are not farbehind. In this context, it is perhaps important to note that the excess of the increase in prices of G5 exports ofmanufactures to developing countries over those of developing countries’ exports of manufactures, shown inTable 4, seems much larger than any similar difference reported in the fairly extensive literature on the subject.

16. This is indicated by the annual data supplied by the Development Prospects Group of the World Bank.




is associated with large-scale privatization, deregulation, “liberalization,” and the pushtoward globalization.

4. A few observations on cross-country diversity in the terms-of-trade trends are per-haps useful. First, a detailed consideration of trends for individual countries is beyond thescope of this article, which focuses on broad overall patterns. Second, almost all trends arenegative for 1970 to 1999, and there are only three or four cases of significantly positivetrends. Therefore, there is a fair degree of uniformity in the cross-country patterns, and it isdifficult to analyze the few positive trends (e.g., Jordan and Tunisia), which seem like spe-cial cases. Third, however, one may be curious why trends for some very successful coun-tries like Korea (and Singapore) are negative while being (insignificantly) positive for In-dia. A comparison of Korea and India indicates that their import-price trends are similar, butKorea has a lower export-price trend.17 It is possible that Korea restrained its export-priceincrease through a variety of strategies aimed at gaining competitiveness and increasing ex-ports. It is also possible that Korea’s exports of manufactures reflect an increasing special-ization that takes the form of product fragmentation and generates a “smaller” unit with alower price. Such cases of negative terms-of-trade trends in manufactures might not neces-sarily be harmful.18 However, this can only be a short-run phenomenon occurring in a fewdeveloping countries. It seems unlikely that even for manufactures a scenario of fallingprices over long periods for most developing countries is “good.” Even if it were good in thesense of increasing their foreign exchange earnings, it might be “better” for developedcountries where the exports went.

One way to get some policy lesson from the cross-country diversity in the observedtrends is to consider the effect of increased export of manufactures on the terms-of-tradetrends. The WTO (2002: 25–7) provides share of manufactures in the exports of individualdeveloping countries from 1968 to 1970 and 1998 to 2000. Data on these shares fortwenty-four of the twenty-six countries in Table 1 are available. Regressing the AR1 terms-of-trade trend estimates (TREND) for these twenty-four countries on the percentage pointincrease in the share of manufactures in exports (DSHARE), one gets the following results(with t-statistics in parentheses):

TREND = –1.92 + 0.034 DSHARE.(–2.95) (2.10)

The simple test shows that increased exports of manufactures improve developing coun-tries’ terms-of-trade. A 10 percentage point increase in the share of manufactures in exportsis expected to raise the trend by about 0.34 of a percentage point.19 It is, of course, obviousthat the test only shows that it is better for developing countries to export manufactures in-stead of primary goods. Such a possibility is consistent with Singer’s (1975) pessimism


17. AR1 estimates of import-price trends for Korea and India are 3.41 and 3.34, respectively. The corre-sponding export-price trends are 2.47 and 3.96.

18. This is related to the view that “income terms-of-trade” (barter terms-of-trade adjusted for changes in thetrade volume) reflect gains from trade in manufactures better than barter terms-of-trade. For primary commodi-ties, this is not an issue since a negative trend in barter terms-of-trade is likely to be associated with a deteriora-tion in income terms-of-trade also. This article focuses primarily on terms-of-trade for (total) imports and ex-ports of all goods.

19. Additional details are available from the author.




about exports of manufactures, especially if it were true that, while developing countriesgain from a diversification of their exports, developed countries gain even more.

5. Although the reported terms-of-trade trends are useful in indicating the broad pat-terns, several caveats implied in the preceding paragraphs may be kept in view. First, the re-ported trends are for all imports and exports that include intragroup trade. Second, as al-ready noted, it is possible that a fall in prices of manufactures, reflected in a deterioration ofterms-of-trade, may not be bad in some cases. Third, it is difficult to make a general state-ment that would apply to all developing countries, and there may be some notable excep-tions. Fourth, unit values, on which the reported trends are based, may sometimes not re-flect the price movements perfectly.20

6. As noted in section 2, trade in services, which is becoming increasingly important ininternational exchange, is not included in the reported trends. Since services are oftenhigh-value items, developing countries may be at a greater disadvantage in trade in servicesthan in manufactures. It is possible to broaden Singer’s (1975) extension further to includetrade in services. Although Singer did not mention services explicitly, his reasoning mayextend to that component easily. The advantage of developed countries due to near-monopolyin technology, innovation, and information, and the power of multinationals, may make thetrade in services between developed and developing countries even more “unequal” thanthat in manufactures.21

7. If developing countries face the well-known disadvantage in exporting primarygoods, experience negative terms-of-trade trends even during a period of remarkable in-crease in exports of manufactures, and may do worse in the trade in services, what alterna-tives can one suggest, particularly in the context of an expanded role of the WTO whose pri-mary mission is to increase international trade? It seems difficult to use the analysisconducted in the article to answer such a question. However, several points may be noted.First, the reported trends do not necessarily imply that trade is harmful for developing coun-tries. These may just indicate that their gain seems to decline. As noted earlier, the Prebisch-Singer hypotheses deal with the unequal distribution of gains from trade and may not neces-sarily imply that trade is harmful for developing countries. Second, as Balassa (1989: 1659)noted, one implication of the original Prebisch-Singer hypothesis was that developingcountries could gain more from exporting primary commodities if they acted together in re-gard to pricing and output. However, the history of OPEC and other similar arrangementsindicates the uncertain outcome of that approach. Third, the simple estimates in paragraph4, above, indicate that developing countries’ terms-of-trade are likely to improve throughincreased exports of manufactures, which should mitigate their disadvantage. Fourth, eventhough developed countries have a powerful voice in the WTO, it appears to be an organiza-tion where a unified stand by developing countries can have a significant impact, and its lat-est annual report gives an indication of such a possibility.22 For example, it states (WTO


20. Maizels (2000) provides a discussion of some differences between unit values and price indices in termsof trade composition, weights, and coverage.

21. Of course, a few developing countries like China and India might do well in the trade in services.22. The influence of the developed countries should, however, not be taken lightly. In regard to the new trade

negotiations in the WTO framework, the World Bank (2001: xi) observed that developing countries

worry that the multilateral system . . . has become less fair and less relevant to their development con-cerns; that the trade agenda is being expanded to include only issues in which the developed countrieshave an interest; and that multilateral rules are increasingly becoming a mere codification of existing




2002: 2–3), “So a basic priority of the international trade community must be . . . the cre-ation of conditions in which developing countries can maximize the gains they are able toreap from trade.” It also observed, “At Doha, developing countries managed, to a greaterextent than ever before, to influence the outcome of a WTO Ministerial Conference.” Fifth,the revolutionary developments in information technology and communications, notablythe Internet, might lead to some mitigation in developing countries’ disadvantage in tech-nology, innovation, and information that Singer (1975) emphasized. Last, as Singer (1975)explained, technology is a major factor in the distribution of economic and trading powerand gains from international exchange. As he stressed, developing countries need to havegreater control over technology and innovation (along with information) to reduce their dis-advantage. Therefore, an international R&D organization of a substantial size that is man-aged and controlled by the developing countries can be a significant factor toward reducingtheir economic and trading disadvantages. It could perhaps be called the World TechnologyOrganization, whose primary function should be to develop and disseminate technologythat is appropriate and useful for developing countries. A collective action by developingcountries for getting better control over technology and innovation might eventually be atleast as effective as similar actions related to trade and exchange.

4. Concluding Remarks

This article reports trends in commodity (net barter) terms-of-trade for individual de-veloping countries as well as the groups of nonoil developing nations and industrial coun-tries since 1970. While there are some cases of positive trends, the overall scenario is of siz-able negative trends for most developing countries over the thirty-year period 1970 to 1999.There is, however, some amelioration between 1980 and 1999. Seven additional points arenoted. First, the observed trends are perhaps largely due to (1) a sizable fall in nonoil com-modity prices and (2) a substantial increase in prices of manufactures imported by develop-ing countries from developed countries relative to the prices of the developing countries’exports of manufactures. Second, the reported trends are broadly consistent with the origi-nal and later versions of Prebisch-Singer hypotheses. Third, although it is difficult to relatesuch trends to any historical event over the period, oil shocks of 1973 and 1979 probablyraised developing countries’ import prices in the 1970s and the 1980s, but the oppositeshock of the mid-1980s may have offset most of that increase. Fourth, despite the predomi-nance of negative trends over the thirty-year period that was marked by a large increase indeveloping countries’ exports of manufactures, a simple test indicates that such an increaseis likely to improve their terms-of-trade, implying that the trends would probably have beenworse without the expansion of exports of manufactures. Fifth, although such trend esti-mates are useful, some caveats may be kept in view while interpreting these. Sixth, the ex-tension by Singer (1975) of the original Prebisch-Singer hypothesis can be broadened to in-clude the proposition that developing countries’ disadvantage in trade in services might beat least as much as that for the trade in manufactures. Last, Singer’s (1975) discussion sug-gests that technology is a primary vehicle for reducing developing countries’ disadvantage


laws and rules prevalent in developed countries, but which are inappropriate or unenforceable in de-veloping countries.




in international exchange and that a sizable international organization to generate anddisseminate technology that is useful and appropriate for developing countries might be animportant step toward mitigating that disadvantage.

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Rati Ram has been Distinguished Professor of Economics at Illinois State University since 1986; he had heldvarious faculty positions at Illinois State and Washington State University since 1977. He obtained a PhD fromthe University of Chicago in 1976 and has MAs from the University of Chicago and Delhi University. Major ar-eas of interest include development economics, human capital, and cross-country studies. He has published innumerous professional journals.





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Trends in Developing Countries’ Commodity Terms-of-Trade since 1970