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UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
GENEVA
TRADE AND DEVELOPMENT
REPORT, 2005
Report by the secretariat of the
United Nations Conference on Trade and Development
UNITED NATIONS
New York and Geneva, 2005
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UNCTAD/TDR/2005
UNITED NATIONS PUBLICATION
Sales No. E.05.II.D.13
ISBN 92-1-112673-8
ISSN 0255-4607
Copyright © United Nations, 2005
All rights reserved
FOREWORD
This year’s Trade and Development Report demonstrates that the conditions for achieving
the Millennium Development Goal of halving extreme poverty by 2015 have improved
considerably over the past three years, as economic growth in the developing world has become
more broad-based and embraced many of the poorest countries.
At a time when the forces of economic expansion in some major developed countries
have been slackening, China and India have become major engines of growth for the world
economy as a whole. Rapid economic development in both countries has helped reduce levels
of extreme poverty at home, by generating employment and boosting incomes. It has also had
positive effects beyond the two countries’ borders, in particular in many other developing
countries.
However, the Report stresses that progress remains far too slow in certain regions. In
sub-Saharan Africa, which has the highest proportion of people living in extreme poverty, per
capita income growth is still too low to make decisive progress. This only underscores the
need for further action by the international community to achieve and maintain strong global
growth dynamics with broad-based participation.
The recent rise in the prices of many primary commodities has provided some economic
breathing space in commodity-dependent economies, but this must not lead to complacency.
On the contrary, this breathing space should be viewed as an opportunity for many developing
countries to accelerate the process of structural change and capital accumulation, and indeed
to reduce their dependence on exports of such commodities. This would boost progress towards
all development goals, and have positive effects in countries with more advanced manufacturing
sectors that provide the machinery and equipment needed for such change.
Our challenge is to sustain the recent positive developments. The Report argues that it is
important not only that the fast-growing Asian countries make the right policy choices, but
also that developed countries take appropriate policy measures to overcome the persistent
imbalances and inequities in the international trading system. A global approach, based on
international action with the effective participation of developing countries in global policy
coordination, is in the interest of all, developed and developing countries alike.
The Goals can still be reached – worldwide and in most, or even all, individual countries
– but only if we break with business as usual. The information and analysis contained in this
Report should contribute to the debate about how best to make the global partnership for
development a reality – and how to help many millions of people realize their long-standing
hopes to live in dignity and peace. In that hopeful spirit, I recommend this volume to a wide
global audience.
Kofi A. Annan
Secretary-General of the United Nations
Trade and Development Report, 2005
v
Contents
Page
FOREWORD ............................................................................................................................................... iii
Explanatory notes .................................................................................................................................... xiii
Abbreviations ............................................................................................................................................ xiv
OVERVIEW ............................................................................................................................................... I-X
Chapter I
CURRENT ISSUES IN THE WORLD ECONOMY ........................................................................... 1
A. Introduction ......................................................................................................................................... 1
B. The world economy: growth performance and prospects ........................................................... 2
1. Economic activity in developed countries ..................................................................................... 2
2. Economic activity in developing countries ................................................................................... 4
3. Recent developments in world trade and finance ....................................................................... 10
C. The global imbalances and the United States current-account deficit .................................... 12
1. Twenty-five years of deficits in the United States ...................................................................... 14
2. The surplus regions........................................................................................................................ 18
3. Tailoring policy measures ............................................................................................................. 19
D. Oil price hikes in perspective.......................................................................................................... 20
1. The impact of an oil price shock on prices and economic activity ........................................... 20
2. The 1973–1974 and 1979–1980 oil price shocks: putting current events in perspective........ 22
3. The impact on oil-importing developing economies .................................................................. 25
E. Rapid growth in China and India and the profit-investment nexus ........................................ 28
1. The sectors driving economic growth .......................................................................................... 30
2. Stable and balanced demand growth as a condition for sustained rapid growth ..................... 33
3. Policy conditions underlying the Asian catching up processes ................................................. 35
4. Challenges for sustained growth in China and India .................................................................. 38
Notes .......................................................................................................................................................... 39
vi
Page
Chapter II
INCOME GROWTH AND SHIFTING TRADE PATTERNS IN ASIA ......................................... 41
A. Introduction ....................................................................................................................................... 41
B. Evolving demand and trade patterns in Asia: a comparative perspective ............................. 44
1. Changing patterns of food consumption ...................................................................................... 44
2. Intensity of metal and energy use................................................................................................. 46
C. Domestic resource constraints and the balance-of-payments constraint ................................ 51
1. Relative resource constraints and country size ........................................................................... 52
2. Shifts in trade composition: experiences of Asian industrialization ......................................... 54
D. World market shares and prices .................................................................................................... 70
1. The growing impact of China and India on global primary commodity markets .................... 70
2. The role of textile and clothing exports ....................................................................................... 77
Notes .......................................................................................................................................................... 82
Chapter III
EVOLUTION IN THE TERMS OF TRADE AND ITS IMPACT
ON DEVELOPING COUNTRIES ........................................................................................................ 85
A. Introduction ....................................................................................................................................... 85
B. The terms-of-trade problem revisited ........................................................................................... 87
C. Recent trends in the terms of trade ............................................................................................... 92
D. Effects of terms-of-trade changes on domestic income ............................................................ 101
E. The distribution of gains or losses from terms of trade ........................................................... 103
F. The distribution of export income and rent from extractive industries ............................... 108
Notes ........................................................................................................................................................ 114
Annex to chapter III
Distribution of Oil and Mining Rent:
Some Evidence from Latin America, 1999–2004 ............................................................................. 117
vii
Page
Chapter IV
TOWARDS A NEW FORM OF GLOBAL INTERDEPENDENCE ............................................. 129
A. Introduction ..................................................................................................................................... 129
B. The growing importance of developing countries in global markets .................................... 132
C. Shifts in the composition of developing-country exports ......................................................... 146
D. What has changed? An assessment ............................................................................................. 153
E. Policies for managing the new forms of global interdependence ........................................... 155
Notes ........................................................................................................................................................ 160
REFERENCES ...................................................................................................................................... 163
viii
List of tables
Table
Page
1.1
World output growth, 1990–2005 ............................................................................................... 3
1.2
GDP growth in selected developing economies, South-East Europe and CIS, 1990–2005 ..... 6
1.3
Export and import volumes of goods, by region and economic grouping, 1996–2004.......... 8
1.4
Current-account balance, selected economies, 2000–2004 .................................................... 13
1.5
Real GDP per capita and GDP growth in China, India, Japan and the Republic of Korea
during their rapid growth periods................................................................................................. 29
1.6
Contribution of consumption, investment and trade to GDP growth
in China, India, Japan and the Republic of Korea ................................................................... 34
2.1
Dietary composition in China and India, 1994 and 2002 ....................................................... 46
2.2
Per capita metal consumption, selected countries, 2003 ......................................................... 47
2.3
Food self-sufficiency ratios in China and India, selected products, 1994–2002 .................. 57
2.4
China’s agricultural trade by major product category, 1980–2003 ........................................ 58
2.5
Product structure of imports of selected Asian countries, 1965–2003 .................................. 61
2.6
Magnitude of change in selected raw material imports by Japan, the Republic of Korea,
China and India, selected periods ............................................................................................. 64
2.7
Product structure of exports from selected Asian countries, 1965–2003 .............................. 66
2.8
World primary commodity prices, 1999–2004......................................................................... 72
2.9
Shares in world exports of manufactures of selected Asian developing economies and
major developed countries, 1962–2003 .................................................................................... 78
2.10
United States apparel imports from selected sources,
market shares and unit values, 1995–2005 ............................................................................... 80
3.1
Export structure of developing countries, by region and by broad product category,
1980–2003 ................................................................................................................................... 91
3.2
Distribution of developing countries by their dominant export category, 2003 ................... 91
3.3
Sensitivity of developing countries to terms-of-trade changes,
by broad product category and by region, 1996–2004 .......................................................... 102
3.4
Impact of changes in terms of trade and net income payments on
national income, selected economies, 2002–2004 ................................................................. 106
3.5
Government revenue from international trade and extractive industries,
selected developing countries .................................................................................................. 112
3.6
Government revenue from fuel industry in selected developing countries ......................... 113
3.A1 Argentina: estimate of oil rent, 1999–2004 ............................................................................ 118
3.A2 Argentina: estimate of government revenue from oil rent, 1999–2004 ............................... 118
3.A3 Ecuador: estimate of oil rent, 1999–2004 .............................................................................. 119
3.A4 Ecuador: estimate of the distribution of oil rent, 1999–2003 ............................................... 120
3.A5 Mexico: estimate of oil rent, 1999–2004 ................................................................................ 120
3.A6 Venezuela: estimate of oil rent, 1999–2004 ........................................................................... 121
3.A7 Venezuela: estimate of the distribution of oil rent, 1999–2004............................................ 122
3.A8 Venezuela: composition of government revenues from oil, 1999–2004 .............................. 122
3.A9 Chile: estimate of copper rent, 1999–2004 ............................................................................ 124
ix
List of tables (concluded)
Table
Page
3.A10 Chile: estimate of government revenue from copper rent, 1999–2004................................ 124
3.A11 Peru: estimate of gold rent, 1999–2004 .................................................................................. 125
3.A12 Peru: estimate of copper rent, 1999–2004 .............................................................................. 126
3.A13 Peru: estimate of government revenue from gold rent, 1999–2004 ..................................... 126
3.A14 Peru: estimate of government revenue from copper rent, 1999–2004 ................................. 127
4.1
Matrix of world merchandise trade by major product category,
1965, 1985 and 2003 ................................................................................................................ 131
4.2
The origin and destination of merchandise trade, 1970–2003.............................................. 133
4.3
South-South trade in world trade, 1970–2003 ....................................................................... 134
4.4
South-South merchandise exports, by geographical region, 1970–2003............................. 140
4.5
Top 10 economies in South-South trade, 2003 ...................................................................... 141
4.6
Importance of South-South trade for developing economies, 1990–2003 .......................... 142
4.7
Export value growth and share in total South-South exports
of the 30 most dynamic products, 1990–2003 ....................................................................... 149
4.8
Composition of developing-economy exports to developed countries,
by broad product categories, 1980–2003................................................................................ 150
4.9
Composition of trade among developing economies,
by broad product categories, 1980–2003................................................................................ 152
x
List of figures
Figure
Page
1.1
United States current-account balance, relative GDP growth and
real effective exchange rate, 1980–2004 .................................................................................. 14
1.2
Merchandise trade balance of the United States, by country/region, 1980–2004 ................ 18
1.3
Current-account balances of 10 OPEC countries..................................................................... 21
1.4
Crude petroleum prices, nominal and real, 1970–2005 .......................................................... 22
1.5
Oil import bill, OECD major oil-consuming countries, 1973–1978,
1979–1983, 1999–2005 .............................................................................................................. 23
1.6
Changes in consumer prices and unit labour costs, OECD major oil-consuming
countries, selected periods ......................................................................................................... 24
1.7
Real interest rates and real effective exchange rates, selected Asian and
Latin American countries, 2003–2005 ...................................................................................... 27
1.8
Productivity in the manufacturing and services sectors compared to
overall productivity in China (1984–1993, 1993–2002) and India (1991–2000) ................. 31
1.9
Productivity in the manufacturing sector in China (1984–1993, 1993–2002)
and in the manufacturing and services sectors in India (1991–2000) .................................... 32
1.10
Evolution of private consumption in China, India, Japan and the Republic of Korea ......... 35
1.11
Real interest rates in China and India, 1980–2004 .................................................................. 37
2.1
Intensity of metal use, selected metals and countries, 1960–2003 ........................................ 48
2.2
Stylized representation of the relationship between intensity of metal use and
per capita income ........................................................................................................................ 50
2.3
Intensity of energy use, selected countries, 1965–2003.......................................................... 50
2.4
Resource combinations of countries/regions, 1960–2000 (at 5-year intervals) .................... 53
2.5
China: consumption and production of oil and coal, 1965–2004 ........................................... 60
2.6
Non-fuel primary commodity prices, nominal and real, by commodity group, 1960–2004 ...... 71
2.7
Shares in world imports of selected primary commodities,
China and India, 1990 and 2003................................................................................................ 74
2.8
Net trade by China and India and world prices, selected primary commodities,
1990–2004 ................................................................................................................................... 75
3.1
United States import and export price indices for selected electronics products, 1980–2004 .. 89
3.2
Terms of trade, export volumes and purchasing power of exports
in developing economies, by region, 1980–2004 .................................................................... 93
3.3
Terms of trade of selected developing economies, by dominant export category, 2000–2004 .. 96
3.4
Contribution of different product groups to terms-of-trade changes,
selected developing economies, 2000–2004 ............................................................................ 98
3.5
Changes in gross domestic product, gross domestic income, gross national income
and terms-of-trade indices, selected developing countries, 1996–2004 .............................. 105
4.1
Schematic illustration of the impact of production-sharing on the statistically
recorded value of South-South trade ...................................................................................... 138
4.2
Triangular trade in manufactures between East Asia and the United States, 1990–2003 .... 139
4.3
Evolution of developing-country exports, by broad product category, 1976–2003 ........... 148
xi
List of boxes
Box
Page
1.1
Primary trade balance effects of changes in the United States GDP growth
and in exchange rates ................................................................................................................. 16
1.2
Income disparities in China and India ...................................................................................... 36
3.1
State income from extractive industries: a historical perspective ........................................ 110
4.1
Towards a new structure of global maritime trade ................................................................ 144
xiii
Explanatory notes
Classification by country or commodity group
The classification of countries in this Report has been adopted solely for the purposes of statistical or
analytical convenience and does not necessarily imply any judgement concerning the stage of devel-
opment of a particular country or area.
The major country groupings used in this report follow the reclassification by the United Nations
Statistical Office (UNSO). They are distinguished as:
» Developed or industrial(ized) countries: in general the countries members of OECD (other than
Mexico, the Republic of Korea and Turkey) plus the new EU member countries which are not
OECD members (Cyprus, Estonia, Latvia, Lithuania, Malta and Slovenia).
» The category South-East Europe and Commonwealth of Independent States (CIS) replaces what
was formerly referred to as “transition economies”.
» Developing countries: all countries, territories or areas not specified above.
The terms “country” / “economy” refer, as appropriate, also to territories or areas.
References to “Latin America” in the text or tables include the Caribbean countries unless otherwise
indicated.
Unless otherwise stated, the classification by commodity group used in this Report follows generally
that employed in the UNCTAD Handbook of Statistics 2004 (United Nations publication, sales no.
E/F.05.II.D.2).
Other notes
References in the text to TDR are to the Trade and Development Report (of a particular year). For
example, TDR 2004 refers to Trade and Development Report, 2004 (United Nations publication, sales
no. E.04.II.D.29).
The term “dollar” ($) refers to United States dollars, unless otherwise stated.
The term “billion” signifies 1,000 million.
The term “tons” refers to metric tons.
Annual rates of growth and change refer to compound rates.
Exports are valued FOB and imports CIF, unless otherwise specified.
Use of a dash (–) between dates representing years, e.g. 1988–1990, signifies the full period
involved, including the initial and final years.
An oblique stroke (/) between two years, e.g. 2000/01, signifies a fiscal or crop year.
A dot (.) indicates that the item is not applicable.
Two dots (..) indicate that the data are not available, or are not separately reported.
A dash (-) or a zero (0) indicates that the amount is nil or negligible.
A plus sign (+) before a figure indicates an increase; a minus sign (-) before a figure indicates a
decrease.
Details and percentages do not necessarily add up to totals because of rounding.
xiv
Abbreviations
ATC
Agreement on Textiles and Clothing
ASEAN
Association of Southeast Asian Nations
bpd
barrels per day
CIS
Commonwealth of Independent States
CPI
Consumer Price Index
ECLAC
Economic Commission for Latin America and the Caribbean
EIA
Energy Information Administration (United States)
EIU
Economist Intelligence Unit
ESCAP
Economic and Social Commission for Asia and the Pacific
ESCWA
Economic and Social Commission for Western Asia
EU
European Union
FAO
Food and Agriculture Organization of the United Nations
FDI
foreign direct investment
FFE
foreign funded enterprise
f.o.b.
free on board
GDI
gross domestic income
GDP
gross domestic product
GFCF
gross fixed capital formation
GNI
gross national income
GSTP
Global System of Trade Preferences
GTAP
Global Trade Analysis Project (model)
ICT
information and communication technology
IEA
International Energy Agency
IMF
International Monetary Fund
IT
information technology
LDC
least developed country
MDG
Millennium Development Goal
MERCOSUR
Southern Common Market
MFA
Multi-Fibre Arrangement
NBTT
net barter terms of trade
xv
NIE
newly industrializing economy
NIIP
net international investment position
NPL
non-performing loan
OECD
Organisation for Economic Co-operation and Development
OEM
original equipment manufacturing
OPEC
Organization of the Petroleum Exporting Countries
PPP
purchasing power parity
R&D
research and development
RCA
revealed comparative advantage
REER
real effective exchange rate
RTA
regional trade arrangement
ROW
rest of the world
SARS
Severe Acute Respiratory Syndrome
SITC
Standard International Trade Classification
SME
small and medium-sized enterprise
SOE
State-owned enterprise
SPS
sanitary and phytosanitary
TDR
Trade and Development Report
TNC
transnational corporation
TRIPS
trade-related aspects of intellectual property rights (also TRIPS Agreement)
UN
United Nations
UN COMTRADE
United Nations Commodity Trade Statistics Database
UN/DESA
United Nations, Department of Economic and Social Affairs
UNESCO
United Nations Educational, Scientific and Cultural Organization
UNCDB
United Nations Common Database
UNCTAD
United Nations Conference on Trade and Development
VER
voluntary export restraint
WTI
West Texas Intermediate (price – reference price for standard crude oil)
WTO
World Trade Organization
Y2K
year 2000
OVERVIEW
Looking at recent trends in the world economy from the perspective of the
Millennium Development Goals (MDGs), the good news is that in 2004 growth
in the developing countries was rapid and more broad-based than it had been
for many years. Strong per capita income growth continued in China and
India, the two countries with the largest number of people living in absolute
poverty. Latin America has seen a rebound from its deep economic crisis, and
a return to faster growth, fuelled by export expansion. Africa again reached a
growth rate of more than 4.5 per cent in 2004. Moreover, relatively strong
growth in many African countries is envisaged in the short-term, owing to
continuing strong demand for a number of their primary commodities. The
bad news is that even growth rates of close to 5 per cent in sub-Saharan
Africa are insufficient to attain the MDGs, and that the outlook for 2005,
overshadowed by increasing global imbalances, is for slower growth in the
developed countries with attendant effects on the developing countries.
Since the beginning of the new millennium, the performance of the world
economy has been shaped by the increasingly important role of China and
India. Rapid growth in these two large economies has spilled over to many
other developing countries and has established East and South Asia as a new
growth pole in the world economy. Their ascent has been accompanied by
new features of global interdependence, such as a brighter outlook for ex-
porters of primary commodities, rising trade among developing countries,
increasing exports of capital from the developing to the developed countries,
but also intensified competition on the global markets for certain types of
manufactures.
II
Global prospects and imbalances
The slowdown in global output growth in 2005 is mainly due to a deceleration in the major
developed economies and some emerging economies in Latin America and East Asia. The temporary
weakness in the United States economy has not been compensated by stronger growth performance in
the euro area and in Japan. Both continue to lack the dynamism needed to redress domestic imbalances
and to contribute to an adjustment of the global trade imbalance. Indeed, beginning in the second half
of 2004, output growth in the euro area and Japan has slowed down markedly, causing forecasts for
2005 to be revised downwards. While greatly benefiting from the global expansion over the past three
years, and especially the Asian boom, neither the euro area nor Japan has managed to revive domestic
demand.
Another reason for concern about global economic prospects is the increase in oil prices, which
have doubled since mid-2002, to reach $58 per barrel in July 2005, despite flexible supply adjust-
ments on the part of oil producers. However, the much feared shock of surging oil prices on economic
activity and inflation in developed countries, an impact of the kind witnessed in the 1970s, has so far
not occurred, for two reasons. First, developed countries have become less oil dependent, as energy is
being used more efficiently. At the same time, the share of services in their GDP has gained in impor-
tance at the expense of industry, where more energy is used per unit of output. Second, the recent oil
price increase was not the result of a big supply shock, but of a gradual increase in demand. Under
these conditions, the wage and monetary policy responses in the developed countries have been meas-
ured, and have not jeopardized price stability or output growth.
The recent surge in oil prices has a stronger impact on oil-importing developing economies,
especially in countries where industrialization has led to greater dependence on oil imports. In Brazil,
for example, the oil intensity of domestic production is 40 per cent higher than the OECD average; in
China and Thailand it is more than twice as high, and in India almost three times as high as in the
OECD countries. Therefore, it is primarily in developing countries where inflationary pressures
resulting from further rising oil prices imply risks for the sustainability of the growth process. Even
though inflation has so far been modest, monetary policy has already been tightened in some coun-
tries.
On the other side, not only oil exporters but also many developing countries exporting non-oil
primary commodities benefited from increased demand and rising prices for their exports. Since 2002,
strong demand from East and South Asia, in particular China and India, has been the main factor
behind the hike in commodity prices. In the markets for some primary commodities, emerging supply
constraints have also contributed to the strong price reaction. Asian demand for primary commodities,
particularly for oil and minerals such as copper, iron ore and nickel, as well as for natural rubber and
soybeans, is likely to remain strong, boosting the earnings of the exporters of these products. But
further developments on the markets for primary commodities will also critically depend on how
III
much additional supply capacity will be created by recent new investments, how fast this capacity will
go on-stream, and how commodity demand from developed countries will be affected by the need to
correct the existing trade imbalances.
Despite the increasing importance of the fast growing developing countries for international com-
modity markets, developed countries, which still account for two thirds of global non-fuel commodity
imports, will continue to play an important role. It is unlikely that the growing imports of primary
commodities by China and India alone will bring about a permanent reversal of the declining trend in
real commodity prices. Indeed, in real terms, commodity prices are still more than one third below
their 1960–1985 average. Moreover, the sharp fluctuations in commodity prices constrain the ability
of many developing countries to attain a path of stable and sustained growth and employment creation
that could benefit all segments of their population and allow them to reach the MDGs.
The large global current-account imbalances represent the greatest short-term risk for stable growth
in the world economy. The United States trade deficit has continued to grow despite the depreciation
of the dollar: it has lost 18 per cent of its value on a trade-weighted basis since February 2002. And the
United States current-account deficit accounts for two thirds of the combined global surpluses. The
deficit has increased in recent years vis-à-vis virtually all its trading partners; the increase has been
the most pronounced in trade with Western Europe and China. On the other hand, China’s trade is in
surplus not only with the United States but also with many other developed countries. However, despite
these surpluses, China’s imports from these countries have also increased rapidly, as have its imports from
neighbouring countries and other developing countries.
A well coordinated international macroeconomic approach would considerably enhance the chances
of the poorer countries to consolidate the recent improvements in their growth performance. Such an
approach would also have to involve the major developing countries and aim at avoiding deflationary
adjustments to the global imbalances.
East and South Asia as a new growth pole
Asia has been a region of economic dynamism over the past four decades, with different econo-
mies in the region successively experiencing rapid growth. The large size of the countries that entered
this process most recently, China and India, has established the East and South Asian region as a new
growth pole in the world economy. Due to the high dependence of these large Asian economies on
imports of primary commodities for industrial output growth, in particular fuels and industrial raw
materials, and the resulting linkages with other developing countries, variations in their growth per-
formance will have strong repercussions on the terms of trade and export earnings of other developing
countries. This inevitably raises the question of the sustainability of the pace of growth of these two
economic powers in the medium and long term.
In terms of per capita GDP, both China and India still have a long way to go to approach the
levels of the leading economies. Their potential for catching up is enormous. To realize this potential,
it will be crucial for both countries to achieve further productivity gains in manufacturing activities
IV
and ensure that all segments of their population participate in income growth. Broad-based income
growth is essential for accelerating the eradication of poverty and gaining widespread social accept-
ance of the required structural changes; but wage increases throughout the economy in line with rising
productivity are also a central pillar for the expansion of domestic consumption and, thus, the
sustainability and stability of output growth. Fixed capital formation depends on favourable demand
expectations in general, and not just on exports, which are subject to the vagaries of the world market
and to changes in international competitiveness.
Shifting trade patterns in China and India
Sustained rapid growth and rising living standards in China and India have been accompanied by
a dramatic increase in Asia’s shares of world exports and raw material consumption. Given the large
size of the Chinese and Indian economies and their specific patterns of demand, changes in their
structure of supply and demand have a much larger impact on the composition of world trade than did
those of other late industrializers in Asia during their economic ascent. The impact of China’s growth
on international product markets and global trade flows is already apparent. India’s merchandise trade
structure may follow a sequence of changes similar to that of China, with a lag of one or two decades,
if industrialization in India gains the same importance in its further economic ascent as it did in the
other fast growing Asian economies.
Metal use in China – and to a lesser extent in India – has strongly increased over the past few
decades, particularly since the mid-1990s. In China, growth in the use of aluminium, copper, nickel
and steel now exceeds that of GDP. Part of this recent increase coincides with very high rates of
investment, especially in infrastructure. However, this recent rapid rise in China’s intensity of metal
use, and the concomitant increase in its imports of minerals and mining products, may well slow down
once investment growth, especially in construction and infrastructure, decelerates. By contrast, India’s
intensity of metal use has remained fairly stable over the past four decades, reflecting the country’s
slower pace of industrialization and the relatively small share of investment in infrastructure in its
GDP.
China’s energy use has steadily increased since the 1960s, but at a slower rate than its GDP. Its
future energy use will depend on how opposing trends play out: on the one hand, continued rapid
industrialization, higher living standards and improved transport infrastructure will tend to further
increase energy use; on the other hand, there remains considerable potential for the adoption of energy-
saving technologies. In either case, China’s energy demand is likely to continue to outpace the future
growth of domestic supply.
Agricultural imports will be determined by a number of factors. To the extent that imports of raw
materials for industrial use are needed as production inputs for the expanding domestic market, import
demand will grow further. This is likely to be the case for rubber and wood. On the other hand, imports
of cotton, which to a large extent have depended on the production of textiles and clothing for export,
V
can be expected to slow down as the composition of exports shifts to more technology-intensive
products.
A continuous increase in average living standards and further progress in poverty reduction in
China will also lead to higher demand for food and to a change in its dietary composition. So far,
China has remained largely self-sufficient in all major food items. But with increasing consumption it
is likely to become more dependent on food imports in the future, notwithstanding possible productivity
and output growth in its domestic agricultural sector as a result of recent agricultural policy reforms.
Given the size of its economy, even small changes in self-sufficiency ratios can have a considerable
impact on China’s agricultural imports.
Since the mid-1980s China has substantially upgraded its export basket, in which labour- and
resource-intensive manufactures and, increasingly, electronics, have become dominant. China’s ex-
ports still have a relatively high import content, but there are indications of a rise in the share of
domestic value added in China’s processing trade, particularly in the electronics sector. India has not
experienced the kind of manufacturing export boom that has characterized the other rapidly growing
economies in Asia. It has become a leading exporter of software and IT-enabled services, particularly
to the United States, but it is highly uncertain whether their share in India’s export earnings can rise
much further. Over the next few years, the absolute value of these services’ exports may continue to
grow, but export dynamism in manufacturing is likely to become stronger.
The growth dynamics in China and other Asian economies have positive effects for many devel-
oped and developing countries. This is true for those countries that benefit directly from the surge in
import demand from the fast growing Asian economies. It is also true for those that benefit indirectly
through the positive growth effects in the economies of their main trading partners. Still others have
achieved higher export and income growth as a result of the rise in commodity prices, even though
their exports to the fast growing Asian economies are relatively small. But it also has to be recognized
that China’s increasing participation in international trade poses new challenges for many countries.
Its weight in international markets due to the very large size of its economy may contribute to a fall in
the export prices of manufactures that it produces and exports along with other developing countries,
such as clothing, footwear and certain types of information and communication technology products.
The rise of China’s clothing exports, in particular, occurred at a time when several developing coun-
tries had adopted more outward-oriented development strategies, and many had developed production
and export activities in the clothing sector partly in response to the quota regulations under the Multi-
Fibre Arrangement.
There is little doubt that the pace of development in the populous Asian economies, and espe-
cially in China, requires accelerated structural change in many other countries – developing and
developed alike. In some sectors, such as the clothing industry and, more generally, in activities at the
low-skill end of the economy, the adjustment pressure is stronger than in others where there is less
competition from low-wage producers with relatively high productivity. There are widespread fears in
many countries that the pace of structural change could result in higher unemployment and lower
output. Paradoxically, among the developed countries, those with large deficits in their trade balance,
such as Australia, Spain, the United Kingdom and the United States, have performed much better in
terms of domestic growth and employment than countries that have been recording large trade sur-
pluses and greater competitiveness, such as Germany and Japan. Challenging the commitment of all
countries to develop a global partnership for development and responding to the integration of large
and poor countries by giving in to protectionist pressures would be counterproductive: most of the
earnings of developing countries from their exports to the developed countries are translated into
higher import demand for advanced industrial products, and thus flow back, directly or indirectly, to
the latter.
VI
The growing importance of South-South trade
Trade among developing countries has sometimes been promoted as an alternative to the tradi-
tional trade pattern where developing-country trade relies mainly on primary commodity exports to
developed countries in exchange for imports of manufactures. The rapid rise in the importance of
South-South trade, particularly over the past two decades, reflects a number of factors. First, there has
been an upswing following the downturn of such trade during the 1980s. Second, the move towards
the adoption of more outward-oriented development strategies, along with trade reform and regional
trade agreements, in a wide range of developing countries has significantly improved access to their
markets, including for imports from other developing countries. But the most important reason for the
rapid growth of South-South trade is that output growth in some large developing economies, particu-
larly China, has been much faster than in the developed countries. Moreover, these countries’ buoyant
growth performance has been closely linked with increasing intraregional specialization and production-
sharing.
While increased South-South trade is a fact, recent developments in the developing countries as
a whole require a careful assessment of the statistical data. Indeed, such an assessment calls for a
number of qualifications to the prima facie impression that trade among developing countries has
grown massively over the past decade or so, and that exports of manufactures account for much of that
rise.
The growing role of developing countries in world trade flows appears to be the result, above all,
of the above-average growth performance of a few Asian economies, and the associated shifts in the
level and composition of their external trade. A substantial part of the statistical increase in South-
South trade in manufactures is due to double-counting associated with intraregional production-sharing
in East Asia for products eventually destined for export to developed countries. It is also due to double-
counting associated with the function of Hong Kong (China) and Singapore as transhipment ports or
regional hub ports. The important role of triangular trade in the measured rise of South-South trade in
manufactures implies that the bulk of such trade has not reduced the dependence of developing countries’
manufactured exports on aggregate demand in developed-country markets. As long as final demand
from developed countries – notably the United States, which is East Asia’s most important export
market – remains high for products for which production-sharing within East Asia plays an important
role, triangular trade and, thus, South-South trade, will remain strong. On the other hand, the economic
rebound in Latin America has improved the prospects for South-South trade in manufactures that is
not related to triangular trade.
The rise of South-South trade in primary commodities appears more modest in trade statistics.
However, it has involved a larger number of countries than the strong rise of South-South trade in
manufactures. It has allowed Africa, as well as Latin America and the Caribbean to recoup some of the
market shares in total South-South trade that they had lost in the 1980s. Indeed, the rise in South-
VII
South exports of primary commodities to the rapidly growing Asian developing countries is likely to
evolve into the most resilient feature of what has come to be called the “new geography of trade”.
The promotion of South-South trade remains a desirable objective for a variety of reasons. First,
sluggish growth in developed countries and their continued trade barriers against products of export
interest to developing countries implies that developing countries need to give greater attention to
each other’s markets to promote export growth in order to achieve their economic growth targets.
Second, the vast size of the rapidly growing Asian economies reduces the need for developing coun-
tries to seek developed-country markets in order to benefit from economies of scale. Third, continued
dependence on developed-country markets exposes developing countries to possible pressure that
links better access to those markets with binding commitments to rapid trade and financial liberaliza-
tion, protection of intellectual property and an open-door policy for FDI. More generally, it also en-
tails the risk of increasingly narrowing the policy space for developing countries.
Terms of trade revisited
The recent and ongoing changes in international trade, with respect to both product composition
and direction of trade, is affecting developing countries in different ways, depending on the product
composition of their exports and imports. On the export side, the impact differs according to the
shares of manufactures and primary commodities, and on the import side, it is especially the depend-
ence on fuels and industrial raw materials that determines the outcome for individual countries.
The same factors that improved the terms of trade of some groups of countries, especially the
higher prices of oil and minerals and mining products, led to a worsening of the terms of trade in
others. In some countries, particularly in Latin America, but also in Africa, the positive effect of price
movements on the purchasing power of exports was reinforced by an increase in export volumes;
whereas in others, gains from higher export unit values were compensated, or even over-compensated,
by higher import prices. Since 2002, economies with a high share of oil and minerals and mining
products in their total merchandise exports have gained the most from recent developments in interna-
tional product markets. The terms of trade of countries with a dominant share of oil exports increased by
almost 30 per cent between 2002 and 2004, and those of countries with a dominant share of minerals
and mining products in their exports increased by about 15 per cent. Terms-of-trade developments
have varied the most among economies where agricultural commodities have dominated total mer-
chandise exports. This reflects large differences in the movement of prices for specific products within
this category, differences in the shares of other primary commodities in their exports and the share of
oil in their merchandise imports.
Developing countries for which manufactures are the dominant category of exports, and which
are at the same time net importers of oil and minerals and metals have seen a deterioration in their
terms of trade in the past two or three years. The deterioration, due to the combined effects of rising
prices of imported primary commodities and stagnating or falling prices of their manufactured exports,
could well become a longer term feature in their external trade. There are two reasons for this: first,
there are indications that the prices for their manufactured exports are falling relative to the prices of
VIII
the manufactures they are importing from the developed countries; second, prices for primary com-
modities are likely to remain strong as long as industrial growth remains vigorous in the large Asian
economies and the imbalances in the developed world can be settled without entering into a recession.
Indeed, the terms-of-trade losses of exporters of manufactures among the developing countries
are partly explained by the pace of the catch-up process in some of these countries, particularly in
China and India. This process has been driven by higher productivity in the export sectors, which has
given them a competitive edge and led to higher import demand. The variations in the global pattern
of demand and their impact on individual countries have resulted in a redistribution of income, not
only between developed and developing countries, but also, and to an increasing extent, between
different groups of developing countries. However, it is important to recognize that a change in the
distribution of real income does not necessarily imply absolute losses. As long as output growth is
strong enough, all countries can gain in terms of real income, with some gaining more than others,
depending on the structure of their exports and the international competitiveness of their producers: a
terms-of-trade deterioration can be compensated by rising export volume. The probability for this to
happen is much greater if exports consist of manufactures, for which the price elasticity of demand is
high, than if they consist of primary commodities.
The productivity gains in Asia have led not only to higher company profits, but also to higher
wages; they have also benefited consumers at home and abroad through lower prices. Higher export
earnings, despite lower export prices, have enabled Asian countries to pay higher prices for imported
inputs, which, in turn, has represented terms-of-trade gains for many primary commodity exporters.
Moreover, exports from Asia also benefit from rising demand in those developing countries that have
seen their export earnings rise thanks to growing Asian demand for their commodities.
Policies for managing the new forms
of global interdependence
Although continuing growth in East and South Asia and recovery in other regions of the developing
world are likely to sustain the demand for primary commodities, the basic problem of instability in
these prices and their long-term tendency to deteriorate in real terms vis-à-vis the prices of manufactures,
especially those exported by developed countries, remains unresolved. Therefore, it is imperative for
developing countries not to become complacent about industrialization and diversification. There is a
risk that the recent recovery of primary commodity markets could lead to a shift away from invest-
ment – both domestic and foreign – in the nascent manufacturing sectors of commodity-exporting coun-
tries in favour of extractive industries. While higher investment in that area may be beneficial in terms
of creating additional supply capacity and raising productivity, this should not be at the expense of
investment in manufacturing. Exporters of primary commodities that have recently benefited from
higher prices and, in some cases, from higher export volumes, have to continue their efforts towards
greater diversification within the primary commodity sector, as well as upgrading their manufacturing
and services sectors. The recent windfall gains from higher primary commodity earnings provide an
opportunity to step up investment in infrastructure and productive capacity – both essential for boosting
development.
IX
At the national level, this raises the question of the sharing of export revenues from extractive
industries, which has always been a central concern in development strategy. Higher global demand
and international prices for fuels and mining products have been attracting additional FDI to these
sectors in a number of developing countries, and this may increase the scope in these countries for
mobilizing additional resources for development. However, government revenues from taxes on profits
in these sectors have typically been very low, partly due to a policy since the beginning of the 1990s
of attracting FDI through the offer of fiscal incentives. Such a policy risks engaging potential host
countries in “a race to the bottom” which, clearly, should be avoided.
Additional sources of fiscal revenue from primary export-oriented activities may be royalties,
the conclusion of joint ventures or full public ownership of the operating firms. However, efforts to
obtain adequate fiscal revenue should not deprive the operators, private or public, of the financial
resources they need to increase their productivity and supply capacity, or their international competi-
tiveness. Recent upward trends in world market prices of fuels and minerals and mining products as a
result of growing demand from East and South Asia provide an opportunity to review the existing
fiscal and ownership regimes. Such a review – which is already under way in several countries – and
possible strategic policy adjustments could be more effective if oil and mineral exporting countries
would cooperate in the formulation of some generally agreed principles relating to the fiscal treatment
of foreign investors. Moreover, a higher share of the public sector or consumers in the rent generated
by extractive industries does not automatically enhance development and progress towards the MDGs;
it has to be accompanied by strategic use of the proceeds for investment that would enhance productive
capacity in other sectors, as well as in education, health and infrastructure.
At the international level, recent increases in the prices of some primary commodities and im-
provements in the terms of trade of a number of developing countries may not have changed the long-
term trend in real commodity prices or altered the problem of their volatility. Wide fluctuations in
primary commodity prices are not in the interest of either producers or consumers. This has also been
recognized by the IMF’s International Monetary and Financial Committee, which, at its April 2005
meeting, inter alia, underscored “the importance of stability in oil markets for global prosperity” and
encouraged “closer dialogue between oil exporters and importers”. Although primary commodities
other than oil may be less important for the developed countries, they are nevertheless equally, if not
more important for those developing countries that depend on exports of such commodities. And since
in many of the latter countries extreme poverty is a pressing problem, the issue of commodity price
stability is of crucial importance not only for the achievement of the MDGs but also for global pros-
perity in general. Consequently, in the spirit of a global partnership for development, the international
community might consider reviewing mechanisms at the global or regional level that could serve to
reduce the instability of prices of a wider range of commodities, not just oil, to mitigate its impact on
the national incomes of exporting countries.
In the short term, however, the central policy issue concerns the correction of existing global
trade imbalances. It is often argued that the decision of central banks in the developing world, and in
particular in Asia, to intervene in the currency market is the main reason for these imbalances. Indeed,
most of the intervening countries explicitly try to avoid currency appreciation that could result from
speculative capital inflows, in order to ensure that the international competitiveness of the majority of
their producers is not put at risk. Most of the East Asian countries adopted a system of unilateral fixing
of their exchange rates following the Asian financial crisis, while most Latin American turned to
managed floating. In both cases, the aim has been to maintain the real exchange rate at a competitive
level while gaining a certain degree of independence from international capital markets.
In the absence of a multilateral exchange rate system that takes account of the concerns of small
and open developing economies, such unilateral stabilization of the exchange rate at a competitive
level appears to be an effective means of crisis prevention. Individual central banks do have the capacity
X
for successful and credible counter-attacks when their own currency is under “threat” or pressure to
appreciate. By contrast, they are practically powerless to stabilize an exchange rate that has come
under threat or pressure to depreciate, even if central banks have accumulated huge reserves of inter-
national currency. It would require multilateral cooperation and policy coherence to address this type
of asymmetry. The premature liberalization of capital markets has seriously heightened the vulner-
ability of developing countries to external financial shocks. Moreover, it has become clear that strengthen-
ing domestic financial systems is not enough to significantly reduce that vulnerability.
For a smooth redressing of the global imbalances, it is essential to avoid a recession in developed
countries – where growth has been depending excessively on the United States economy – and a
marked slowdown in developing countries. A scenario which seeks to correct the global imbalances,
and most importantly the external deficit of the United States, through massive exchange rate appre-
ciation and lower domestic absorption in China and other developing countries in Asia, will almost
inevitably have a deflationary impact on the world economy. It will not only jeopardize China’s at-
tempts to integrate a vast pool of rural workers and, more generally, reduce poverty, but will also
adversely affect the efforts of other developing countries towards achieving the MDGs.
By contrast, adjusting the global imbalances will be less deflationary if demand from the euro
area and Japan grows faster. It should not be forgotten that much of the counterpart to the United
States’ external deficit is to be found in the surpluses of other developed countries. The current-account
surpluses of the euro area and Japan with the rest of the world are mushrooming – despite rising
import bills for oil and other primary commodities. Indeed, Japan and Germany together accounted
for $268 billion or about 30 per cent of the combined global current-account surplus in 2004. This
compares with an overall current-account surplus of $193 billion in East and South Asia. China, the
country on which revaluation pressure has been most intense, accounts for just over one third of this
amount, or less than 8 per cent of the combined global surplus.
International initiatives to alleviate poverty and to reach the MDGs should not ignore the impor-
tance of a smooth correction of the global imbalances so as to ensure the sustainability of the “Asian
miracle”. Indeed, further economic catch-up by China and India will have expansionary effects for
most developing countries. Any slowing down or disruption of this process would carry the risk of
intensifying global price competition on the markets for manufactures exported by developing countries,
while weakening the expansionary effects resulting from the growing demand from Asia.
Supachai Panitchpakdi
Secretary-General of UNCTAD
Current Issues in the World Economy
1
Chapter I
CURRENT ISSUES IN THE WORLD ECONOMY
A. Introduction
The world economy is still growing at a
The sustainability of the present growth path
steady pace but the risk of a relapse hangs in the
is facing several threats. Serious multilateral ac-
balance. The moderate slowdown registered in the
tion to unwind global current-account imbalances
first half of 2005 indicates that the world’s main
without endangering the growth process has been
engine of growth, the United States economy, may
missing. Instead, political pressure on some coun-
not be able to drive forward global growth with-
tries to take unilateral measures is mounting, as
out the support from other parts of the world.
analysed in section C of this chapter. It is shown
Meanwhile, the euro area is stuck in stagnation,
that the European Union, in its own interest,
and Japan’s growth shows a moderate deceleration.
should do more to accelerate domestic demand
growth and enhance absorption.
Growth performance in the developing coun-
tries was generally good and the populous East
Section D of this chapter focuses on the ef-
and South Asian countries, in particular China and
fects of the oil price hike on the world economy
India, acted as the second engine of worldwide
from a historical perspective. It shows that the
growth. As a result of their vigorous expansion
direct impact of quickly rising oil-import bills on
and their strong demand for imports of raw mate-
the developed countries has been much less pro-
rials, many other developing countries have
nounced than in the period which followed the oil
experienced windfall revenues from rising com-
price shocks of the 1970s. Moreover, there are so
modity prices and surging demand for intermediate
far no signs of negative indirect effects on infla-
products. Even Africa posted a growth rate of
tion and interest rates. On the other hand, the oil
about 4.5 per cent in 2004 and it is expected to
price hike has had, and continues to have, a sig-
expand by close to 5 per cent this year. Although
nificant impact on the economies of many
these growth rates allow for an increase in per
oil-importing developing countries.
capita income, in sub-Saharan Africa they are still
insufficient to attain the Millennium Development
Section E examines some aspects of the
Goals (MDGs) by 2015. Section B of this chapter
present economic expansion in China and India,
assesses the global growth record and regional
and compares it with the rapid growth episodes
performances.
experienced by Japan and the Republic of Korea
2
Trade and Development Report, 2005
in the period following the Second World War. It
of establishing a balance between expanding do-
highlights the role played by profit-investment
mestic and foreign demand, and the importance
linkages, the sectors driving the economy, the need
of supportive macroeconomic policies.
B. The world economy: growth performance and prospects
The world economy grew by almost 4 per
what supplementary policies would be needed if
cent in 2004, recording its best performance since
the United States current account is to be signifi-
2000. Global growth continued into 2005 – albeit
cantly reduced (see section C).
at a slower pace – and is expected to fall to around
3 per cent. Most of this deceleration is attribut-
Annual growth in the United States is fore-
able to the slowdown in developed economies,
casted to be around 3.5 per cent in 2005 (Klein and
although some developing countries are also
Ozmucur, 2005). Indeed, personal consumption
showing signs of losing momentum. Developing
expenditures and fixed investment have slowed
economies as a whole are expected to grow by
in the first quarter 2005.1 It is an open question
5 to 5.5 per cent, down from 6.4 per cent in 2004
whether these are the first signs of a persistent
(table 1.1).
deceleration of growth. On one hand, recent in-
creases in labour income and corporate profits may
support future private expenditure while, on the
other hand, their positive effects may be offset by
1.
Economic activity in developed
slower productivity gains, high energy costs, and
countries
the fading of temporary factors such as tax cuts
and the depreciation of the dollar. Moreover, di-
minishing fiscal and monetary stimulus may
Domestic demand was the main driving force
eventually affect domestic demand. Fiscal policy
of growth in the United States in 2004, with pri-
is set to be less expansive than in previous years,
vate domestic investment growing at a two-digit
as it aims to reduce the public deficit from 3.6 per
rate and personal consumption maintaining a sig-
cent of GDP in 2004 to 1.8 per cent by 2009. This
nificant rate of growth, especially in durable
may require some cutbacks in expenditure, espe-
goods. The volume and value of United States
cially if reforms involving fiscal costs, such as
exports grew at a brisk pace in 2004 and the first
those associated with the social security system,
months of 2005, in part because of the real depre-
are carried out while higher interest rates weigh
ciation of the dollar. However, imports grew even
on public debt services. Even if interest rates re-
faster and, as a consequence, trade contribution
main at historically low levels, rising rates may
to gross domestic product (GDP) growth continued
have a negative effect on the consumption of du-
to be negative. Trade and current-account deficits
rable goods and on fixed investment. More
widened, with the latter rising to 6 per cent of GDP
generally, interest rate movements may have size-
in the last quarter of 2004, raising the question of
able economic effects, as domestic debt levels in
Current Issues in the World Economy
3
Table 1.1
WORLD OUTPUT GROWTH, 1990–2005a
(Percentage change over previous year)
1990–
Region/countryb
2000c
1999
2000
2001
2002
2003
2004d 2005e
World
2.7
2.9
4.0
1.3
1.8
2.5
3.8
3.0
Developed countries
2.4
2.7
3.5
1.0
1.3
1.7
3.0
2.3
of which:
Japan
1.4
0.1
2.8
0.4
-0.3
1.4
2.6
1.8
United States
3.4
4.1
3.8
0.3
2.4
3.0
4.4
3.5
European Union
2.1
2.9
3.6
1.7
1.1
0.9
2.1
1.5
of which:
European Union-15
2.1
2.9
3.5
1.6
1.0
0.8
2.0
1.4
Euro area
2.0
2.8
3.5
1.6
0.9
0.5
1.8
1.2
France
1.7
3.2
3.8
2.1
1.2
0.5
2.1
1.5
Germany
1.6
2.0
2.9
0.9
0.2
-0.1
1.0
0.8
Italy
1.6
1.7
3.0
1.8
0.4
0.3
1.0
-0.4
United Kingdom
2.7
2.8
3.8
2.1
1.7
2.2
3.1
2.0
South-East Europe and CIS
-4.3
3.4
8.1
5.6
4.9
6.9
7.5
6.0
Developing countries
4.8
3.5
5.4
2.4
3.5
4.7
6.4
5.4
Developing countries, excluding China
4.0
3.0
5.0
1.5
2.7
3.9
5.7
4.6
Source: UNCTAD secretariat calculations, based on UNCTAD Handbook of Statistics 2004; United Nations, Department of
Economic and Social Affairs (UN/DESA), Development Policy and Planning Office, Project Link estimates; national
sources; IMF, World Economic Outlook, April 2005; JP Morgan, Global Data Watch, various issues; Economic Intelligence
Unit (EIU), Country Forecast, various issues; and OECD, Economic Outlook No. 77.
a Calculations are based on GDP in constant market prices based on 1995 dollars.
b Region and country groups correspond to those defined in the UNCTAD Handbook of Statistics 2004.
c Average.
d Preliminary estimates.
e Forecast.
non-financial sectors reached $24.8 trillion at the
have benefited from significant gains in terms of
end of the first quarter of 2005 – roughly twice the
trade, in large part due to their primary commod-
size of GDP.
ity exports. Australia, Canada and the United
Kingdom are expected to experience a moderate
Rising interest rates and/or a decline in
decline in their GDP growth in 2005, to a rate close
housing prices may also affect other developed
to 2.5 per cent.
countries – such as Australia, Canada and the
United Kingdom – where private consumption has
Economic growth in the euro area has slowed
been partly sustained by booming house prices and
since mid-2004. Most forecasters have reduced the
rising household indebtedness. This contribution
2005 growth expectations (set in the Autumn of
to growth is most likely coming to an end as house-
2004) from 2 per cent to 1.5 per cent or even
hold saving ratios recover from their current low
slightly below. The economic slowdown was
levels. Real appreciation has hampered export
mainly attributed to a fall in the growth rate of
volumes and boosted imports in Australia and
exports (induced by the appreciation of the euro)
Canada, resulting in a negative contribution of net
in concert with sluggish domestic demand in many
exports to GDP growth; however, these countries
countries. As pointed out by UNCTAD over the
4
Trade and Development Report, 2005
past three years, the biggest European countries
2.
Economic activity in developing
have not been able to reach a higher and sustain-
countries
able growth path despite receiving enormous
stimulus from the world economy. This inability
is attributed to depressed domestic demand as a
In 2004, all developing regions posted sig-
result of a mixture of deflationary wage policies
nificantly higher growth rates than in previous
(i.e. in Germany, where a 0.8 per cent growth rate
years (table 1.2). With a GDP growth of 4.6 per
expected in 2005) and losses of market shares (i.e.
cent, Africa continued to grow at the same rate as
in Italy, whose GDP is expected to fall in 2005).
in 2003 – the highest level reached in about a dec-
France, with a more moderate deflationary policy
ade. However, the overall figures for the region
than Germany, remains in the middle of the group,
mask considerable differences across countries,
with growth forecasted at around 1.5 per cent.
with growth rates ranging from an expansion of
Spain is estimated to grow at a rate of about 3 per
31 per cent (Chad) to a contraction of over 8 per
cent in 2005 owing to sustained domestic demand.
cent (Zimbabwe). The strong growth performance
As no fundamental changes in economic policy
in Africa was fuelled mainly by higher prices of
within the euro area are foreseen, an acceleration
primary commodity exports, particularly petro-
of growth in the near future cannot be expected.
leum, on the back of strong global demand.
The 2005 outlook for the ten new members of the
Economic growth was also supported by greater
European Union is more upbeat and growth rates
political stability and the improved agricultural
are expected to exceed 4 per cent.
performance resulting from favourable weather
conditions. The continued growth in domestic
All in all, Europe is not positioned to help
demand is also credited to increased levels of ex-
reduce global imbalances in the next two years.
ternal resource inflows via aid and debt relief, with
Its overall current-account deficit is rather low
the latter contributing to lower fiscal deficits. The
(0.3 per cent of GDP) but the imbalances of coun-
general level of inflation went down from over
tries inside the European Monetary Union in-
10 per cent to about 8 per cent.
creased dramatically in the last three years. For
example, Germany’s surplus of $110 billion (3.8 per
Real GDP growth in 2004 was widespread in
cent of GDP), forecasted for 2005 by IMF (2005a),
both sub-Saharan Africa and North Africa. High
is much larger than China’s surplus.
oil prices underscored output growth in Central
Africa, which recorded the highest subregional
In 2004, Japan recorded a growth rate of
growth rate at just over 7 per cent, and North Af-
2.6 per cent, which was driven by private and pub-
rica, with a growth rate of around 5 per cent.
lic consumption, non-residential investment and
Economic performance in East and West Africa
brisk export performance. Growth was strong in
benefited from a combination of higher agricul-
the first quarter of 2004, but faded in the second
tural output and rising commodity prices. However,
half of the year, as domestic and foreign demand
economic growth in West Africa was subdued, due
weakened. In the first months of 2005, high cor-
to political instability in Côte d’Ivoire and a lo-
porate profits and the reversal of the long-lasting
cust invasion in Mali, Niger and Senegal. Despite
downward trend in employment and wages indi-
higher growth in South Africa, the Southern African
cate that the sluggishness of domestic demand in
region recorded the worst economic performance
the second half of 2004 may be over. Recent data
of all the African subregions, largely due to the
on export performance are, however, less positive.
continued economic contraction experienced by
They show a year-on-year deceleration of exports
Zimbabwe as a consequence of drought and eco-
in late 2004, due to a slowdown in electronics ex-
nomic uncertainties.
ports. This is partly related to rising foreign direct
investment (FDI) and production relocation to
Twelve African countries posted real output
China (see chapter II). As a result, in 2005 trade
growth of 6 per cent or more in 2004, eight of
is not expected to make a positive contribution to
which are either oil exporters (Chad, Equatorial
real GDP growth as it had in 2004. The forecast
Guinea, Angola, the Libyan Arab Jamahiriya and
for 2005 points to a moderate deceleration in real
Sudan), or are recovering from a very low base
growth to 1.8 per cent.
(Ethiopia, Sierra Leone and the Democratic Re-
Current Issues in the World Economy
5
public of the Congo). Thus, once again, most coun-
will probably be maintained at the current high
tries have fallen short of the 7 per cent annual
levels in the Islamic Republic of Iran, Qatar and
growth rate that is needed to attain the MDGs. A
the United Arab Emirates. In addition, several in-
modest improvement is expected in the region’s
vestment projects are on line, covering the energy
economic performance in 2005 on the back of
sector (oil, gas and refineries), infrastructure, tele-
continuing macroeconomic and political stability
communications and real estate. At the same time,
and high commodity prices; although domestic
government expenditure is set to continue its up-
prices and external accounts in oil-importing coun-
ward trend; and it is aimed, in part, at addressing
tries will continue to suffer from high oil prices.
social problems related to high unemployment.
However, even in oil-exporting countries that have
been growing at two-digit rates over the past few
Other economies within the region, such as
years, poverty levels will not be significantly re-
Jordan and Lebanon, also experienced accelerated
duced unless governments manage to channel a
growth in 2004, mainly driven by domestic de-
significant part of the oil revenues into financing
mand that was stimulated by the expansion of
of non-oil economic sectors (including social and
regional tourism and higher workers remittances
economic infrastructure), where the great major-
(ESCWA, 2005). Also, capital inflows into real
ity of population is employed.
estate investments boosted the construction sec-
tor. These countries managed to expand exports
West Asia performed strongly in 2004, reach-
and profit from higher regional demand, includ-
ing 6.2 per cent growth in comparison to 5.3 per
ing from Iraq. However, imports also expanded
cent in the previous year. These performances are
significantly and public debt remains high. These
directly related to the massive injection of wind-
circumstances limited the room for manoeuvre of
fall revenues flowing into oil exporting countries,
economic policies, making them highly depend-
which also benefited indirectly most of the other
ent on continued inflows of capital, tourism and
countries in the region through increased demand
remittances.
for their exports, capital inflows and workers re-
mittances.
Turkey posted a 8.9 per cent growth rate in
2004, propelled by strong domestic demand, in
Export revenues of the major oil exporters
particular private consumption and fixed invest-
in the region (excluding Iraq) reached $292 bil-
ment. An economic slowdown began in the second
lion in 2004,2 32 per cent more than in the previous
half of that year and extended into the first months
year, owing mainly to higher international oil
of 2005.3 However, GDP growth in 2005 is estimated
prices. The volume of oil production also in-
to remain at around 5 per cent. Macroeconomic
creased (4.2 per cent for the group as a whole),
policy has to deal with the “twin” deficits prob-
contributing significantly to real GDP growth.
lem. Overall fiscal balance remained negative in
These additional revenues, on average, repre-
2004, despite a primary surplus of 6.5 per cent of
sented 12 per cent of these countries’ GDP, and
GDP, due to a public debt stock amounting to three
boosted domestic expenditure. In particular, govern-
quarters of GDP and high real interest rates. More-
ment revenues augmented significantly, allowing for
over, although exports were growing significantly,
an increase in public expenditures and, simulta-
the current-account deficit reached 5 per cent of
neously, a significant fiscal surplus. Part of the
GDP in 2004, as a result of booming imports and
surplus has been used to accumulate reserves, but
interest payments. These deficits remain a chal-
another part was used to reduce indebtedness. As
lenging issue for the Turkish economy. On the
in some countries (notably Saudi Arabia) the bulk
other hand, the continued reduction of interest
of public debt is held by nationals, debt repay-
rates by the central bank may play an important
ments have further expanded private liquidity and
role in the sustainability of public debt and in pre-
demand. Expansionary trends have continued into
venting an excessive economic slowdown.
2005. Oil prices rose by 30 per cent in the first
half of the year; if such price levels persist, oil
With 7.1 per cent growth in 2004, East and
revenues will increase in 2005 at a similar rate as
South Asia recorded its strongest expansion since
in the previous year. Oil production is set to in-
the 1997 financial crisis. China led the boom with
crease further in Saudi Arabia and Kuwait, and
output growing by 9.5 per cent, but growth was
6
Trade and Development Report, 2005
Table 1.2
GDP GROWTH IN SELECTED DEVELOPING ECONOMIES,
SOUTH-EAST EUROPE AND CIS, 1990–2005a
(Percentage change over previous year)
1990–
Region/economyb
2000c
1999
2000
2001
2002
2003
2004d
2005e
Developing economies
4.8
3.5
5.4
2.4
3.5
4.7
6.4
5.4
Latin America
3.3
0.2
3.8
0.4
-0.6
2.0
5.7
4.2
of which:
Argentina
4.1
-3.4
-0.8
-4.4
-10.9
8.7
9.0
7.5
Bolivia
4.0
0.4
2.3
1.5
2.8
2.9
3.6
3.5
Brazil
2.9
0.8
4.5
1.5
1.5
0.6
4.9
3.0
Chile
6.6
-0.8
4.2
3.1
2.1
3.3
6.1
6.0
Colombia
2.9
-4.2
2.9
1.4
2.5
2.0
4.0
3.5
Ecuador
2.2
-6.3
2.8
5.1
3.8
3.1
6.9
3.0
Mexico
3.1
3.6
6.6
-0.2
0.9
1.3
4.4
3.3
Paraguay
2.2
0.5
-0.4
2.7
-2.3
2.6
4.0
3.0
Peru
4.6
0.9
2.8
0.3
4.9
4.0
4.8
5.5
Uruguay
3.4
-2.4
-1.4
-3.4
-11.2
2.5
12.3
5.5
Venezuela
1.6
-6.1
3.2
2.8
-8.9
-7.5
17.9
8.0
Africa
2.6
3.0
3.5
3.4
2.9
4.7
4.6
4.9
of which:
Algeria
1.9
3.2
2.4
2.1
4.1
6.7
5.8
7.5
Cameroon
1.8
4.2
5.3
4.6
4.0
4.0
4.8
4.5
Cape Verde
6.0
8.6
6.8
3.0
4.6
5.0
4.0
6.0
Côte d’Ivoire
3.3
1.9
-2.7
0.1
-1.2
1.8
-1.0
-1.0
Democratic Republic of the Congo
-4.9
-4.3
-6.9
-1.1
3.1
5.0
6.8
7.0
Egypt
4.2
5.4
3.5
3.2
3.1
2.8
3.2
5.0
Ethiopia
3.9
6.3
5.4
7.9
1.2
-3.8
11.6
6.0
Ghana
4.3
4.4
3.7
4.2
4.5
4.7
5.8
5.0
Kenya
2.1
1.3
-0.2
1.1
1.0
1.8
2.6
3.0
Morocco
2.3
-0.1
1.0
6.3
3.2
5.2
3.7
4.0
Nigeria
2.9
2.8
5.8
2.8
1.5
10.7
5.1
4.5
South Africa
2.1
2.0
3.5
2.7
3.6
2.8
3.7
4.0
Tunisia
4.7
6.1
4.7
4.9
1.7
5.6
5.7
5.0
Zimbabwe
2.5
-0.7
-4.9
-8.4
-5.6
-13.2
-8.2
-3.0
Sub-Saharan Africa
2.6
2.9
3.9
3.2
3.0
4.8
4.4
4.4
Asia
6.0
5.3
6.6
3.2
5.5
5.9
6.9
6.0
Asia, excluding China
4.9
4.8
6.2
1.9
4.7
4.8
6.0
4.8
West Asia
3.2
-0.6
4.6
-0.1
4.3
5.3
6.2
5.2
of which:
Iran, Islamic Republic of
3.5
4.2
2.8
3.2
8.0
6.7
5.4
5.5
Jordan
4.6
1.5
2.7
3.5
4.9
3.0
6.2
5.0
Lebanon
6.3
4.0
2.0
1.4
2.0
3.0
4.0
2.0
Saudi Arabia
1.7
-0.8
4.9
1.2
0.1
7.2
5.3
5.5
Turkey
3.8
-4.7
7.4
-7.5
7.8
5.8
8.9
5.0
United Arab Emirates
2.6
2.5
5.4
5.0
1.6
6.3
5.9
6.0
Yemen
5.5
3.7
5.1
3.9
3.3
4.2
2.0
3.0
East and South Asia
6.6
6.5
7.0
3.9
5.7
6.0
7.1
6.1
of which:
China
10.4
7.0
7.9
7.5
8.0
9.1
9.5
9.0
Hong Kong (China)
4.0
3.4
10.2
0.5
2.3
1.5
8.1
5.0
India
6.0
7.1
4.0
5.5
4.3
7.8
6.7
6.5
Indonesia
4.2
0.8
4.9
3.4
4.3
5.0
5.1
6.0
Malaysia
7.0
6.1
8.3
0.5
4.1
5.3
7.1
5.5
Pakistan
3.5
4.3
2.6
2.9
5.8
5.3
6.3
7.5
Philippines
3.3
3.4
6.0
3.0
4.4
4.7
6.1
4.0
Republic of Korea
5.8
10.9
9.3
3.1
6.4
3.1
4.6
3.5
Singapore
7.7
6.4
9.4
-2.4
3.2
1.4
8.4
2.5
Taiwan Province of China
6.3
5.3
5.8
-2.2
3.9
3.3
5.7
3.5
Thailand
4.2
4.4
4.6
1.8
5.4
6.7
6.1
4.0
Viet Nam
7.9
4.8
6.8
6.9
7.0
6.0
7.7
7.0
/...
Current Issues in the World Economy
7
Table 1.2 (concluded)
GDP GROWTH IN SELECTED DEVELOPING ECONOMIES,
SOUTH-EAST EUROPE AND CIS, 1990–2005a
(Percentage change over previous year)
1990–
Region/economyb
2000c
1999
2000
2001
2002
2003
2004d
2005e
South-East Europe and CIS
-4.3
3.4
8.1
5.6
4.9
6.9
7.5
6.0
CIS
-5.0
5.6
9.3
5.8
5.0
7.6
7.8
6.3
of which:
Belarus
-1.7
3.5
5.8
4.7
5.0
6.8
11.0
7.0
Kazakhstan
-4.1
2.7
9.8
13.2
9.9
9.2
9.4
8.5
Russian Federation
-4.7
6.4
10.1
5.1
4.7
7.3
7.1
6.0
Ukraine
-9.5
-0.2
5.9
9.2
3.6
8.5
12.1
6.5
South-East Europe
-1.6
-4.4
3.8
4.6
4.4
4.1
6.4
4.8
of which:
Bulgaria
-1.9
2.3
5.4
4.1
4.8
4.8
5.6
5.0
Croatia
0.6
-0.9
2.9
3.8
5.2
4.7
3.8
3.5
Romania
-0.6
-1.2
2.1
5.7
4.9
4.8
8.3
5.5
Source: UNCTAD secretariat calculations, based on UNCTAD Handbook of Statistics 2004; UN/DESA, Development Policy
and Planning Office, Project Link estimates; ECLAC, Economic Survey of Latin America and the Caribbean 2004–2005;
ESCAP, Economic and Social Survey of Asia and the Pacific 2005; ESCWA, Survey of Economic and Social Develop-
ments in the ESCWA Region 2005; national sources; IMF, World Economic Outlook, April 2005; JP Morgan, Global
Data Watch, various issues; EIU, Country Forecast, various issues; and OECD, Economic Outlook No. 77.
a Calculations are based on GDP in constant market prices based on 1995 dollars.
b Region and country groups correspond to those defined in the UNCTAD Handbook of Statistics 2004.
c Average.
d Preliminary estimates.
e Forecast.
also strong in most other countries in the region
rate. Other countries maintained a fixed exchange
(table 1.2). Economic growth was generally fuelled
rate vis-à-vis the dollar, or even depreciated their
by a combination of strong foreign demand and
currency as in Indonesia. Only the Republic of
robust domestic demand. Exports have been a
Korea underwent a significant real appreciation
major driving force: in 2004, exports of goods
of its currency, but so far this has not restrained
from the region grew by 22 per cent in volume
exports from growing briskly.
terms (table 1.3). China’s exports led the expan-
sion, with export volume growing by 33 per cent,
With the exception of the Republic of Korea
but several other countries that participate in re-
where private demand was constrained by high
gional production networks associated with China
indebtedness of households and small firms, do-
also benefited from its strong export performance.
mestic demand contributed considerably to the
The region’s exports continued to grow at double-
region’s growth. Private consumption provided a
digit rates in 2004, partly as a result of the dynamism
strong stimulus to growth in China, India, Indo-
in the global market for electronics. In general,
nesia, Malaysia, Singapore, Thailand and Viet
exchange rate stability helped to maintain inter-
Nam, with fixed investment being the main driver
national competitiveness in most countries, although
of growth in China and Taiwan Province of China.
in Singapore, Taiwan Province of China and Thai-
Inflation, as measured by consumer prices, showed
land, and recently in China as well, managed
a moderate increase in some countries during 2004,
floating led to a moderate appreciation vis-à-vis
but remained modest in most East and South Asian
the dollar. This softened the impact of the rising
countries. Monetary policy maintained an accom-
price of primary imports, without leading to a sig-
modative stance and real interest rates have mostly
nificant appreciation of the real effective exchange
been declining. On the whole, high income growth
8
Trade and Development Report, 2005
Table 1.3
EXPORT AND IMPORT VOLUMES OF GOODS, BY REGION
AND ECONOMIC GROUPING, 1996–2004
(Percentage change over previous year)
Export volume
Import volume
1996–
1996–
2000a 2001
2002
2003
2004
2000a 2001
2002
2003
2004
World
7
-1
5
6
13
7
-1
4
7
13
Developed economies
7
-1
2
3
11
8
-1
3
5
11
of which:
Japan
6
-8
8
9
13
4
1
1
6
6
United States
7
-6
-4
3
9
11
-3
4
5
11
Europe
7
2
4
3
12
8
1
2
5
11
Developing economies
8
-2
9
12
16
7
-3
7
10
19
of which:
Africa
2
1
2
11
7
1
5
4
7
26
Latin America
10
1
2
3
10
9
-3
-4
0
13
West Asia
5
0
8
1
3
10
-4
7
-5
35
East and South Asia
10
-3
12
17
22
6
-3
11
15
18
of which:
China
12
9
25
35
33
11
12
23
36
26
India
8
7
17
10
18
5
4
13
9
17
South-East Europe and CIS
1
7
5
9
13
-0
17
10
21
17
Source: UNCTAD secretariat calculations, based on UN COMTRADE; United Nations Statistics Division, United Nations Common
Database (UNCDB); United States Bureau of Labor Statistics, Import/Export Price Indexes database; Japan Customs
Trade Statistics database; UNCTAD, Commodity Price Bulletin, various issues; and other national sources.
a Average.
and good investment performance contributed to a
first months of 2005. Private consumption began
balanced increase of domestic and foreign demand.
to recover in the Republic of Korea in the last
quarter of 2004, after contracting for almost two
In 2005, economic expansion in East and
successive years. However, this does not fully
South Asia is expected to slow to a growth rate of
compensate for slowing export growth. As a result,
slightly above 6 per cent. In particular, the contri-
GDP growth is forecast to decline to 3.5 per cent
bution of external trade to growth is diminishing
(KDI, 2005). Investment has been increasing in
in several countries in the region, although it re-
Indonesia and Thailand in 2005, owing to recon-
mains significant. Global demand for electronics,
struction work after the December 2004 tsunami
especially personal computers and semiconduc-
and the subsequent influx of public investment and
tors, is growing much slower since the end of
incentives for infrastructure development. In In-
2004, affecting exports from several Asian econo-
donesia, the tsunami did not cause a significant
mies, such as Japan, Malaysia, Singapore, Taiwan
impact on economic growth in the first quarter of
Province of China and Thailand.
2005. On the other hand, economic activity was
more severely affected in Thailand, where the re-
On the other hand, domestic demand has gen-
duction of tourism receipts and shrimp production
erally maintained its contribution to growth in the
after the tsunami added to other adverse factors,
Current Issues in the World Economy
9
such as high oil prices, drought and outbreaks of
In South Asia, India and Pakistan are experi-
bird flu (NESDB, 2005). As a result, Thailand’s
encing high and stable growth rates. India has
growth will decelerate in 2005 to a rate of 4 per
undergone significant growth in manufacturing
cent. In Malaysia, private consumption is expected
and exports of IT-related services and business-
to continue growing in 2005, and investment
process outsourcing. This has helped to off-balance
should increase within a context of low interest
the adverse impact of a poor monsoon on agricul-
rates and easy credit availability. As Malaysian
ture. Inflation has been kept in check despite
exports are highly concentrated in electronics and
higher oil and other primary commodity prices.
electrical machinery, export growth is likely to
The fiscal measures taken by the Indian Govern-
slow down. The overall result would be a moder-
ment have so far not led to a substantial reduction
ate deceleration of growth to a still strong 5.5 per
of the fiscal deficit, which remains stable at 4.5 per
cent. Taiwan Province of China, is also experi-
cent of GDP. As a consequence, macroeconomic
encing slower export growth, while its overall
policy is likely to maintain a rather supportive
domestic demand should be sustained by the in-
stance. In Pakistan, strong GDP growth resulted
crease in private consumption, owing to rising real
from good performances in all sectors; however,
disposable income and falling unemployment.
it particularly benefited from an unusual expan-
These trends show a further rebalancing of growth
sion of agricultural output. A rich cotton crop has
in Asia as economies slowly shift their reliance
also contributed to stronger than expected growth
on export-led growth to internally-generated de-
in the textile sector. Real GDP growth may accel-
mand growth (NIESR, 2005: 19). Such a
erate in 2005, driven by the continued expansion
rebalancing is particularly relevant in light of the
of manufacturing output and exports, supported
huge global trade imbalances (see section B).
by the phasing out of textile import quotas in Janu-
ary 2005. Domestic demand will sustain present
GDP growth in China remained very high in
growth rates, in particular private consumption,
2004 and the first quarter of 2005 (9.5 per cent).
due to continued higher growth of personal dis-
The tightening measures introduced in the course
posable income.
of the year have started to have some impact on
investment expansion, even though it is still grow-
Latin American economies showed a remark-
ing at a rapid pace.4 Policy measures included the
able improvement in 2004, expanding at 5.7 per
abandonment of the strict pegging regime with the
cent, following five years of stagnation and cri-
dollar, higher bank reserve requirements, moder-
sis. The engines driving this economic recovery
ate increases in interest rates and direct measures
were export expansion and the terms-of-trade im-
aimed at limiting the financing of construction
provement in most countries in the region (see
projects and industries, such as steel and cement,
chapter III). Gains from terms of trade were very
that may have been building excessive production
significant for oil and mining exporters, and lower
capacities. These measures are likely to influence
but still relevant for agriculture exporters. On the
not only the amount that is invested, but also its
other hand, some Central American and Caribbean
direction. A reorientation of investment financing
countries that export labour-intensive manufac-
is under way towards areas where bottlenecks have
tures and import oil, suffered terms-of-trade losses.
appeared recently, in particular, energy and infra-
These countries managed to shoulder the external
structure. Inflationary pressures have abated
burden by increasing the volume of their exports
during the first half of 2005, indicating that more
(owing to expanding imports from the United
severe monetary tightening is unlikely. Exports
States) and receiving substantial remittances from
of goods continue to grow at a rapid pace, driven
overseas workers. The external environment led
by the end of textile quotas in developed coun-
to an overall surplus in the region’s current ac-
tries and the production of past investments in
count for the second consecutive year, despite a
manufacturing coming on stream. As a result of
significant growth in imports. On the fiscal side,
these trends, even though it remains a major driv-
the last few years showed a moderate reduction
ing factor, investment may not be making such a
in fiscal deficits and, in several cases, a consider-
large contribution to growth as in the past, while
able surplus in the primary balance (excluding in-
private consumption and net exports are playing
terest payments). This has been partly the result
an increasingly important role.
of increasing public revenues originated in pri-
10
Trade and Development Report, 2005
mary commodity exports, either directly – through
tics of this economic growth are radically different
State-owned exporting firms – or indirectly,
from those prevailing before the crisis. Argentina
through rising taxes and royalties. Fiscal expendi-
and Uruguay are drawing the benefits of restored
ture has been allowed to increase in some cases,
competitiveness after shifting relative prices in fa-
although in most countries fiscal policy was more
vour of tradable goods and services. Moreover,
oriented towards “debt sustainability” rather than
they have managed to restructure their foreign
towards the encouragement of economic activity
debt, particularly Argentina, with a sizeable reduc-
and investment. For this economic reactivation to
tion in capital and interest rates. Domestic demand
persist, it should rely less on temporary factors,
is providing new stimulus through higher domestic
such as the favourable external environment and
consumption and fixed investment. These countries
more on a sustained recovery of domestic demand,
have also benefited from improving terms of trade,
including investment. Even though the latter has
with a sizeable impact on domestic income and
improved after reaching record lows in 2003, fixed
fiscal receipts, especially in Venezuela, where am-
investment was only 18.5 per cent of the region’s
bitious social and development programmes have
GDP in 2004 (ECLAC, 2005).
been launched.
Preliminary evidence for 2005 points to a
The Andean countries that have gained strong-
continuation of economic growth, but at a slower
ly from oil and mining exports, both in volume
pace. One reason for this slowdown is monetary
and value terms, such as Bolivia, Chile, Ecuador
tightening in the two biggest Latin American econo-
and Peru, will continue to grow in 2005. How-
mies: Brazil and Mexico. In these two countries,
ever, there will not be the same amount of invest-
high priority is being placed on inflation targets,
ment in natural resources and of new production
leading to a significant increase in policy interest
capacities coming on stream in 2005 as in 2004.
rates, especially since the second half of 2004. In
High prices for their exports will continue to pro-
June 2005, the policy rate in Brazil reached a level
vide a considerable level of revenues for both the
close to 20 per cent with the inflation rate remain-
private and the public sector, maintaining a healthy
ing at 6 to 7 per cent. As a result, fixed investment
domestic demand. Central American countries will
and private consumption slowed down in the last
keep a moderate growth pace in 2005, with some
quarter of 2004 and the first quarter on 2005 (com-
export price increases, higher public investment
pared with the same period of the previous year),
linked to debt-relief programmes and private con-
affecting manufacturing, construction, commerce
sumption sustained by workers’ remittances. Fi-
and communications. Official forecasts for Brazil
nally, Caribbean countries, some of which were
anticipate a recovery in domestic demand in the
hit by natural disasters in the second half of 2004,
second part of the current year in expectation of
should benefit from the recovery of tourism in
lower interest rates and rising minimum wages.
2005.
GDP is expected to grow at a rate close to 3 per
cent in 2005, down from 4.9 per cent in 2004
(IPEA, 2005). In Mexico, persistent monetary
tightening has pushed the interbank rate up from
3.
Recent developments in world trade
5.3 per cent in January 2004 to 10.1 per cent in
and finance
May 2005. Economic activity decelerated in the
first months of 2005, particularly in manufactur-
ing, agriculture and construction, pointing to an
annual growth rate of about 3.3 per cent (com-
The strong performance of the global economy
pared to 4.4 per cent in 2004).5
in 2004 brought about an acceleration in world
trade. Total merchandise exports grew by 22.5 per
Economic activity in Latin America is also
cent in current dollars. As in 2003, this expansion
set to slow in 2005 because Argentina, Uruguay
was the result of both increasing volume (13 per
and Venezuela will grow at a less brisk pace. Ac-
cent) and rising dollar prices (9.5 per cent).6 The
cording to some observers the recent rapid growth
latter was partly caused by the depreciation of the
just reflects a return to the pre-crisis GDP levels.
dollar, which increased the value of international
However, the driving sectors and the characteris-
trade in dollar terms within the euro area.
Current Issues in the World Economy
11
The expansion in export volume was associ-
ports, as the economy has increasingly relied on
ated with some changes in its geographical com-
outsourcing in foreign markets.
position (table 1.3). In comparison with the situation
which prevailed in 2003, the major change was
World trade in services (transport, travel and
the strong recovery of export volumes from de-
other commercial services) grew by 16 per cent
veloped countries, which grew by 11 per cent in
in dollar terms in 2004 (WTO, 2005a). The expan-
2004, compared to 3 per cent in the previous year.
sion of transport services was naturally stimulated
There was a widespread acceleration of export
by the strong recovery in trade volume. In par-
volume growth in Europe, largely due to the speed-
ticular, world seaborne trade volume grew by
ing up of intraregional trade with the new EU ac-
4.3 per cent in 2004 (after a 5.8 per cent expansion
ceding member countries, and to expanding sales
in 2003), mainly as a result of increased shipments
to East Asia and to oil-exporters in West Asia and
of primary commodities directed to China and
the CIS. Exports from the United States also re-
other countries in East Asia (UNCTAD, 2005a).
covered, as a result of a more competitive cur-
Strong demand for transport services has main-
rency level, while Japan continued to benefit from
tained freight rates at very high levels, after
dynamic Asian intraregional trade.
soaring in 2003 (see box 4.1 in chapter IV). By
the end of 2004 the level of freight rates in the
Exports from developing countries continued
main containerized routes – trans-Pacific, trans-
their expansion at a very rapid pace in 2004, and
Atlantic and Asia-Europe – were mostly above the
registered a growth rate of 16 per cent in volume
levels that prevailed at the end of 2003.
terms. As in previous years, East and South Asia
led this expansion, but Latin America and Africa
Travel services recovered markedly from the
also experienced significant increases in export
2001 downturn. 2004 was an excellent year for
volumes. As has been usually the case since 1990,
tourism, with international tourist arrivals increas-
exports increased at higher rates in developing
ing by 10.7 per cent. Growth in tourism services
countries than in the developed world. However,
rebounded by 28 per cent in Asia and the Pacific,
the revival of exports of developed countries reduced
following the lows of the first half of 2003, which
the relative contribution of developing countries
had been due to SARS. It was also very fast in the
to global export growth from two thirds in 2003
Middle East (21 per cent), while Europe performed
to an estimated 40–45 per cent in 2004.
below the world average (with 5 per cent growth
in 2004) as a result of the continued strength of
Increasing export volume, together with
the euro. International tourism kept growing in the
higher commodity prices provided a boost to the
first four months of 2005, albeit at a slower pace
value of merchandise exports from developing
(7.7 per cent compared to the same period of
countries, which grew by 26 per cent in current
2004). Growth rates showed wide disparities, with
dollars. In particular, regions with a large share
very positive results in South America (with a 19 per
of primary commodities in their total exports –
cent expansion), Middle East (17 per cent) and
Africa, CIS, South America and West Asia – re-
sub-Saharan Africa (15 per cent), and slow growth
corded above-average export growth in 2004.
rates in Western and Southern Europe (below 3 per
Terms-of-trade gains from in these regions explain
cent). South-East Asia and South Asia experienced
the very rapid growth in import volume, clearly
a sudden deceleration in tourist arrivals due to the
exceeding that of exports (table 1.3). Among the
tsunami in December 2004 (World Tourism Or-
manufacturing exporters, East and South Asia also
ganization, 2005: 6–7).7
performed above average, mainly due to strong
export growth from China and India. As a whole,
Given these developments in goods and serv-
the share of developing countries in world exports
ices trade and the growing inflow of workers’
rose to 33.4 per cent in 2004, compared to 27.7 per
remittances in several countries, all developing
cent ten years earlier. Among developed countries,
regions posted current-account surpluses in 2004.
the United States have been constantly reducing
Naturally, these regional totals concealed some defi-
their share in world exports from 12 per cent in
cits at the country level, especially in sub-Saharan
the mid-1990s to 9 per cent in 2004, while at the
Africa, South-East Europe, Central America and
same time slightly rising their share in world im-
the Caribbean. But, in general, the need for fi-
12
Trade and Development Report, 2005
nancing the current account was less stringent in
cantly. Yet external debt problems have persisted
the developing world than in previous years. The
in some middle-income countries; many of them
single most important source of external financ-
have issued new bonds in order to repay those
ing for developing countries was FDI, which
coming to maturity, and have remained in a vul-
recovered to its 2001 level.8 A large part of the
nerable situation. But market conditions were
current-account deficit in several sub-Saharan and
favourable for a restructuring of external debt at
Central American countries is explained by the
lower interest rates. They also facilitated the end
expansion of FDI in recent years, which was ac-
of the Argentine debt default through a debt re-
companied by an increase in imports of capital
structuring, which included debt stock reduction,
goods and an outflow profit remittances. In other
extended maturity and/or lower interest rates. Sec-
cases, current-account deficits were financed
ond, there has been a continued accumulation of
through grants or official borrowing. On the other
international reserves in a number of developing
hand, in several middle-income countries in Asia
countries, mainly in East and West Asia. In 2004,
(including West Asia) and Latin America current
foreign exchange reserves of developing countries
accounts were in balance or in surplus.
increased by an unprecedented $450 billion (IMF,
2005a). As increasing reserves mainly consist of fi-
This overall situation had two consequences
nancial assets issued by developed countries (and
for the international financial markets. First, as
particularly those of the United States), they repre-
the more comfortable balance-of-payments situa-
sent a significant export of capital from developing
tion of the “emerging markets” coincided with
to developed countries, and a key element in the cur-
high liquidity in developed countries, the spreads
rent phenomenon of global economic imbalances.
on emerging markets bonds have declined signifi-
This issue is further examined in the next section.
C. The global imbalances and the United States
current-account deficit
The United States current account recorded
to shoulder part of the adjustment burden. Much
a deficit of $666 billion in 2004, which makes it
of the world economy continues to depend on the
the counterpart of almost 70 per cent of the aggre-
United States economy, both as the consumer and
gated surpluses in the world economy (table 1.4).
the debtor of last resort. Serious policy initiatives
This unprecedented size of a deficit and the dim
to tackle the problem are missing, and the debate
perspectives of its correction in the foreseeable
is now focused on whether dramatic exchange rate
future have raised questions about the stability of
changes are the only way out or whether policies
the global financial system and the sustainability
to stimulate growth in surplus regions, combined
of global growth. Warnings abound, as to date no
with measures to limit growth in the United States,
other major economic power has been prepared
could be an alternative.
Current Issues in the World Economy
13
Table 1.4
CURRENT-ACCOUNT BALANCE, SELECTED ECONOMIES, 2000–2004
2000
2001
2002
2003
2004
2000
2001
2002
2003
2004
(As a percentage of total
($ billion)
surplus or deficit)
Surplus economies
Japan
119.6
87.8
112.6
136.2
171.8
23.8
21.6
21.9
20.4
19.3
Germany
-25.7
1.6
43.1
51.8
96.4
3.9
0.4
8.4
7.8
10.9
China
20.5
17.4
35.4
45.9
70.0
4.1
4.3
6.9
6.9
7.9
Russian Federation
44.6
33.4
30.9
35.4
59.6
8.9
8.2
6.0
5.3
6.7
Saudi Arabia
14.3
9.4
11.9
29.7
49.3
2.9
2.3
2.3
4.4
5.5
Switzerland
30.7
20.0
23.3
42.4
42.9
6.1
4.9
4.5
6.4
4.8
Norway
26.1
26.2
24.4
28.3
34.4
5.2
6.4
4.8
4.2
3.9
Sweden
9.9
9.7
12.1
23.0
28.0
2.0
2.4
2.4
3.4
3.2
Singapore
11.9
14.4
15.7
27.0
27.9
2.4
3.5
3.1
4.0
3.1
Republic of Korea
12.3
8.0
5.4
12.1
26.8
2.4
2.0
1.0
1.8
3.0
Canada
19.7
16.1
14.4
17.0
26.0
3.9
4.0
2.8
2.6
2.9
Netherlands
7.2
9.8
12.8
15.1
19.4
1.4
2.4
2.5
2.3
2.2
Taiwan Province of China
8.9
18.2
25.6
29.3
19.0
1.8
4.5
5.0
4.4
2.1
United Arab Emirates
12.2
6.5
3.5
6.9
16.1
2.4
1.6
0.7
1.0
1.8
Hong Kong (China)
7.1
9.9
12.6
16.2
15.9
1.4
2.4
2.5
2.4
1.8
Malaysia
8.5
7.3
8.0
13.4
15.7
1.7
1.8
1.6
2.0
1.8
Kuwait
14.7
8.3
4.3
7.3
15.1
2.9
2.0
0.8
1.1
1.7
Belgium
9.0
8.9
14.1
13.3
14.9
1.8
2.2
2.8
2.0
1.7
Venezuela
11.9
2.0
7.6
11.4
14.5
2.4
0.5
1.5
1.7
1.6
Qatar
3.2
3.5
3.3
6.8
12.0
0.6
0.9
0.6
1.0
1.3
Total surplus
501.7
406.6
513.7
667.6
888.0
Deficit economies
United States
-413.5
-385.7
-473.9
-530.7
-665.9
62.2
67.7
72.5
71.1
69.0
Spain
-19.4
-16.4
-15.9
-23.6
-49.2
2.9
2.9
2.4
3.2
5.1
United Kingdom
-36.5
-32.2
-26.4
-30.6
-47.0
5.5
5.7
4.0
4.1
4.9
Australia
-15.3
-8.2
-16.6
-30.2
-39.4
2.3
1.4
2.5
4.1
4.1
Italy
-5.8
-0.7
-6.7
-21.9
-24.8
0.9
0.1
1.0
2.9
2.6
Turkey
-9.8
3.4
-1.5
-8.0
-15.6
1.5
0.8
0.2
1.1
1.6
Portugal
-11.1
-10.4
-8.9
-8.0
-13.3
1.7
1.8
1.4
1.1
1.4
Hungary
-4.0
-3.2
-4.7
-7.5
-8.9
0.6
0.6
0.7
1.0
0.9
Mexico
-18.2
-18.2
-13.7
-8.6
-8.7
2.7
3.2
2.1
1.1
0.9
Greece
-7.8
-7.7
-9.7
-10.8
-8.4
1.2
1.4
1.5
1.4
0.9
New Zealand
-2.5
-1.2
-2.2
-3.3
-6.0
0.4
0.2
0.3
0.4
0.6
Czech Republic
-2.7
-3.3
-4.2
-5.6
-5.6
0.4
0.6
0.6
0.7
0.6
France
18.0
21.5
14.5
5.0
-5.4
3.6
5.3
2.8
0.7
0.6
Romania
-1.7
-2.6
-2.0
-3.9
-5.4
0.3
0.5
0.3
0.5
0.6
South Africa
-0.2
-0.0
0.7
-1.5
-5.3
0.0
0.0
0.1
0.2
0.6
Poland
-10.0
-5.4
-5.0
-4.1
-3.6
1.5
0.9
0.8
0.5
0.4
Serbia and Montenegro
-0.3
-0.5
-1.4
-1.6
-3.2
0.1
0.1
0.2
0.2
0.3
Lebanon
-3.1
-3.8
-2.6
-2.5
-3.1
0.5
0.7
0.4
0.3
0.3
Ireland
-0.1
-0.6
-1.5
-2.1
-2.7
0.0
0.1
0.2
0.3
0.3
Azerbaijan
-0.2
-0.1
-0.8
-2.0
-2.3
0.0
0.0
0.1
0.3
0.2
Total deficit
-664.9
-569.4
-653.7
-746.0
-965.2
Source: IMF, World Economic Outlook, April 2005.
Note: Calculations are based on a total of 180 countries; the sum of total surpluses and deficits is different from zero because
of errors and omissions. Countries are listed according to the levels of their surplus/deficit in 2004.
14
Trade and Development Report, 2005
Figure 1.1
UNITED STATES CURRENT-ACCOUNT BALANCE,a RELATIVE GDP GROWTH
AND REAL EFFECTIVE EXCHANGE RATE, 1980–2004
(Per cent and index numbers, 2000 = 100)
Source: UNCTAD secretariat calculations, based on United States Bureau of Economic Analysis, International Economic Accounts
database; World Bank, World Development Indicators database; and JP Morgan, Effective Exchange Rate Indices
database.
a As a percentage of GDP.
1.
Twenty-five years of deficits in the
mainly determines the international competitive-
United States
ness of United States producers, rose markedly
during the first half of the 1980s. An overvalued
dollar played a central role in the widening cur-
The deficit in the United States current ac-
rent-account deficit. The subsequent reduction of
count is not a new phenomenon. In 1982 the
the deficit was accompanied by a depreciation of
United States current account fell into a deficit,
the dollar in the second half of the 1980s. The
which continued to grow until 1987 (fig. 1.1).
second factor is the gap between real GDP growth
Following the Plaza Agreement in 1985 and the
in the United States and in the rest of the world.
Louvre Accord in 1987, it returned to balance in
Relatively fast growth in the United States tends
1991. However, the current account went into defi-
to exacerbate the current-account deficit via strong
cit again, and it has since continued to widen in
import demand, whereas outright recessions (such
the context of the long-lasting and strong recov-
as the one which occurred in 1991) lead to the
ery in the United States. Since 1998, the share of
opposite result. More recently, however, these fac-
the deficit in GDP increased from around 2 per
tors seemed to have a weaker influence on the
cent to almost 6 per cent in 2004.
current account; since 1998 the deficit continued
to increase as a percentage of GDP, even though
These developments are explained by two
the growth gap between the United States and the
major factors. First, the real exchange rate, which
rest of the world has almost disappeared since
Current Issues in the World Economy
15
2000, and the dollar substantially depreciated in
in the United States current-account deficit in re-
2003 and 2004. While exports increased in 2004
cent years, it has considerable deficits with many
and in the first few months of 2005, the expan-
Asian countries as a result of its rapid growth and
sion of imports has continued to outpace them.
its presence at the end of many production chains.
On the other hand, the moderate increase in the
Some of the explanations given for the lack
current-account surplus of the EU as a whole hides
of a rapid response of imports to exchange rate
the much bigger increases in the surpluses of some
changes point to temporary factors; for instance,
individual countries in the euro area, in particular
the unit value of imports rises immediately after a
Germany.
devaluation, increasing the import value, while im-
port volume takes more time to adjust downward
In addition to such trade balance considera-
(the so-called J-curve effect). It has also been sug-
tions, a number of authors and organizations have
gested that firms exporting to the United States
recently examined how a devaluation of the dol-
would be willing to squeeze their profit margin
lar may modify the terms of the global imbalance
for some time in order to keep their market shares.
problem if the effects of financial globalization
Other interpretations indicate more durable factors,
are taken into account. They have introduced the
such as a loss of competitiveness and market shares
“valuation effect”, that is, the role of the actual
of some United States industries and redeployment
valuation of the stock of assets and liabilities and
of industrial production to Asia (Aglietta, 2004: 31).
the changes in their valuation due to asset price
It has also been argued that income elasticity for
changes and exchange rate changes.
United States imports is structurally larger than
foreign income elasticity for United States exports,
In the United States liabilities are almost ex-
leading to a tendency towards a trade deficit, even
clusively denominated in domestic currency. As
in the absence of a growth gap.9
two thirds of United States assets are denominated
in foreign currencies, a depreciation of the dollar
These arguments suggest that only a huge
increases the domestic currency value of assets,
depreciation of the dollar – with all its potential
while leaving the value of liabilities more or less
repercussions on the global financial system –
unchanged. As a result, the depreciation had a
could reduce the United States trade imbalances
positive effect on the “net international investment
and bring them down to a sustainable level. On
position” (NIIP) of the United States – i.e. the dif-
the other hand, an adjustment brought about by a
ference between the value of the accumulated
much lower growth in the United States involves
stock of assets (domestic claims on foreigners) and
obvious risks for the world economy. As the value
the accumulated stock of liabilities (foreign claims
of the United States imports currently represents
on residents). This effect did not stop the deterio-
roughly 180 per cent of its exports, the latter will
ration of the NIIP in dollar terms (i.e. liabilities
have to grow much faster than imports for a con-
to increase more than assets) due to the persist-
siderable time for the trade deficit to follow a
ence of the current-account deficit, but it limited
downward trend. Box 1.1 presents UNCTAD sec-
that deterioration.
retariat’s calculations of the order of magnitude
of the currency depreciation or the growth adjust-
Obviously, the opposite valuation effect oc-
ment required for reducing the current-account
curs in those countries, mainly in Europe, that are
deficit.
facing a currency appreciation vis-à-vis the dol-
lar. This process is interpreted as a burden sharing
These considerations raise a string of questions
among countries and as a facilitation of the glo-
about the currencies the dollar should depreciate
bal adjustment process.
against and which countries should either enhance
or dampen economic growth. The increase in the
However, the sharp appreciation of the dol-
Unites States deficit in recent years is most pro-
lar from 1996 to 2002 led to similar valuation
nounced with the EU and Asia (fig. 1.2); however,
losses for the United States and gains for Europe.
the intraregional structure of current-account sur-
Accordingly, the appreciation of the dollar at that
pluses and deficits has also to be taken into
time had accelerated the deterioration of the in-
account. While China accounts for most of the rise
vestment position of the United States that is
16
Trade and Development Report, 2005
Box 1.1
PRIMARY TRADE BALANCE EFFECTS OF CHANGES IN THE UNITED STATES
GDP GROWTH AND IN EXCHANGE RATES
UNCTAD secretariat calculated long-term trade elasticities for the estimation of: (i) the impact of
changes in domestic GDP on the United States merchandise trade balance; and (ii) the effect of a
dollar depreciation on the same trade balance. However, it must be kept in mind that, given the
trade deficit at the “initial situation”, exports must grow at least 1.8 times faster than imports to
reduce the merchandise trade deficit.
The table in this box presents the main results. The first exercise supposes that the rest of the word
(ROW) grows at 3.2 per cent, and considers three situations characterized by different GDP growth
in the United States, with the exchange rate remaining unchanged. In scenario 1, the United States
growth rate is the same than in the ROW. In this case, imports continue to grow faster than exports,
and the United States trade deficit would grow by 0.3 per cent of GDP, on top of the existing
5.7 per cent of GDP in 2004. In scenario 2 it is assumed that the trade deficit remains at its 2004
level. In order to achieve that (and assuming that ROW grows at 3.2 per cent), the United States
economy would need to reduce its GDP growth to 1.5 per cent. In this case, import growth would
be lower than in scenario 1, at 3.1 per cent. In scenario 3 the trade deficit is reduced to 5 per cent
of GDP. At constant exchange rate and ROW growth, this would require a negative GDP growth of
1.8 per cent in the United States, which would lead to a contraction in imports of 3.6 per cent.
The table also shows that a 10 per cent appreciation of the currency of one of the main trading
partners of the United States would not improve the imbalance visibly. The highest impact would
come from an appreciation of the Canadian dollar, followed by the euro and the Mexican peso.
Appreciations of the Chinese renminbi and the Japanese yen would have lower impacts, because of
the lower shares of these economies in the United States merchandise exports. According to the
simulation, a 10 per cent general depreciation of the dollar would reduce the trade deficit to 4.5 per
cent of GDP.
Additionally, the table shows the rates to which the main trading partners should appreciate their
currencies to reduce the United States trade deficit to 5 per cent of GDP. In the case of China, given
its low weight in the composition of United States exports, the renminbi would need to appreciate
by 67 per cent, whereas, for the Canadian dollar an appreciation of 26.5 per cent would be suffi-
cient.
decelerated by the depreciation now. Thus, the cur-
dollar that had accelerated the deterioration of the
rent change in favour of the United States simply
NIIP of the United States since the mid-1990s did
compensates the adverse effect that occurred be-
not prevent the rapid increase of the current-ac-
fore.
count deficit. Did the deterioration in the NIIP due
to the negative valuation effect make the access
Hence, the argument that the sustainable level
to external financing more difficult for the United
of that deficit would increase through the valua-
States at that time? If not, it is difficult to argue
tion effect because it is easier to finance the deficit
that the positive valuation now makes access of
thanks to a higher net value held in the United
the United States to financial markets much easier.
States is not convincing. The appreciation of the
If market participants in the financial markets
Current Issues in the World Economy
17
Box 1.1 (concluded)
EFFECT OF CHANGES IN GDP GROWTH AND IN EXCHANGE RATES
ON THE UNITED STATES TRADE BALANCE
Hypothetical change
Outcome
United States
Exchange
Merchandise
GDP
rate
Exports
Imports
trade balance
(Per cent)
(Per cent)
(Per cent of GDP)
GDP growth changes in the United Statesa
Scenario 1
3.2
-
4.4
6.6
-6.0
Scenario 2
1.5
-
4.4
3.1
-5.7b
Scenario 3
-1.8
-
4.4
-3.6
-5.0
Exchange rate changes
Euro
-
10.0
1.5
-0.6
-5.5
Canadian dollar
-
10.0
2.3
-0.7
-5.4
Chinese renminbi
-
10.0
0.4
-0.6
-5.6
Japanese yen
-
10.0
0.6
-0.4
-5.6
Mexican peso
-
10.0
1.4
-0.4
-5.5
United States dollar
-
-10.0
9.9
-4.2
-4.5
Exchange rate changes required for a reduction
of the United States trade deficit to 5 per cent of GDP
Euro
-
37.2
5.7
-2.2
-5.0
Canadian dollar
-
26.5
6.2
-2.0
-5.0
Chinese renminbi
-
67.4
2.9
-3.8
-5.0
Japanese yen
-
74.1
4.8
-2.7
-5.0
Mexican peso
-
44.9
6.1
-2.0
-5.0
United States dollar
-
-5.6
5.5
-2.3
-5.0
Source:
UNCTAD secretariat calculations, based on United States Bureau of Economic Analysis, International Economic
Accounts database.
a
GDP growth in the rest of the world is assumed at 3.2 per cent in all scenarios.
b
The deficit of the United States merchandise trade balance as a percentage of GDP in the base year (2004) is
5.67 per cent.
expect appreciations and depreciations to be
fect both the domestic value of assets and the do-
equally distributed over the long term, the short-
mestic value of liabilities. Appreciation of the
term valuation does not change their perception
national currency of a developing country reduces
of a long-lasting current-account deficit.
the burden of liabilities (denominated in foreign
currencies) and also reduces the value of assets
For most of the developing countries the
(denominated in foreign currencies). On the other
valuation effect is felt on both sides of the bal-
side, depreciation increases the burden of liabili-
ance sheet. The liabilities of developing countries
ties and increases the value of assets. In the past,
are normally denominated in foreign currencies.
in many developing countries with huge stocks of
For these countries, exchange rate movements af-
net foreign debt, depreciation shocks after finan-
18
Trade and Development Report, 2005
Figure 1.2
of the deficit and to assess the chances for a
smooth resolution of global imbalances.
MERCHANDISE TRADE BALANCE OF THE
UNITED STATES, BY COUNTRY/REGION,
1980–2004
2.
The surplus regions
(Billions of dollars)
The fact that the current account essentially
corresponds to net foreign investment in finan-
cial assets, reflecting the simple logic that whoever
extends demand beyond means has to raise debt,
has been taken as proof for the willingness of the
rest of the world to provide the United States con-
sumers with “savings” that could not be used
elsewhere. This static logic overlooks the fact that
without the stimulus provided by United States
growth, income and savings in the rest of the world
(and in particular, in surplus countries) would have
been lower. Thus, part of the savings that were
used to finance the current-account deficit of the
United States were generated by the process of
rising demand from the United States. If the sur-
plus regions were to reduce their financing to the
United States, they would not be re-allocating their
“savings” elsewhere, but the process of generat-
ing these savings would itself be at stake. In other
words, the attempt to repatriate funds may have
Source: UNCTAD secretariat calculations, based on UN
negative consequences not only in the deficit but
COMTRADE; and United States Bureau of Economic
Analysis, International Economic Accounts database.
also in the surplus economies. This poses a di-
Note: Asia includes: China, Hong Kong (China), Japan, the
lemma to surplus regions, in Asia and in particular
Republic of Korea, Singapore and Taiwan Province
of China.
in some parts of Europe.
In the aftermath of the currency crises at the
end of the 1990s, Asian economies implicitly or
cial crises have led to big negative valuation effects
explicitly pegged their currencies to the dollar at
on their liabilities that could not be compensated
rather low values. The currency peg has encour-
by the positive effects on their assets. Argentina
aged rising exports and has had a positive effect
was the most prominent case recently.
on growth, profits and jobs in these countries.
Moreover, in Asia imports have been rising rap-
Although there is no strict and general ceil-
idly, spilling the effects of the Asian boom over
ing for sustainable external deficits, recent studies
many developing countries. From the point of
analysing current-account dynamics in industrial
view of these countries and their beneficiaries, a
economies conclude that reversals usually take
sharp currency appreciation that would markedly
place as deficits reach about 5 per cent of GDP.10
reduce the current-account surplus might jeopard-
However, the mechanisms towards such an adjust-
ize these positive outcomes on a broad scale.
ment may be different for the United States. So
far, the biggest economy in the world has been
The members of the euro area as well as those
able to finance its current-account deficit at rela-
economies whose currencies are tied to the euro
tively low interest rates. An examination of the
constitute the third major block in the current im-
economic situation in the surplus regions is nec-
balances constellation. As in the case of Asia, this
essary to understand this continued easy financing
block has registered external surpluses that rely
Current Issues in the World Economy
19
on the United States market, even if their contri-
currency depreciation already in place, combined
bution to the United States trade deficit has not
with careful measures to dampen domestic demand.
risen as dramatically in recent years. Yet, like Asia,
Monetary policy has already shifted to a more re-
European authorities have been focusing on ex-
strictive path and some fiscal adjustment is under-
port-led growth strategies, although the European
way. However, in light of the dominance of the
Central Bank has not pursued an explicit exchange
United States economy on a global scale, authori-
rate policy. A major reason for the good trade per-
ties should refrain from excessively curtailing ab-
formance has been wage restraint, which has
sorption in order to avoid recessionary tendencies
resulted in stronger international competitiveness,
that could feed back into a worldwide slowdown.
but also in anaemic growth of private consump-
tion. Thus, in some large member countries,
In contrast, the euro area has no reason to
domestic demand remains weak due to overly
worry about its external balance, but growth is
moderate wage increases. The dependency on
stalling and in many countries unemployment is
foreign demand explains the uneasiness at the
very high or even rising. Consequently, the whole
beginning of 2005, when the euro rose to 1.35
region would greatly benefit from higher demand
against the dollar. In a way, Europe will have the
and rising absorption. Thus, the optimal combi-
most to lose if it does not move quickly. If Asian
nation of macroeconomic policies to correct global
central banks stick to managing dollar rates while
imbalances would certainly include a massive
at the same time diversifying their portfolio by
expansion of domestic demand in the euro area. A
moving towards the euro, Europe is doomed to
coordinated effort of macroeconomic policies is
bear the brunt of dollar depreciation.
needed to foster economic growth and to approach
internal and external equilibrium at the same time.
Overall, none of the three regions analysed
In an environment of negligible inflation rates,
above has an interest in prolonging the current
monetary and fiscal policy can actively contrib-
situation as long-term risks exceed short-term
ute to economic recovery by lowering interest
advantages. As the issuer of the world’s predomi-
rates and stimulating domestic demand. Finally,
nant reserve currency, the United States bears a
the excessively moderate stance of wage policy
special responsibility for financial market stabil-
in some member countries should be abandoned
ity. A further lowering of the dollar exchange rate,
to avoid deflationary spillovers.
if eventually needed, should take place in an or-
derly adjustment process, in which both, the deficit
Identifying an appropriate approach for sur-
and the surplus regions, would act transparently
plus countries in Asia is much more complicated
and effectively.
as most countries in the region are already report-
ing rapid and sometimes “neck breaking” growth
rates. Despite the fact that the often-mentioned
danger of overheating – most pronounced in the
3.
Tailoring policy measures
non-tradable sectors – does not represent a major
threat to price stability yet, the argument whereby
more growth is needed to increase absorption in
There can be little doubt that a smooth cor-
this region is unconvincing. The recommendation
rection of global imbalances will have to be
given by many observers to use currency appre-
achieved through adjustments in both relative
ciation for creating leeway for monetary authorities
prices and absorption levels. Obviously, the main
to fight overheating by raising interest rates, would
difficulty is the identification of policy measures
reduce absorption and imports, and trade surpluses
tailored to the specific economic circumstances
might thus persist despite currency appreciation.
of certain countries and regions. The examination
Consequently, global imbalances would continue
of the internal and external performance of the
but at a slower rate of GDP growth for the world,
euro area and the United States leads to relatively
and they would be accompanied by lower demand
clear policy conclusions.
for other developing countries primary commodity
exports. Additionally, countries such as China need
The United States starts from relatively low
to integrate a vast pool of rural workers – unac-
unemployment and high growth. It could use the
counted for by official unemployment statistics –
20
Trade and Development Report, 2005
if political and economic stability is to be main-
History offers examples of correcting global
tained.
imbalances, some of which ended in regional cri-
ses and in an upsurge in protectionism harming
As shown before, any bilateral exchange rate
trade, growth and welfare, as was the case for the
realignment with the dollar will fall short of a sig-
Asian episode of 1997–1998. But there are other
nificant re-equilibrating effect; this could even
examples where crises have been avoided by early
have a disruptive effect on the revaluing country
and controlled adjustments of exchange rates, for
and on the region it is mainly trading with. If ex-
example the regional arrangements in Europe that
change rate reforms are undertaken in surplus
preceded the European Monetary Union. But even
regions, they will have to involve all regional pro-
on a global scale, the current-account reversal that
tagonists within a multilateral agreement. China’s
followed joint political efforts by the major pow-
move to abandon the peg with the dollar in July
ers in the late 1980s suggests that an orchestrated
2005 without allowing for a major revaluation could
attempt might have a greater chance of succeed-
be a step in the right direction if it forms part of a
ing than isolated measures. This may well be the
concerted action among the global players.
right time for a global exchange rate agreement.
D. Oil price hikes in perspective
After the relatively low prices seen in the first
1.
The impact of an oil price shock on
half of the 1990s, when the price of crude petro-
prices and economic activity
leum rarely exceeded $20 per barrel,11 the price
of oil began to rise in 1999 and culminated at
$60 per barrel in mid-2005. This surge in oil prices
The consequences of a rise in oil prices are
worries governments in many oil-importing coun-
usually separated into first- and second-round ef-
tries, who fear the detrimental effects of a sub-
fects. Under any normal circumstances, consumer
stantial and long-lasting rise in energy prices on
prices rise (or stop falling) immediately after pe-
output growth. This is a special concern for many
troleum products, such as gasoline and heating oil,
developing countries which have become increas-
become more expensive because the elasticity of
ingly dependent on oil imports as industrializa-
demand is rather low at most stages of the pro-
tion has progressed.
duction chain. On the other hand, second-round
effects occur if workers try to compensate their
Oil price shocks have repeatedly had a nega-
real income loss by bargaining for higher nomi-
tive aggregate impact on global economic activity.
nal wages. The occurrence of second-round effects
The reason for this has to be mainly sought in the
becomes more likely the larger the impact of first-
response of economic policy in countries affected
round effects of a rise in oil prices – or energy
by an oil price shock. Inappropriate reactions,
prices more generally – on the overall price level.
particularly from those responsible for wage and
A higher rate of inflation implies a loss of real
monetary policies, can aggravate the situation and
income unless nominal wages rise alongside con-
lead to losses in economic activity that could oth-
sumer prices. If, however, workers successfully
erwise have been avoided.
bargain for higher wages in order to compensate
Current Issues in the World Economy
21
Figure 1.3
CURRENT-ACCOUNT BALANCES OF 10 OPEC COUNTRIESa
(Per cent of GDP)
Source: UNCTAD secretariat calculations, based on UNCTAD Handbook of Statistics 2004; IMF, Balance-of-Payment Statistics
database and International Financial Statistics database; Economist Intelligence Unit, Country Reports; and national
sources.
a Algeria, Ecuador, Gabon, Indonesia, the Islamic Republic of Iran, Kuwait, the Libyan Arab Jamahiriya, Nigeria, Saudi
Arabia and Venezuela.
for real income losses, the result is an additional
in favour of the latter. Essentially, this implies a
upward pressure on the price level as firms will
real income transfer from consuming to produc-
seek to pass rising labour costs on to consumer
ing countries. Shrinking real incomes in countries
prices. Workers may thus find that their recently
facing larger oil bills, in turn, mean less income
negotiated wages do not keep up with the rising
to spend on other products, which translates into
price level, and consequently enter the next round
lower domestic demand unless matched by re-
of wage bargaining with yet augmented aspirations.
duced domestic savings and/or higher export
In the worst case, such a scenario may lead to a
demand. To date, the evidence suggests that the
wage-price spiral resulting in accelerating inflation.
propensities of oil-producing countries to consume
At best, it will still cause inflationary expectations
from current income are low relative to consuming
to become embedded in the economy’s wage bar-
economies. Oil price increases have historically
gaining processes, involving a permanently higher
been accompanied by swelling current-account
inflation rate compared to the initial situation.
surpluses in oil-exporting countries, implying that
the windfall revenue accruing to producers is typi-
Apart from the consequences on inflation, the
cally not immediately spent to its full extent – a
effects of an oil price shock on the overall eco-
pattern that can also be observed in the current
nomic activity in importing countries are more
situation (fig. 1.3).
difficult to disentangle. The most obvious impact
stems from the deterioration in the terms of trade.
In this case, cutbacks in output and employ-
An oil price increase shifts the terms of trade be-
ment are the consequence of falling demand
tween net-importing and net-exporting economies
in consuming countries. While macroeconomic
22
Trade and Development Report, 2005
Figure 1.4
price level due to the change in relative prices
induced by higher energy prices, they will be
alerted by second-round effects and curb persist-
CRUDE PETROLEUM PRICES,a NOMINAL
ent inflation through restrictive monetary policy.
AND REAL,b 1970–2005c
With such a move they would add to the restrictive
(Dollars per barrel)
first-round effects on the real economy to prevent
inflationary expectations from becoming embed-
ded in the system.
2.
The 1973–1974 and 1979–1980 oil
price shocks: putting current events
in perspective
By the early 1970s, the price of crude oil had
been declining persistently for about two decades
to reach a level of $2–3 per barrel. This situation
changed dramatically after 1973. Between Novem-
ber 1973 and the first quarter of 1974, the price
increased from $3.3 to $13. Prices remained rela-
tively unchanged for the next four years. In late
1978, OPEC cutbacks triggered the second oil
price shock and oil prices peaked at $39 in No-
Source: UNCTAD secretariat calculations, based on UNCTAD,
vember 1980.
Commodity Price Bulletin, various issues; and IMF,
International Financial Statistics database.
a Average of Dubai/Brent/Texas equally weighted.
Compared with the two oil price shocks in
b Deflated by United States Consumer Price Index (CPI)
(2000 = 100).
the 1970s, the substantial oil price rise between
c 2005 data are estimates.
1998 and mid-2005 presents several features ren-
dering it less dramatic than it seems to be at first
glance. Firstly, the starting point for oil prices
($11 in the beginning of 1999) was an abnormally
low one, following the plummeting of oil prices
studies usually confirm the general effect on the
that resulted from the Asian financial crisis in
aggregate level, empirical studies using disaggre-
1997–1998. Among informed market participants,
gated data suggest that demand disturbances of oil
the expectation prevailed that the oil price would
price shocks vary substantially between sectors,
not remain depressed for much longer, but would
with producers of consumer durables being hit es-
soon rise again to previous levels of around $20.
pecially hard during oil-price related recessions
Secondly, recent price increases have been stretched
(Bresnahan and Ramey, 1992). To the degree that
over five years, and have thus taken the form of a
firms are able to pass higher costs to market prices
gradual evolution instead of an explosion. Thus,
without a subsequent reaction of nominal wages,
the surprise effect of the oil price increase was
the burden of adjustment shifts from producers to
milder this time. Thirdly, in real terms, the recent
consumers, while the net negative impact remains
oil price increase was significantly smaller than
identical.
that of the 1970s (fig. 1.4). Measured in today’s
prices, the oil price increases of the 1970s were
A further effect operates through nominal
considerably more substantial than implied by the
interest rates, which may be higher if second-
nominal figures.
round effects on inflation are triggered by an oil
price increase. While central banks will find it
One obvious reason for current developments
difficult to prevent an initial rise in the general
on the oil market being steadier compared to 30 years
Current Issues in the World Economy
23
Figure 1.5
OIL IMPORT BILL, OECD MAJOR OIL-CONSUMING COUNTRIES,a
1973–1978,1979–1983, 1999–2005b
(Per cent of GDP)
Source: UNCTAD secretariat calculations, based on UN COMTRADE; UN National Accounts Main Aggregates database; EIU,
Country Forecast, various issues; and OECD, International Trade by Commodity Statistics database.
a Canada, France, Germany, Italy, Japan, Spain, the United Kingdom and the United States.
b 2005 data are estimates.
ago is that they were primarily demand-driven,
In the same way as the size of the oil price
rather than motivated by supply decisions in oil-
increase, its impact has also been much smaller in
exporting countries. Despite the fact that there
this recent episode than in earlier ones. Between
have been several OPEC interventions on oil sup-
1973 and 1974, oil imports as a percentage of GDP
ply in recent years, there is little doubt that the
in eight major industrialized countries increased
growing demand for oil imports, primarily com-
from 1.3 to 3.2 per cent, and remained between
ing from the United States and the rapidly growing
2 and 3 per cent for the rest of the decade, before
developing countries in East and South Asia, in
rising again in 1980–1981 to reach 3.7 per cent of
particular China and India, is at the origin of the
GDP. The 1999–2000 oil price increase resulted
oil price hike. On the supply side, OPEC spare
in a rise of the oil import bill from 0.8 per cent of
supply capacity almost disappeared in 2004.
GDP in 1999 to 1.4 per cent in 2000, and it went
OPEC countries had dramatically reduced their
down again over the subsequent two years. In
supply in the first half of the 1980s, but their pro-
2005, assuming that the renewed hike will main-
duction was replaced by new entrants with higher
tain oil prices at an annual average of $50 per
production costs (such as North Sea producers). In
barrel, it may reach 1.9 per cent but even then it
recent years, however, non-OPEC supply grew at
would fall short of the levels attained in 1974 and
lower rates, and OPEC countries recovered their
the following years (fig. 1.5).
1979 production level. At present, OPEC coun-
tries are not in a position to respond rapidly to a
On average, consumer prices in the major
surge in demand or a disruption in supply in a
industrialized countries increased by about 10 per
major producer. Oil supply is expected to increase
cent in the course of the first and second years of
in the coming years, but at a pace that will prob-
both oil price crises in the 1970s, and by only
ably not exceed that of demand (Kaufmann, 2004).
marginally less in the following years. By con-
24
Trade and Development Report, 2005
Figure 1.6
trast, the impact of recent price increases on the
consumer price index is rather negligible (fig.
1.6A). The evolution of unit labour costs in the
CHANGES IN CONSUMER PRICES AND UNIT
industrialized countries during the 1970s and early
LABOUR COSTS, OECD MAJOR OIL-CONSUMING
1980s demonstrates the role and weight of sec-
COUNTRIES,a SEVERAL PERIODS
ond-round effects. The rise in unit labour costs is
(Per cent)
especially marked in the wake of the first shock.
Trade unions were firmly determined to compen-
sate for real income losses, as unit labour costs
grew by 15 per cent in the first year and 12 per
cent in the second year, and subsequently remained
in the neighbourhood of 7 per cent. Increases were
less pronounced during the second crisis, although
they were still quite considerable (fig. 1.6B).
The development of unit labour costs in the
major oil-consuming countries since 2000 indicates
that second-round effects have been practically ab-
sent. Unit labour costs rose by just over 2 per cent
in 2000 and have been growing more slowly ever
since, a fact that is also reflected in the consumer
prices shown in figure 1.6A. Except for the im-
mediate impact of higher energy prices, there is
no sign of inflationary tendencies taking hold as
trade unions have refrained from seeking compen-
sation for real income losses due to energy prices
during wage negotiations.
Nevertheless, central banks in the industri-
alized countries have continued to vehemently
warn against the occurrence of second-round ef-
fects, to which they would react by raising interest
rates in a bid to defend price stability. However,
given the absence of inflationary second-round
effects, central banks have refrained from respond-
ing immediately to slightly higher inflation rates,
focusing instead on “core inflation” indices that
exclude energy prices. Volatility in energy costs
and the concomitant variation of real incomes
have, arguably, come to be seen in the developed
world as something that is outside the control of
consumers, manufacturers and monetary authori-
ties and thus can only be accepted.
The policy responses during the major oil
crisis followed a quite different pattern. That the
two oil price shocks had markedly different reper-
cussions in individual countries is quite instructive
with a view to lessons to be learned by those coun-
Source: OECD, Main Economic Indicators database and
Economic Outlook No. 77.
tries in the developing world faced by a similar
a GDP weighted average of Canada, France, Germany,
oil price increase. By the time of the second oil
Italy, Japan, Spain, the United Kingdom and the
United States.
price shock, all major central banks adopted a re-
Current Issues in the World Economy
25
strictive stance, led by the Federal Reserve. The
has also been a decline in energy intensity of pro-
federal funds rate reached 19 per cent in 1981 and
duction.13 The overall economic structure of
remained above the 10 per cent mark through late
developed economies has changed over the past
1982. Even in those countries whose central banks
30 years. It has become more service-oriented and
had pursued a largely accommodative monetary
less reliant on industrial production, which fur-
policy stance throughout the 1970s, such as
ther reduces the likely role of an oil price rise as
France, short-term rates scaled new heights in the
an impending disturbance. The combination of
early 1980s. Interest rates increased sharply de-
these various factors explains why the average oil
spite the fact that oil-exporting countries recycled
bill of the major economies (as depicted in fig-
their windfall oil revenues through the interna-
ure 1.5) has declined to about 0.8 per cent of GDP
tional capital markets, rather than to spend them
in 1999, and why present inflation did not pick up
directly on higher imports. The potentially de-
in the same way it did during the 1970s.
creasing impact on interest rates of these capital
flows reaching the international capital markets
was overlaid by the concerted action to curb
inflation carried out by central banks of the in-
3.
The impact on oil-importing
dustrialized countries after 1979.
developing economies
Many developing countries, in particular in
Latin America, were caught in this high interest
rate trap with disastrous results for their overall
Exposure of oil-importing developing coun-
economic development and their foreign indebt-
tries to oil price hikes frequently differs from that
edness. Servicing the existing debt became more
of the developed world. First-round effects on
difficult in an environment of climbing interna-
prices and balance of payments tend to be more
tional interest rates and, eventually, plunged many
severe, as the energy and oil intensities are gener-
developing economies into severe economic cri-
ally higher in these countries. Taking the OECD
ses during the 1980s.
countries level as 100, oil intensity (e.g. primary
oil consumption per unit of GDP) in 2002 was
The repercussions from current price devel-
142 in Brazil, 232 in China, 237 in Thailand and
opments in the oil market will much less likely
288 in India (IEA, 2004b: 11). Moreover, the share
produce the kind of dramatic impact seen during
of taxes in the final price of fuels is usually much
the 1970s, particularly in the absence of compa-
lower in developing than in most developed coun-
rable interest rate reactions in developed countries.
tries, and in a number of them, these prices are
subsidized. As a consequence, the cost of crude
Moreover, the impact on consumer prices is
has a more direct impact in developing countries,
much weaker as increased efficiency in energy use
either on the final consumer price or on fiscal ac-
over the past few decades has contributed to a
counts. If these impacts are seen as a threat to the
decline in the share of energy products in the con-
control of inflation or to fiscal consolidation, they
sumer price index. The effect is further mitigated
would call for policy adjustments with all the at-
by the presence of higher indirect taxes on energy
tendant effects these have on growth. Finally,
consumption, particularly on gasoline. In the euro
developing countries could also feel another indi-
area, about two thirds of the price for transport
rect effect, stemming from policy reactions in the
fuels and lubricants are made up by taxes, mean-
developed countries, in the form of lower exports
ing that a price increase only works on one-third
and tighter conditions in international financial
of the overall price. The respective tax burden is
markets.
smaller in the United States and slightly larger in
Japan. Moreover, the use of other energy sources
In contrast to the substantial reduction of oil
has also contributed to the reduction in the share
dependency in developed countries, reliance on
of oil in total energy consumption.12
oil imports has increased in the developing word,
as a result of industrialization and urbanization.
Furthermore, in addition to greater efficiency
In 1972, the oil import bill in developing coun-
in the use of energy for final consumption, there
tries (excluding OPEC) represented 0.8 per cent
26
Trade and Development Report, 2005
of current GDP, and it climbed to 2.3 per cent in
Summing up, oil prices have had, and con-
1975–1976 and 3.4 per cent in 1980. In 1998–1999
tinue to have, an impact on the import expenditure
this share was 1.7 per cent of GDP, and it rose to
of a significant number of developing countries
2.7 per cent in 2000–2003. In 2004–2005 it has
which is comparable to the one subsequent to the
probably exceeded 3.5 per cent, roughly twice the
1970s oil shocks. However, in many cases their
oil import bill paid in the main OECD countries.14
negative impact on the trade balance has been
As a result, the increased cost in oil imports in
compensated, either by a parallel increase in the
developing countries clearly exceeds those faced
price of other exported primary commodities or
by developed regions and more closely resembles
by expanding volumes of manufactured exports;
the experience of the oil shocks of the 1970s.
the first case was especially relevant in several
South-American and sub-Saharan countries, while
Latin America (excluding the oil-exporting
the second explains the solid trade performance
countries of Ecuador and Venezuela) shows the
in East and South Asia, despite high oil prices.
lowest exposure among developing regions, with
Other oil-importing countries, however, face se-
the share of oil imports rising from 0.8 per cent of
vere financial strain.
GDP in 1998 to 1.3 per cent in 2003. This has
been, in particular, the result of active Brazilian
In some developing countries, high commod-
policies aimed at substituting oil with national
ity prices (including oil) have caused concern about
energy sources (hydroelectricity and alcohol) and
inflationary pressures, and prompted a tightening
at increasing the domestic production of hydro-
of monetary policies in order to prevent second-
carbons. However, oil imports account for a
round effects on prices. This is in stark contrast
significant proportion of GDP in Chile (4.7 per
to the reaction in developed economies. There the
cent in 2003), Central America (4.9 per cent on
lesson has been learned that monetary policy
average for Costa Rica, El Salvador, Guatemala,
instruments, which almost exclusively operate
Honduras, Nicaragua and Panama) and the Carib-
through the impact on aggregate demand and the
bean, with particularly high shares in Guyana,
absolute price level, should not be used to abate
Jamaica, Belize and Barbados.
price increases originating in changes of relative
prices.
Asia (excluding OPEC) accounts for roughly
80 per cent of oil imports from developing coun-
Indeed developing countries have taken dif-
tries, and is also the region where the ratio of oil
ferent approaches. For example, monetary policy
imports to GDP remains the highest. The main rea-
was tightened in Brazil and Mexico in 2004 in
son for this is the deepening of industrialization
order to prevent second-round effects, even though
in East and South Asian countries. In 2003, the
it was recognized that higher-than-expected infla-
share of oil imports in GDP was 5 per cent or more
tion was mainly related to supply-side factors,
in Singapore, the Republic of Korea, Thailand,
including energy prices (IPEA, 2005: 7–9; Banco
Taiwan Province of China and the Philippines, and
de México, 2005: 2). The policy response in other
more than 4 per cent in Pakistan and Sri Lanka; in
Latin American and most East Asian countries was
India, which is relatively less advanced in indus-
more flexible. In order to avoid negative effects
trialization than other countries in the region, this
on growth, monetary policy was not used to curb
share amounted to 3.8 per cent.
inflation forced by higher oil prices (fig. 1.7). For
instance, economic policy in Argentina tried to
In Africa, the situation is very heterogene-
avoid high real interest rates and currency ap-
ous as the region comprises several major oil
preciation as ways to fight against accelerating
exporters, but also a number of countries that are
inflation in early 2005. The latter was considered
heavily dependent on oil imports, particularly
to be largely due to temporary factors, and the
among sub-Saharan countries. This subregion as
current levels of real exchange and interest rates
a whole (excluding Nigeria and South Africa)
are central policy instruments for maintaining eco-
presents levels of oil dependency close to those
nomic growth and competitiveness. Similarly, in
found in East and South Asian countries (3.5 per
most East and South-East Asian countries, supply-
cent of GDP in 2000–2003), despite the much
side driven inflation pressures have not led to
lower level of industrialization.
sharp interest rates increases, which could have
Current Issues in the World Economy
27
Figure 1.7
REAL INTEREST RATES AND REAL EFFECTIVE EXCHANGE RATES,
SELECTED ASIAN AND LATIN AMERICAN COUNTRIES, 2003–2005
Source: UNCTAD secretariat calculations, based on Thomson Financial Datastream; national sources; and JP Morgan, Effective
Exchange Rate Indices database.
a Interbank rates deflated by CPI changes.
28
Trade and Development Report, 2005
undermined economic growth and the recovery of
latter countries, these policies have recently been
their financial systems from the 1997–1998 crisis.
revised, leading to an increase in oil prices (Chan-
For the Malaysian monetary authorities, for in-
nel News Asia, 2005).
stance, price pressures have been contained by
improvements in labour productivity and capacity
In conclusion, the chances of an oil price hike
expansion, enabling monetary policy to remain sup-
plunging the global economy into a recession com-
portive to growth (Bank Negara Malaysia, 2005).
parable to the ones of the 1970s and 1980s appear
to be small. In the major developed countries, oil
Several countries have also tried to isolate
prices have considerably lost significance for the
domestic from international oil prices. In Latin
evolution of GDP. First- and second-round effects
America, this has been the traditional approach in
have not led to inflationary pressures that would
Venezuela (see also annex to chapter III), but also
have prompted a restrictive stance in monetary
in a number of Asian countries, including oil-pro-
policy. Naturally, the higher cost for energy had
ducing countries, such as Viet Nam and Malaysia,
an impact on price indices, but the monetary au-
and countries dependent on oil imports. In India,
thorities have learned from the previous oil price
for example, the government resorts to subsidies
hikes that monetary tightening is not a proper re-
in the order of 0.5 per cent of GDP for specific
sponse to this challenge. However, oil dependency
petroleum products largely used by the rural poor.
remains high in many developing countries and
In Thailand, such subsidies reached 1.3 per cent
the prospect of permanently higher oil prices is
of GDP in 2004, and in Indonesia they amounted
especially disturbing for those countries that are
to 2.5 per cent of GDP in the same year. In the
not benefiting from higher prices for their exports.
E. Rapid growth in China and India and
the profit-investment nexus
Asia has been a remarkably dynamic region
In spite of their rapid growth over a number
over the past four decades, with different econo-
of years, both China and India still have relatively
mies in the region experiencing rapid growth and
low levels of per capita income (table 1.5). How-
catching up. Following Japan’s economic catch-
ever, due to the two countries’ size and the fact
ing up episode between the 1950s and the 1980s,
that, together, they account for about two fifths
the fast pace of economic growth, industrializa-
of the world population and one fifth of global
tion and growth of manufactured exports in the
income (measured in terms of purchasing power
Republic of Korea, as well as in other Asian newly
parity, PPP), their economic performance has al-
industrializing economies (NIEs) – Hong Kong
ready a sizeable impact on international trade
(China), Singapore and Taiwan Province of China
patterns, global output growth, and the economic
– awarded these countries, and by extension the
prospects of other developing countries, includ-
region, with the distinction of forming the “East
ing their progress towards achieving the MDGs.
Asian miracle”. China and India have entered this
In 2003, China ranked second and India fourth in
process most recently.
the world in terms of absolute purchasing power,
Current Issues in the World Economy
29
Table 1.5
REAL GDP PER CAPITA AND GDP GROWTH IN CHINA, INDIA, JAPAN AND
THE REPUBLIC OF KOREA DURING THEIR RAPID GROWTH PERIODS
Real GDP per capita (dollars)
Average growth rate (per cent)
Market pricesa
PPPb
Year
Year
Year
Year
Year
Year
1st
2nd
3rd
4th
1st 20
1
10
20
2003
1
10
20
2000 decade decade decade decade years
China (1979)
163
347
752
1 067 1 023
1 752
3 276
3 747
8.6
8.1
.
.
8.3
India (1980)
222
304
440
511 1 159
1 634
2 414
2 479
3.7
3.8
.
.
3.7
Japan (1957)
5 481 11 575 20 763 38 222 3 605
7 515 13 544 24 675
8.4
6.1
2.9
2.9
7.2
Rep. of Korea (1965) 1 297
2 397
4 149 12 232 1 803
3 501
6 237 15 876
6.7
5.7
7.5
4.2c
6.2
United States
.
.
.
35 566
.
.
.
33 293
.
.
.
.
.
Source: UNCTAD secretariat calculations, based on UNCDB; Japanese Ministry of Internal Affairs and Communications, Historical
Statistics of Japan database; World Bank, World Development Indicators database; and Penn World Table 6.1, 2002.
a In constant 2000 dollars.
b In constant 1996 dollars.
c The Republic of Korea’s average growth rate in the 4th decade covers only 9 years due to data constraints.
their respective ranks being sixth and twelfth in
supports the upgrading of skills as well as institu-
terms of real GDP. Moreover, as the third largest
tional deepening.
importer and exporter in the world in 2004, China’s
growth dynamics significantly influence commod-
A macroeconomic environment which both
ity prices and the prices of some traded manufactures
supports and encourages investors is required for
such as textiles, as discussed in subsequent chap-
domestic and foreign investment to become a
ters of this Report.
source of growth and development. The profit-
investment nexus emphasizes that profits, the sav-
This section addresses selected issues that are
ings accrued at companies, are the dominant
of crucial importance for the sustainability of rapid
source of financing. Rising profits can create a
economic growth in China and India in the me-
virtuous circle whereby the profits stemming from
dium and long term. In particular, investment plays
investment increase the incentives for companies
a key role in the expansion of productive capacity
to invest, thereby raising the capacity for financing
and productivity growth (TDR 2003). UNCTAD’s
new and additional investment.15 For this to happen
analysis has shown that the catching up process
on an economy-wide scale, access to reliable, ad-
in the NIEs was based on the so-called profit-
equate and cheap sources of financing is an impor-
investment nexus (TDR 1996, chap. II, TDR 2003,
tant precondition. The stance of domestic monetary
chap. IV), in which savings created by profits in a
policy is of crucial importance to initiate a process
process of rapid capital accumulation, technologi-
that will become self-supporting once profits have
cal progress and structural change constitute the
started to create the savings necessary to finance
basis for sustained productivity growth, rising liv-
additional investments. Overly restrictive monetary
ing standards and successful integration into the
policy may lead investors to prefer investing in fi-
international economy. Investment plays the cru-
nancial assets over extending productive capacity.
cial role due to its ability to simultaneously create
income, develop productive capacities, and trans-
Together with the interest rate, the exchange
mit technological progress; moreover, investment
rate level is the other crucial macroeconomic price.
30
Trade and Development Report, 2005
Without a competitive and rather stable exchange
1.
The sectors driving economic growth
rate it is even more difficult for developing coun-
tries to successfully integrate into the world market.
Hence, the monetary conditions of an open mar-
A breakpoint analysis on labour productiv-
ket economy (i.e. the interest rate and the real
ity trends16 for the post-Second World War
exchange rate) are of utmost importance for domes-
catching up process in selected Asian countries
tic and foreign investors and for the sustainability
indicates rapid growth episodes for Japan between
of the growth process.
1957 and 1973, the Republic of Korea since 1965,
China since 1979, and India since 1980. At the
Finally, the experience of the successful
beginning of their economic take-off, the level of
Asian economies shows that growing profits and
Japan’s per capita income (in constant 2000 dol-
positive profit expectations do not exclude the full
lars) was $5,481 and that of the Republic of Korea
participation of labour in the functional distribu-
$1,297. Compared to these levels, economic take-
tion of income. By contrast, only if overall demand
off in China and India started from a much lower
grows in line with the production potential of an
base – $163 for China and $222 for India. Table
economy, can investors expect a stable and last-
1.5 shows the four countries’ per capita GDP in
ing source of profit income. But domestic demand
market prices, as well as in constant PPP terms,
can only follow such a growth path if real wages
which gives less divergent results among coun-
increase in line with productivity. This, more than
tries, as poor countries generally have lower price
the perceived ability and willingness to “save”,
levels and higher purchasing power per dollar.
has been one of the characteristic features of the
Asian economies during their catching up epi-
Assuming labour to be immobile internation-
sodes. High ex-post savings are the result of the
ally and wages to be set at the level of the national
investment process, rather than its source.
economy, the sectors where profits rise or prices
fall will be those that are best positioned to ex-
Thus, three conditions for sustainable growth
ploit the potential for productivity growth through
emerge from Asia’s growth experiences. First,
the increasing use of sophisticated equipment and
economies need productivity drivers. These driv-
technologies. Whereas, in principle, any sector can
ers may be individual companies, or a critical mass
take the lead and become a driver, the manufac-
of companies located in specific sectors or
turing sector has most often assumed this role,
branches, that push productivity growth beyond
because it is apparently the best placed to exploit
formerly reached limits and create the kind of
all the specific advantages of machinery and tech-
incentive needed for maintaining the overall
nology for large-scale production. The pattern of
profit-based dynamics of the economy. In the past,
manufacturing productivity growth dominating
manufacturing has been the most important driver,
overall productivity growth can be found in most
as the potential to expand productivity growth has
of the successful catching up episodes.
been closely related to the opportunities of inten-
sifying the process of capital deepening.
In the Republic of Korea, manufacturing pro-
ductivity was expanding at about 2.5 per cent
Second, growth dynamics need to be sup-
above the productivity of the overall economy
ported by both domestic demand and exports. An
between 1963 and 1983.17 Where this is the case,
appropriate balance between domestic and foreign
and where wages in manufacturing rise broadly
demand is required mainly to cushion the shocks
in line with productivity of the overall economy,
that frequently emerge from the vagaries of world
manufacturing producers have a huge advantage
financial markets and their impact on exports.
above all other sectors. They can either increase
In particular, steady and rapid growth of private
the volume of production by lowering prices or
consumption, which is quantitatively the most im-
realize consistently higher profits than other parts
portant component of overall demand, is needed
of the economy.
to sustain growth processes. Finally, pro-growth
macroeconomic conditions are required to set and
The same pattern of development can be ob-
keep the economy on a sustainable and steep
served in China’s rapid growth phase starting in
growth path.
the early 1980s. Between 1981 and 2000, its manu-
Current Issues in the World Economy
31
Figure 1.8
PRODUCTIVITY IN THE MANUFACTURING AND SERVICES SECTORS COMPARED TO
OVERALL PRODUCTIVITY IN CHINA (1984–1993, 1993–2002) AND INDIA (1991–2000)
(Index numbers, initial year = 100)
Source: UNCTAD secretariat calculations, based on UNCDB; China State Information Center (SIC) Database; Ghoshal, 2003;
and World Bank, World Development Indicators database.
Note: Numbers over 100 mean that manufacturing and services sectors productivities exceed overall productivity.
facturing productivity growth averaged 9.4 per
tively well-educated workforce, but also because
cent, an extremely high rate by historical stand-
of the incentives offered by its Government. For
ards, exceeding all the other sectors of the economy
more than two decades, foreign funded enterprises
by 2.5 per cent per year on average. In China,
(FFEs)18 have benefited from tax breaks which
manufacturing productivity growth accelerated in
gave them a competitive advantage over local
the mid-1990s and expanded at an unprecedented
State-owned and private companies. For corpo-
rate of 14.7 per cent annually between 1997 and
rate income tax, local companies are charged a
2000 (fig. 1.8). This productivity surge in the Chi-
tax rate of 33 per cent as soon as they start mak-
nese manufacturing is closely related to rapidly
ing profits, while foreign firms pay 7.5 per cent
increasing inflows of FDI and their concentration
two years after they start earning profits, followed
in industry. Inflows of FDI in industry increased
by 15 per cent starting from the sixth year they
from $11 billion in 1992 to $45 billion in 1997
continue to earn profits.
and to $53 billion in 2003. Indeed, since the mid-
1990s, 60 per cent of China’s total FDI inflows
India is still far from such a regime of manu-
have been oriented to the manufacturing sector
facturing-driven growth. Comparing China’s and
(UNCTAD, 2004a: 55).
India’s manufacturing productivity growth and
their total economy productivity growth,19 reveals
Producers in high-cost industrialized coun-
the dominating role of China’s manufacturing sec-
tries have found in China an attractive outsourcing
tor (fig. 1.8). Although India also experienced
platform not only because of its cheap and rela-
vigorous growth of manufacturing productivity in
32
Trade and Development Report, 2005
Figure 1.9
PRODUCTIVITY IN THE MANUFACTURING SECTOR IN CHINA (1984–1993, 1993–2002)
AND IN THE MANUFACTURING AND SERVICES SECTORS IN INDIA (1991–2000)
(Constant 2000 dollars)
Source: UNCTAD secretariat calculations, based on UNCDB; China State Information Center (SIC) Database; Ghoshal, 2003;
and World Bank, World Development Indicators database.
the first half of the 1990s, the dominance of manu-
growth rate of services between 1993 and 2002
facturing was much less pronounced in India than
averaged only 3.7 per cent, and it has lagged con-
it was in China throughout the 1980s and 1990s.
siderably behind overall productivity increases.
This is reflected in the fact that China almost tri-
pled its manufacturing productivity between 1993
In absolute terms, productivity in India’s
and 2002 (fig. 1.9).
services sector is still much lower than in China’s
manufacturing sector (fig. 1.9). For instance, pro-
In India, the services sector seems to be as-
ductivity in Chinese manufacturing increased from
suming the role as an engine of income growth
$900 in 1984 to $5,400 in 2002. Productivity in
and driver of change, albeit in a less pronounced
India’s services sector reached $530 in 1991 but
fashion, that manufacturing has played in other
rose to only $870 in 2000. Moreover, productiv-
countries. Moreover, productivity growth in In-
ity in Indian manufacturing stood at about $960
dia’s services sector is only slightly higher and
in 1991, a level roughly comparable to China’s
more stable than in manufacturing. Average an-
$900 in 1984. But over a period of 10 years India’s
nual growth rates of 5.6 per cent in the services
manufacturing productivity increased to only
sector in the 1990s were outstanding, especially con-
$1,500 while China had already reached $1,950
sidering that this very heterogeneous sector includes
in 1993. Thus, while the initial productivity level
a large part of informal activities and activities with
of Indian manufacturing was higher, the growth
a very low productivity potential. In China the
dynamics were insufficient to keep the position.
Current Issues in the World Economy
33
With extraordinary productivity growth in the
enous stabilizer to economic development. Even
last decade, Chinese manufacturers, domestic and
more, if it is true that revenues from a flourishing
foreign alike, had a wide margin to improve their
domestic demand flow back to the business sector
market position. While labour productivity in
in form of steadily rising profits, the participation
manufacturing increased at an average annual rate
of workers in the proceeds of an economy-wide
of 12.2 per cent from 1991 to 2002, real wages
expansion may be indispensable for a sustainable
grew by only 6.8 per cent in that sector. The huge
growth process.
gap between productivity growth and wage growth
could be strategically used to reduce prices of their
If the increase in labour productivity of the
products and to gain market shares against for-
total economy is fully reflected in real wage and
eign competitors and domestic producers in less
salary increases, disposable income and real con-
favoured sectors. Depending on the degree of com-
sumption grow consistently at a rate close to the
petition in their specific markets, manufacturing
growth rate of GDP. Indeed, in a world where the
producers could also use the gap to increase their
distribution of income between labour and capi-
profit margins and to strengthen their ability to
tal and the household savings rate are constant,
invest.
the growth rates of GDP and private consumption
are identical.
In China, as well as in the other successful
2.
Stable and balanced demand growth
Asian countries, the full participation of labour in
as a condition for sustained rapid
the proceeds of total economy productivity in-
growth
creases was never in question. Apart from the
growing inequality of the personal distribution of
income between different types of labour, the func-
An analysis of the contribution of the differ-
tional distribution between labour and capital has
ent components of GDP growth in Asia suggests
been reflecting equality of powers rather than the
that an effective policy should not only focus on
dominance of one side. For instance, for the pe-
exports and imports but try to balance foreign and
riod between 1990 to 2000, available statistics
domestic stimuli (table 1.6). In fact, the contribu-
indicate that, on average, real wage in the total
tion of exports to GDP growth has increased over
economy grew by around 8 per cent annually,
time in all the countries considered but domestic
while overall economy productivity grew at a rate
demand, comprising investment and private con-
of some 9 per cent (Flassbeck et al., 2005).20
sumption, plays a much more important role in
quantitative terms. While India lags behind in its
Recently, real wage growth seems to have
investment dynamics, China and the other Asian
been even more rapid than overall productivity
drivers have used an approach where both, exter-
growth. This is in line with reports warning about
nal and domestic demand had a significant impact
labour shortages in the manufacturing sector,
on the sustainability of GDP growth. Obviously,
which would be leading to an upward pressure on
large and populous countries such as China and
wages. For example, the province of Guangdong
India cannot rely on exports as the only engine of
in the Pearl River delta is short of two million
growth; domestic demand, investment and con-
migrant workers; a shortage evident throughout
sumption, is at least as important.
the manufacturing sector along China’s eastern
shoreline, from the Pearl River Delta up to Shang-
Real household demand, the main contribu-
hai (The Economist, 9 October 2004). Other
tion to GDP growth, grew at an average annual
observers also warn of an impending labour short-
rate of 8.9 per cent in China, 7.7 per cent in Japan,
age (Yang, 2005).
7 per cent in the Republic of Korea and 4.7 per
cent in India (fig. 1.10). Private consumption reg-
These developments have led to a significant
istered a remarkably steady and strong growth rate
reduction in poverty, but as rapid wage increases
in China. Given the sustainability of the past per-
are unevenly distributed among sectors and re-
formance in Asia, it seems that the steadiness of
gions, they have also led to a more unequal income
households demand growth can act as an endog-
distribution (box 1.2).
34
Trade and Development Report, 2005
Table 1.6
CONTRIBUTION OF CONSUMPTION, INVESTMENT AND TRADE TO GDP GROWTH
IN CHINA, INDIA, JAPAN AND THE REPUBLIC OF KOREA
(Per cent)
Consumption
Gross
Trade
Average
fixed
annual
Private
Public
capital
GDP
consumption expenditure
formation
Exports
Imports
growtha
1st decadeb
China
4.88
1.39
3.05
0.61
-1.06
10.10
India
3.25
0.75
1.33
0.32
-0.57
5.89
Japan
4.89
0.58
4.40
1.34
-1.27
9.41
Republic of Korea
6.08
0.65
4.27
3.80
-5.25
9.01
2nd decade
China
3.88
1.10
3.62
2.03
-1.96
9.41
India
3.11
0.70
1.51
1.16
-1.38
5.70
Japan
3.45
0.64
3.10
1.38
-0.97
7.41
Republic of Korea
3.96
0.43
3.43
4.33
-3.67
7.35
Source: UNCTAD secretariat calculations, based on UNCDB; Japanese Ministry of Internal Affairs and Communications, Historical
Statistics of Japan database; and World Bank, World Development Indicators database.
a Differences between the sum of the contributions and GDP growth are due to variations in stocks and/or statistical
discrepancies.
b Starting years as in table 1.5.
All in all, consumption may not have been
cent over a 20-year time span, whereas investment
the main engine of growth, but the stable growth
in Japan expanded by 12.5 per cent and in China
rate of consumption must have been a huge stimu-
by 11 per cent annually. India’s average perform-
lus for investors. The profit-investment nexus has
ance lags far behind, at 6.8 per cent, but India’s
not materialized through a redistribution of income
and China’s investment growth has accelerated
from labour to capital, but by equally rapidly ris-
markedly in the past five years at 7.6 per cent and
ing profits and wages in the overall economy as-
14.1 per cent respectively.
sociated with surging manufacturing productivity.
In other words, investment that pushed the economy
Investment shares of GDP were high in the
towards new frontiers has created sources of new
Asian countries, at levels hovering around 30 per
investment through consumption (Eatwell et al.,
cent in the first and second decades of their rapid
2002).
growth periods. While Japan’s investment share
levelled off to just below 30 per cent in the third
Compared to private consumption, invest-
and fourth decades following the initial take-off,
ment growth rates are much more volatile in all
the Republic of Korea’s share has remained at over
the countries under consideration. The magnitude
30 per cent up to the present. In India, investment
of investment in the Republic of Korea and Japan
shares in the first and second decades have again
in the first 20 years of the economic take-off
lagged around 10 per cent behind the respective
dwarfs the much-quoted spectacular growth of
Chinese and Japanese investment shares, and the
Chinese investment. Overall, the Republic of Ko-
investment gap between China and India widened
rea recorded an average annual growth rate of
further between 2000 and 2004. On average, Chi-
gross fixed capital formation (GFCF) of 17.2 per
na’s investment share reached 41.1 per cent per
Current Issues in the World Economy
35
Figure 1.10
EVOLUTION OF PRIVATE CONSUMPTION IN CHINA, INDIA, JAPAN AND THE REPUBLIC OF KOREA
(Index numbers on a logarithmic scale, initial year = 100)
Source: UNCTAD secretariat calculations, based on UNCDB; Japanese Ministry of Internal Affairs and Communications, Historical
Statistics of Japan database; and World Bank, World Development Indicators database.
annum in this period, compared with India’s
Korea in the 20 years from 1967 to 1986. In China
22.5 per cent. In 2004, India’s GDP share of GFCF
and India it was 5.6 per cent and 8 per cent, re-
stood at 23.4 per cent, half of China’s 46.6 per cent.
spectively, between 1990 and 2003. Moreover,
China’s growth and investment have recently ex-
perienced an extraordinary acceleration but there
are still no hints of an impending inflationary ac-
3.
Policy conditions underlying the
celeration that could force the government and the
Asian catching up processes
central bank to sacrifice real growth in order to
stabilize prices in an overheating economy. De-
spite the rise in commodity prices, and oil in
Asia’s catching up episode has also been a
particular, monthly headline inflation did not ex-
period of consistent monetary stability. Despite
ceed 5.3 per cent at annual rate in 2004.
extremely fast real income growth, rising employ-
ment opportunities and falling unemployment
It is important to note that the achievement
rates, long periods of very high investment have
of price stability is not rooted in a restrictive mon-
coincided with very low inflation rates. None of
etary policy. For example, the policy interest rate
the countries under consideration experienced in-
(in real terms) set by the Peoples’ Bank of China
flation rates above 30 per cent during their
throughout the boom years, i.e. from the mid-
respective growth periods. The inflation rate, on
1990s to the present, has remained at an average
average, was 7.4 per cent for Japan between 1960
level of 3 per cent. In Japan’s 20-year period from
and 1979, and 12.7 per cent for the Republic of
1957 to 1976, the average real interest rate (again
36
Trade and Development Report, 2005
Box 1.2
INCOME DISPARITIES IN CHINA AND INDIA
In China, the number of people living in absolute poverty has been reduced considerably over the
past 25 years. However, both relative poverty and the gap between the rich and the poor are grow-
ing. China’s Gini-coefficient increased from 0.18 to 0.33 in urban areas and from 0.25 to 0.36 in
the rural areas between 1981 and 2002 (United Nations, 2004a). In 2001, the Gini-coefficient for
the country as a whole was 0.44. In India, it was significantly lower than in China at 0.32 in 2000,
down from 0.37 for the period 1993–1998. In comparison, in 2000, the Gini-coefficients in Swe-
den, Germany and the United States were 0.25, 0.28 and 0.41, respectively.
The high value of the Gini-index in China in general, compared to the lower values for rural and
urban areas, reflects the rising disparities between regions within the country. As the rural popula-
tion is an important factor for the expansion of domestic demand, in China, the policy to raise
welfare of the rural population will be a crucial factor for economic growth in the future. In this
regard, the Chinese Government recently reduced agricultural taxes in order to increase the in-
comes of China’s 800 million rural residents.
For India, widening disparity is less of an issue. However, with more than 350 million poor people
(UN Statistical Division, Millennium Indicator Database) not fully participating in overall eco-
nomic growth, social stability could be threatened. Only if India can significantly increase income
levels nation-wide, can overall pro-growth balanced demand be created to help move the economy
forward.
based on the policy rate) was negative at -0.1 per
of China, India and the Republic of Korea depre-
cent and slightly positive in the Republic of Ko-
ciated throughout most of their catching up periods
rea, at 0.6 per cent from 1967 to 1986.21 The
with major devaluations taking place at the be-
averages for the Chinese and Indian real short-
ginning of the 1990s in India and in the mid-1990s
term rates between 1990 and 2004 were 1.1 per
in China. Thus monetary stability and competitive
cent and 1.3 per cent, respectively. Lending rates
valuation functioned as strongly supportive and sta-
were also extremely low in China, and they have
bilizing elements of the high-growth periods in all
remained well below the growth rate of GDP,
of the four countries without fuelling inflation.24
which may be considered as a proxy for the rate
of return on investment in fixed capital; as a re-
China and India were able to create a favour-
sult, they have consistently stimulated the creation
able monetary environment throughout the 1980s
of new capital. In India, real lending rates were on
and early 1990s and, even more importantly, to
average close to real growth of GDP (fig. 1.11).22
defend these positions throughout the past dec-
ade. Since 2000, China has had to justify its
The pro-growth stance is as true for domes-
pro-growth monetary policy against external po-
tic monetary conditions as for the main external
litical pressure and, despite continued currency
condition: the real exchange rate. The four coun-
appreciation in real terms during and after the
tries’ development paths were supported by low
Asian financial crisis it has managed to preserve
and fairly stable real exchange rates, which con-
competitiveness and the expansionary stance of
tributed to a high level of competitiveness on the
its monetary policy. The Indian real effective ex-
world market.23 The real effective exchange rates
change rate has remained stable over the past
Current Issues in the World Economy
37
Figure 1.11
REAL INTEREST RATESa IN CHINA AND INDIA, 1980–2004
(Per cent)
Source: UNCTAD secretariat calculations, based on IMF, International Financial Statistics database.
a Nominal lending rates deflated by consumer prices.
decade. Financial crises in India (in 1991) and in
non-monetary instruments, such as an income
China (in 1994) had the effect of radically changing
policy or direct price controls,25 monetary policy
their monetary regimes; both countries conse-
was freed from the task of permanently fighting
quently adopted an anchor approach for their
inflationary dangers. Empirical evidence provided
exchange rates at a rather low level in order to
in TDR 2003 has shown that the freedom to set
being able to defend their respective positions
pro-growth macroeconomic conditions (interest
unilaterally (TDR 2004). Only recently and under
rates and exchange rates) has been a key feature
enormous political pressure has China modified
of Asia’s success in comparison with Latin America.
its external monetary regime slightly by introduc-
ing a more flexible band for the exchange rate and
In this respect, the macroeconomic regime,
by envisaging a basket approach instead of unilat-
in a broad sense, is an important component for
eral fixing against the dollar.
an explanation of Asia’s comparatively good per-
formance. The successful Asian countries were
Price stability and pro-growth monetary con-
able to permanently stimulate investment because
ditions of the Asian countries are in stark contrast
a special assignment of policies created the space
to those of other developing regions. Latin America,
for pro-growth monetary policy and a competitive
for example, has over the past three decades ex-
exchange rate. Sound institutional and structural
perienced high and highly volatile inflation rates
conditions were not seen as substitutes for support-
and very restrictive monetary policies as well as
ive macroeconomic policies but the precondition
overvalued exchange rates. Different policy in-
for applying them. The Chinese example, in par-
struments used in Asia for coping with inflationary
ticular, shows that even in a very open economy
pressures have been more effective, both in terms
with large FDI inflows, the labour market and, to
of price stability and economic growth. In par-
a very large extent, the money and capital mar-
ticular, by stabilizing the price level through
kets may remain within the realm of national
38
Trade and Development Report, 2005
governments and central banks. The Asian expe-
processing has expanded rapidly, offering many
rience demonstrates that globalization has not
new opportunities for a country with weak infra-
reduced the need for economic policy to act at the
structure and low investment in fixed capital, but
national level; in fact that need may even have in-
equipped with a fairly large educated workforce.
creased. The smoothing of the adjustment process
to more open markets, the stimulation of investments
Although considerable productivity gains are
and the maintenance of overall competitiveness
to be expected from structural change and in-
of an economy is, more than ever, the responsi-
creased use of economies of scale, technological
bility and the opportunity of national governments.
upgrading can accelerate the catching up process.
Since China and India launched their economic
reforms, the pace of integration has been increas-
ing due to major structural changes in the world
4.
Challenges for sustained growth in
economy. Production sharing in global manufac-
China and India
turing and services has enabled China, and subse-
quently India, to integrate into the world economy
by using their absolute advantage of a low-cost,
Rapid growth in China and India over the past
educated workforce. In comparison with the home
two and a half decades have made the East and
grown industries of Japan and the Republic of
South Asian region a new growth pole in the world
Korea, it took much less time for the specialized
economy. The challenge for the two countries now
activities in China and India to become part of
is to ensure the sustainability of their growth mo-
the international supply chain. However, indus-
mentum. There is a need to strengthen the factors
trialized countries are increasingly reluctant to
underlying their current growth, as well as to ad-
transfer technologies and know-how as part of
dress existing challenges.
their engagement, particularly in China.
One of these challenges is how to foster the
China has tried to circumvent this trend by
pace of structural change. History shows that in
attracting FDI, which, ideally, incorporates the
the development process, the importance of manu-
transfer of required technology to the host coun-
facturing and services increases both in output and
try. However, despite granting ever-increasing
employment, whereas that of agriculture declines.
preferential treatment to foreign ventures that in-
In China and India, by contrast, the role of agri-
clude the transfer of advanced technologies, there
culture in economic development will continue to
are indications of difficulties in acquiring the
be of great importance for many years to come,
needed technological know-how through this
given that the majority of their populations still
channel. It is well known that such spillover is
live in rural areas, and the sector still employs
limited due to the prevalence of “technology mer-
50 to 60 per cent of the workforce in both countries.
cantilism” of foreign ventures whereby TNCs seek
to retain control over their technologies. In re-
For China, expanding GDP and employment
sponse, China has shifted its policy to include the
in manufacturing and exporting sectors has been
purchase of key hardware, products and know-
imperative, but services will, in the future, pro-
how. However, so far China lacks the ability to
vide more employment opportunities. In Japan and
indigenize most imported technologies. Signifi-
the Republic of Korea the services sector com-
cant manufacturing capabilities have been devel-
pensated for the declining contribution of the
oped, but most of them are aimed at producing by
industrial sector to GDP in the 1980s and 1990s,
means of original equipment manufacturing to
respectively. In India, in contrast to China and the
supply TNCs and large brand name retailers.
NIEs in the high growth period of the 1990s the
share of industry in GDP has remained constant
India’s industry has succeeded in develop-
while that of services has risen rapidly. This might
ing certain knowledge-based industries in sectors
pose a challenge for sustained growth, as produc-
such as pharmaceuticals, basic organic chemicals
tivity increases in the services sector are normally
and IT. As with China’s manufacturing sector,
less strong than in the manufacturing sector.
however, there is the danger that the Indian IT
Nevertheless, outsourcing in IT and business
industry will remain trapped at the low end of the
Current Issues in the World Economy
39
market, exporting services such as debugging, test-
efits of economic growth, even if a price in terms
ing, conversion and installation of software, and
of greater interpersonal inequality has been paid
importing expensive branded software and hard-
in the first round. The present analysis has shown
ware products.
that the growth of real wages in line with rising
productivity is important for gaining general ac-
As more developing countries develop ca-
ceptance of the rapid processes of structural change.
pacities to produce labour-intensive manufactured
It is also of the utmost importance for maintain-
goods, competition in manufactured exports will
ing the stability of the growth process and, hence,
also intensify. Thus there is an additional strong
for the success of catching up at large. Investment
imperative for technology upgrading, to support
depends on favourable demand expectations. Ex-
more diversified and higher value-added produc-
port demand is subject to the vagaries of the world
tion, which would enable both countries to maintain
market and national competitiveness, and no coun-
their economic growth.
try can expect permanent increases in its global
market shares. Therefore domestic consumption
In both countries it will be crucial to ensure
is the most important factor for stabilizing and
that the majority of their population reaps the ben-
sustaining private investment.
Notes
1
See United States Bureau of Economic Analysis,
8
See UNCTAD (2005b) for a detailed analysis on
National Economic Accounts database, at: www.bea.
recent FDI trends.
gov/bea.
9
For a discussion on this issue, see Houthakker-
2
Oil exports alone amounted to $213 billion.
Magge (1969), Krugman (1988), Hooper et al.
3
See Republic of Turkey, State Institute of Statistics,
(1998), Mann (2003) and Wu (2005).
Economic Panorama database, at www.die.gov.tr.
10
The results of the seminal study by Freund (2000)
4
Urban fixed-asset investment (whose evolution is
have recently been confirmed by Croke et al. (2005)
used as an indicator for domestic investment) grew
and Debelle and Galati (2005).
by 26.4 per cent year on year in January–May 2005,
11
The source for all oil price data in this section is the
while the Government’s goal is a 16 per cent in-
UNCTAD Commodity Price Bulletin. Unless other-
vestment growth for the whole year. See EIU (2005a).
wise stated, quoted prices always refer to the nomi-
5
See Instituto Nacional de Estadística, Geografía e
nal dollar price per barrel of Dubai/Brent/Texas
Informática (INEGI), Indicador global de actividad
(equal weights).
económica database, at: www.inegi.gob.mx/est/.
12
The share of oil consumption in total primary energy
6
Export and import volumes calculated by UNCTAD
consumption in Japan decreased from 77 per cent in
include re-exports; this may explain, at least partly,
1974 to nearly 50 per cent in 2003. During the same
the differences between these estimates and those
period, in North America this share went down from
of other sources. For instance, the World Bank esti-
45 per cent to 36 per cent. The five biggest Euro-
mated that trade expanded by 10.3 per cent in 2004.
pean Union countries registered a fall from 45 per
See World Bank (2005).
cent to 42 per cent (British Petroleum (BP), 2004).
7
Country groups in this publication slightly differ
13
For a more detailed discussion on intensity of en-
with those generally used in this report.
ergy use, see chapter II.
40
Trade and Development Report, 2005
14
UNCTAD secretariat estimations, based on UN
20
The underlying data for this analysis incorporates
COMTRADE and UNCDB.
“state-owned units, urban collective-owned units
15
As argued by Akyüz and Gore (1996), the presence
and other ownership units”. It is sometimes argued
of such an investment-profit nexus played an im-
that this definition does not cover the whole
portant role in East Asian industrialization, as it had
economy, as it excludes the rural segment. In any
earlier, in Western Europe’s growth during the three
case, the figures provide the best possible proxy to
decades after the Second World War.
show the trend of overall participation of wage re-
16
The analysis used breakpoint techniques of produc-
cipients in productivity growth.
tivity growth series, measured by growth rates of
21
Preferential interest rates for export industries in
GDP per worker as is frequently used in the litera-
Japan and particularly in the Republic of Korea, even
ture on catching up and integration (Maury and
further pushed down, de facto, the real interest rates.
Phiyaud, 2004; IMF, 2004a). While it revealed clear
Thus, recorded average interest rates tend to be over-
starting breakpoints for Japan, the Republic of Ko-
stated.
rea and China, the starting point cannot be deter-
22
In India, and particularly in China, not all compa-
mined as clearly for India. For the purpose of this
nies and sectors have equal access to the banking
analysis this starting point was 1980.
system and bank credits; only those enterprises that
17
UNCTAD secretariat calculations based on Korea
have such access can therefore actually benefit from
National Statistical Office, Statistical database
the low real interest rates.
KOSIS and UNCDB.
23
See TDR 2004 for a discussion of the concept of
18
FFEs include equity joint ventures, contractual joint
competitiveness.
ventures, wholly-foreign-owned enterprises and
24
TDR 2004 (chap. IV, section B) examined the cau-
joint exploration companies for special extraction
sality between depreciation and actual export pro-
industries. They range from large TNCs to small-
motion, and presented various countries’ experiences
and medium-sized enterprises (SMEs) owned
at a more general level and with more recent datasets.
mainly by investors of ethnic Chinese living in other
25
For a detailed discussion of China’s non-monetary
parts of East Asia.
instruments, see Flassbeck et al., 2005.
19
Productivity for India could be calculated only from
1991 to 2001, owing to data constraints.
Income Growth and Shifting Trade Patterns in Asia
41
Chapter II
INCOME GROWTH AND SHIFTING
TRADE PATTERNS IN ASIA
A. Introduction
Sustained rapid growth and rising living
tive pressure from Asian economies might, over
standards in a number of Asian countries have
time, wipe out export opportunities for other de-
been accompanied by a dramatic increase of the
veloping-country exporters. Combined with the
region’s shares in world exports and raw material
recent, much slower pace of economic growth in
consumption. The recent emergence of develop-
most developed countries, it has also fuelled the
ing Asia as a driver of world economic growth
debate in developed countries about the employ-
has been widely welcomed, not least because the
ment and growth consequences of rising imports
associated poverty reduction in China and India
of labour-intensive manufactures from, and in-
signifies important progress towards achieving the
creased relocation and outsourcing of economic
Millennium Development Goal of halving global
activities to, Asian developing countries. Further,
poverty by 2015. Moreover, combined with their
particularly over the past three years, policy-mak-
rapid growth, the greater integration of these coun-
ers in some developed and developing countries
tries into the world trading system has created new
have been concerned about the potential adverse
export opportunities for many developed and other
impact on their economies’ growth prospects of
developing countries.
the rise in commodity prices, especially those of
metals and fuels. This price rise is partly attrib-
But policy-makers in some developed and
uted to the strong increase in demand from the
developing countries have also expressed concern
rapidly growing Asian developing countries.
about potential adverse effects on their economies
stemming from the rising import demand and ex-
The global impact of China’s buoyant eco-
port supplies of these rapidly growing Asian
nomic performance has been the focus of many
countries. For example, Asia’s sustained superior
of these concerns in recent years. For example,
export performance relative to other developing
there have been widespread fears that China’s ac-
regions has sparked fears that this region might
cession to the World Trade Organization (WTO)
become a price setter for labour-intensive export
in 2001 and, in particular, termination of the WTO
activities in the world market, and that competi-
Agreement on Textiles and Clothing (ATC) at the
42
Trade and Development Report, 2005
beginning of 2005, might be followed by a massive
more than double the pace of growth in world
increase in China’s exports of labour-intensive
manufactured exports.
apparel. Some fear that this might be accompa-
nied by a significant decline in the price of inter-
However, there are also important differences
nationally traded clothing, which would erode the
between the recent growth of China and India, on
export opportunities of other developing-country
the one hand, and the earlier episodes of rapid
exporters, as well as displacing producers in im-
growth, industrialization and greater trade inte-
porting developed countries. Moreover, media
gration by Japan and the Republic of Korea, on
reports on observed or expected changes in the
the other. Two of these have to do with the coun-
fortunes of the Chinese economy can have an enor-
tries themselves. First, both China and India are
mous influence on short-term price movements of
very large economies, each with a population
internationally traded raw materials such as pe-
about 10 times larger than that of Japan and about
troleum, copper and nickel.
25 times larger than that of the Republic of Ko-
rea. The share of China in total world population
India’s economic development has sparked
has averaged about 21 per cent since the begin-
less fear, even though the country has also regis-
ning of the country’s economic catch-up and grow-
tered buoyant economic growth over the past few
ing trade integration in the late 1970s, and the
years. Moreover, India’s growth
share of India has been around
potential is sometimes consid-
17 per cent since the intensi-
ered to be even greater than that
fication of its trade integration
of China (Panagariya, 2004).
China and India will have a
in the late 1980s. By contrast,
However, India’s exports of la-
much larger impact on the
the respective shares for Japan
bour-intensive manufactures
composition of world trade
and the Republic of Korea
have not featured as promi-
than Japan and the
were about 3 per cent and 1 per
nently as China’s in world trade
cent, respectively, during their
Republic of Korea had
flows, nor has its raw material
corresponding phases of rapid
during their economic
consumption grown at any-
economic catch-up and export
ascent.
where near the same pace as
expansion. Moreover, China
China’s. Rather, developed
accounts for about 13 per cent
countries’ fears of India’s eco-
– and India for another 6 per
nomic growth focus mainly on offshoring in the
cent – of global income, measured in terms of
services sector, particularly from the United States.
purchasing power parity (PPP).
Some developing-country policy-makers are oc-
casionally concerned about the impact on their
Second, rapid income growth and greater
countries of a potential surge in labour-intensive
trade integration by China and India started from
apparel exports from India following termination
lower levels of per capita income. For example,
of the ATC and full implementation of WTO rules
in the late 1980s (i.e. when the two countries
for this sector; this could reinforce the perceived
strongly accelerated their trade integration), their
adverse effects from the growing Chinese exports
respective per capita incomes were at about the
of these commodities.
same level as that of the Republic of Korea at the
beginning of its export surge in the early 1960s,
In some sense, China’s recent rapid income
but only at about half that of Japan’s in the mid-
growth and shifts in its pattern of trade resemble
1950s, when this country began its post-War
those experienced by Japan and the Republic of
export take-off. This means that the patterns of
Korea some decades ago. For example, between
demand in China and India may change at least as
1965 and 1985 manufactured exports from the
much as that in the Republic of Korea and much
Republic of Korea grew at an average annual rate
more than that in Japan during their respective
of almost 35 per cent, which was more than dou-
catch-up and rapid integration periods after the
ble the pace of growth in world manufactured
Second World War.
exports. Similarly, between 1987 and 2003 manu-
factured exports from China grew at an average
Given the large size of the Chinese and In-
annual rate of almost 18 per cent, which was also
dian economies, and their specific patterns of
Income Growth and Shifting Trade Patterns in Asia
43
demand, changes in the two countries’ level and
patterns that have been associated with success-
structure of supply and demand will tend to have
ful economic development in China and India.
a much larger impact on the composition of world
This is done from a historical perspective and in a
trade than those of Japan and the Republic of
comparative framework, referring to the economic
Korea during their economic ascent. China’s
catch-up and industrialization periods of Japan
growth has already demonstrated some of this
after the Second World War and of the Republic
impact on global trade flows. The structure of
of Korea. The impact of domestic resource and
India’s merchandise trade is likely to follow a
balance-of-payments constraints on rapid economic
sequence of changes similar to that of China, but
growth and industrialization is emphasized. The
with a lag of one or two decades, if the role of
chapter also assesses the impact of the changing
industrialization in India’s further economic as-
trade patterns in China and India on international
cent is similar to that in the other fast growing
trading relationships. More specifically, the chap-
Asian economies.
ter focuses on two key aspects:
Three additional differences concern the inter-
•
Shifts during rapid income growth and indus-
national environment in which economic catch-up
trialization in the pattern of food consumption
and greater integration by China and India are
and the intensity of metal and energy use,
taking place. One is the much slower pace of eco-
which, when combined with shifts on the sup-
nomic growth and industrialization in developed
ply side, affect the level and composition of
countries. This has reduced income-related export
a country’s external trade;
opportunities for developing-country exporters of,
for example, labour-intensive manufactures, and
contributed to rather pessimistic forecasts of glo-
•
The impact of these shifts on the pattern of
bal primary commodity consumption. As a con-
international trade flows when they occur in
sequence, investment in commodity production
very large economies with relatively low lev-
and processing facilities has fallen, particularly
els of per capita income.
in mining and energy production. Another differ-
ence is that greater trade integration by China and
The chapter shows that import demand by
India is occurring concurrently with similar ef-
China and India for a number of primary com-
forts by other developing countries; a number of
modities (particularly metals and energy products,
countries have been simultaneously increasing
as well as some soft commodities such as natural
their export-oriented activities in the same prod-
rubber and soybeans) can be expected, in the near
ucts. This risks creating growing competition
future, to keep international prices for a limited
among the developing countries for export mar-
number of products at levels above those experi-
kets. A third difference in the international envi-
enced over the past decade or so. However, it is
ronment is reduced space for proactive trade and
uncertain whether this can lead to a reversal of the
industrial policies to manage greater trade inte-
long-standing price decline in primary commodi-
gration. This has made it more difficult to use the
ties more generally. Rising prices will stimulate
kind of targeted support to nascent industries that
the production of some of the affected commodi-
policy-makers in the Republic of Korea provided
ties, including domestic production in the importing
during its economic catch-up so as to create broad-
countries, and reduce the consumption of some
based domestic forward and backward linkages
others. The chapter also shows that the ability of
in which greater trade integration could be em-
the fast-growing Asian economies to further in-
bedded. Partly as a result of this, policy-makers
crease their export earnings in line with their rising
in developing countries have actively supported
import bills, in the medium term, will depend on
participation in international production networks,
their progress with regard to structural change and
increasingly through the use of tax instruments.
domestic capital formation, as well as their ca-
pacity to upgrade production to more skill-intensive
Bearing these similarities and differences in
manufactures in the case of China, and to expand
mind, this chapter examines changes in the trade
manufacturing in the case of India.
44
Trade and Development Report, 2005
B. Evolving demand and trade patterns in Asia:
a comparative perspective
It is well known that the process of economic
Asian economies, emphasizing the experiences of
development is accompanied by changes in the
China and India over the past decade.
sectoral composition of production, employment,
private consumption, and external trade. On the
demand side, the changes are derived from the
pattern of income elasticity of private consumer
1.
Changing patterns of food
demand and the intensity of metal and energy use
consumption
associated with urbanization and industrialization.
On the supply side, they result from factor accu-
mulation and productivity growth. Shifts in the
A rise in per capita income from low levels
patterns of production, employment and consump-
is associated with an increase in per capita food
tion are more uniform across countries than shifts
consumption and a shift in the composition of
in the level and composition of external trade. This
household expenditure away from primary prod-
is because a host of country-specific factors (such
ucts, particularly food, towards manufactures,
as size, geographic location, resource endow-
such as textiles and clothing, wood and paper
ments, history of industrial growth, and trade and
products, machinery (e.g. electrical household
exchange rate policies) influence shifts in a coun-
equipment), and chemicals (e.g. pharmaceuticals).
try’s level and composition of external trade.
Household demand for services also increases,
particularly for transport (especially personal
There is clear evidence of a close relation-
transportation), electricity and housing (including
ship between (i) increasing population and per
furniture and consumer appliances).1 The share of
capita income, on the one hand, and the level and
food in total household expenditure, while increas-
composition of food consumption, on the other;
ing in absolute terms, declines relative to that of
and (ii) per capita income and the level of indus-
other products, because the income elasticity of
trial production, on the one hand, and the intensity
demand for food is below unity. Moreover, as per
of metal and energy use, on the other (Syrquin,
capita income continues to grow, the increase in
1988; Syrquin and Chenery, 1989). The trade im-
per capita calorie intake peters out, and households
pact of shifts in the level and composition of food
change the composition of food consumption: the
consumption is often relatively small, depending
share of staple cereals falls, while in most coun-
on the supply response in agriculture to shifting
tries the shares of meat, fish, dairy products, and
relative prices. By contrast, given that metals and
fruits and vegetables tends to rise.
most energy products are non-renewable resources,
rising demand for these raw materials can often
Income changes are not the only cause of
lead to a substantial rise in imports. This section
shifts in food consumption patterns. Lifestyle and
examines these relationships in the rapidly growing
preference changes, particularly those associated
Income Growth and Shifting Trade Patterns in Asia
45
with urbanization and the increasing number of
manded food group), as well as some increase in
two-income nuclear families, also play a role.
the shares of oil crops and vegetable oils, meat,
They tend to lead to a greater emphasis on con-
dairy products, fish and seafood, and fruits. This
venience, including a growing
shift has been most pronounced
share of food consumed away
in the urban areas, where con-
from home, a larger intake of
sumers have higher incomes
readymade meals, and efforts
The change in the
and access to a wider range of
to reduce the preparation time
composition of China’s food
food products. Aggregate meat
for traditional dishes (Popkin,
consumption is likely to
consumption has grown by
1993). Urbanization has a par-
induce a further rise in the
more than 50 per cent over the
ticularly strong impact on the
past decade. Per capita meat
demand for livestock
level and composition of a
consumption has also grown
products, oil crops,
country’s food consumption
considerably, mainly due to a
vegetable oils, and fruit and
if the incomes of urban con-
higher demand for pork and
vegetables.
sumers are significantly higher
poultry, the consumption of
than those of rural consumers.
which has risen by about one
Where this is the case, rural
third over the past decade. The
consumers may continue to strive for a higher per
growing demand for meat is likely to continue:
capita calorie intake on the basis of traditional
projections indicate that China alone will account
diets, whereas urban consumers will have already
for over 40 per cent of the additional demand
reached nutrition levels similar to those in devel-
for meat worldwide between 1997 and 2020 (Rose-
oped countries and will start shifting away from
grant et al., 2001: 65). The overall rise in meat
traditional diets.
consumption has also contributed to higher over-
all demand for soybeans, due to its increasing use
The evolution of the level and composition
as animal feed. Per capita consumption of veg-
of food demand has differed between China and
etable oils, notably soybean oil and palm oil, has
India. By the end of the 1990s, China’s average
grown rapidly as the rise in urban incomes has
level of daily per capita calorie intake fell only
stimulated their use in place of lower grade veg-
10 per cent short of the level of developed coun-
etable oils.
tries. Due to India’s relatively lower level and
growth rate of per capita income, growth in per
Changes in India’s dietary pattern over the
capita demand for cereals in that country has been
past decade have been markedly different from
much slower than in China over the past two dec-
those in China (table 2.1). India’s cultural tradi-
ades, and per capita rice and
tions favouring vegetarianism
wheat consumption in India is
have held back the country’s
still well below Chinese lev-
demand for meat and animal
els. Indeed, India’s average
There is also potential for a
feeds, and thus the dietary
level of daily per capita calo-
strong rise in India’s
shift away from cereals to meat
rie intake has remained about
consumption (Rosegrant et al.,
consumption of livestock
20 per cent below the Chinese
2001: 5–30). But the share of
products and feed.
level. The expectation, there-
cereals in India’s total food
fore, is that the increase in
consumption has fallen only
China’s level of per capita food
slightly, and the shares of veg-
consumption in the future will be slower than in
etables, dairy products and fruit have not increased
the past, while in India there is considerable scope
as much as in China. This indicates that India’s
for a further strong increase in per capita food
dietary pattern has not yet shifted to the same ex-
consumption (FAO, 2002: 11–12).
tent as China’s over the past decade and as Japan’s
and the Republic of Korea’s in the 1970s and
Table 2.1 shows a sharp decline in the share
1980s.2
of cereals in China’s dietary pattern and an almost
equally sharp increase in the share of vegetables
Rapid population growth and rising per capita
(which have replaced cereals as the most de-
incomes have, nonetheless, resulted in a sharp rise
46
Trade and Development Report, 2005
Table 2.1
in such feed, as happened in China during the
1990s. By 2020, India could thus reach a level of
livestock product consumption (measured in terms
DIETARY COMPOSITION IN CHINA AND
of meat equivalents) similar to that of China in
INDIA, 1994 AND 2002
the early 1990s (Bhalla, Hazell and Kerr, 1999).
(Per cent)
India’s shift in dietary pattern would also imply a
strong increase in the consumption of fruit, veg-
China
India
etables, fish and seafood, similar to that of other
Product
1994
2002
1994
2002
Asian countries.
Alcoholic beverages
3.6
3.8
0.3
0.4
To sum up, China’s pattern of average food
Cereals
36.0
23.0
38.9
36.0
consumption has gone through most of the first
Eggs
2.1
2.4
0.3
0.4
stage of the nutrition transition, as the aggregate
Fish and seafood
3.3
3.5
1.1
1.1
level of per capita calorie intake has come close
Fruits
5.0
6.5
8.5
8.6
to that of developed countries. Hence, a future rise
in the level of food consumption is likely to be
Meat
6.7
7.3
1.2
1.2
much slower than in the past. By contrast, the
Milk
1.3
1.8
14.0
14.4
change in the composition of food consumption
Oil crops
1.4
0.9
2.0
1.5
(i.e. the second stage of the nutrition transition)
Pulses
0.3
0.2
3.1
2.8
is likely to continue for some time, leading to a
Starchy roots
10.7
11.1
5.3
5.5
further rise in the demand for livestock products,
Sugar and sweeteners
1.2
1.0
5.9
5.6
oil crops, vegetable oils, and fruit and vegetables.
Sugar crops
0.0
0.0
2.8
2.9
The pace at which rural incomes catch up with
Vegetable oils
1.3
1.3
1.7
2.1
urban incomes will have a marked influence on
how fast China’s aggregate per capita calorie
Vegetables
25.5
35.1
13.5
15.9
intake fully converges with developed-country
Other
1.5
1.9
1.3
1.6
levels and how fast its composition of food con-
Total
100.0
100.0
100.0
100.0
sumption continues to change. India, by contrast,
appears still to be in the first stage of the nutrition
Source: UNCTAD secretariat calculations, based on FAOSTAT.
transition, with substantial potential for a rapid
rise in per capita calorie intake, particularly in the
consumption of livestock products and livestock
feed.
in India’s absolute level of food consumption. For
example, over the past decade, the aggregate con-
sumption of cereals grew by about 15 per cent and
vegetables by about 50 per cent, while that of
2.
Intensity of metal and energy use
soybeans about doubled and poultry almost tri-
pled over the same period.3 This indicates that
India is still experiencing the first stage of the
Over the past few decades, metal use in
nutrition transition (i.e. the expansion of per capita
China, and to a lesser extent in India, has strongly
calorie intake); once the level of per capita calo-
increased. This trend has become particularly vis-
rie intake in India comes close to the current level
ible in China since the mid-1990s. Between 1994
in China,4 India might also experience a shift in
and 2003, China’s average annual growth of GDP
its dietary pattern similar to that of other Asian
of 8.2 per cent was accompanied by an even higher
countries. It has been estimated that by 2020 the
average annual rate of growth in the use of alu-
consumption of dairy products, in particular, will
minium (13.6 per cent), copper (14.9 per cent),
increase dramatically to compensate for the rela-
nickel (13.0 per cent) and steel (9.2 per cent). By
tively low meat consumption, but meat consump-
contrast, India’s average annual growth of GDP
tion will also increase. This, in turn, could drive a
of 5.8 per cent over the same period was exceeded
dramatic increase in the demand for cereals for
only by the growth of copper use (12.4 per cent),
livestock feed, unless soybeans take a larger share
while there was slower growth in the use of alu-
Income Growth and Shifting Trade Patterns in Asia
47
Table 2.2
minium (3.2 per cent), nickel (3.7 per cent), and
steel (4.4 per cent).5 Whereas the absolute level
of metal use has risen rapidly in both China and
PER CAPITA METAL CONSUMPTION,
India, measured in per capita terms it has remained
SELECTED COUNTRIES, 2003
relatively low, in particular when compared with
the Republic of Korea or developed countries such
(Kilograms per capita)
as Japan and the United States (table 2.2).
Aluminium Copper
Nickel
Steel
Both these features of metal use by China and
India reflect earlier findings in the literature based
China
4.0
2.4
0.1
197.9
on the “intensity-of-use” hypothesis (e.g. Malem-
India
0.7
0.3
0.0
33.4
baum, 1973). In this context, “intensity of use” is
Japan
15.8
9.4
1.4
603.2
defined as the ratio of metal use to national in-
Rep. of Korea
20.6
18.9
2.4
984.6
come; that is, the change in metal use depends on
United States
19.3
7.8
0.4
349.3
the change in the intensity of use and on the change
in income. According to the “intensity-of-use”
hypothesis, the intensity of metal use is low in poor
Source: UNCTAD secretariat calculations, based on World
Bank, Global Economic Prospects - Commodity
countries, which rely largely on unmechanized
Market Briefs, 2004; International Iron and Steel
subsistence agriculture. As economic development
Institute, Steel Statistical Yearbook 2004; Inter-
takes place, manufacturing, construction of hous-
national Copper Study Group, Copper Bulletin, 11(4),
2004; and United Nations Department of Economic
ing and physical infrastructure, and household
and Social Affairs (UN/DESA), Population Division,
demand for consumer durables grow, while the
World Population Prospects, Rev. 2002.
share of agriculture in GDP declines. This causes
the intensity of use to rise. At some point, how-
ever, the growth of manufacturing and construction
activities, as well as household demand for con-
China currently is in the stage of rapid industri-
sumer durables, starts to slow down. Thus, the
alization on its intensity-of-use curve (i.e. the
“intensity-of-use” hypothesis anticipates an in-
income elasticity of metal use exceeds unity).
verted U-shaped relationship, with the intensity
However, the rise in its intensity of metal use has
of use first rising and then falling with growing
not been continuous. Its intensity of aluminium
per capita income. The hypothesis also anticipates
and copper use rose until the late 1970s, after
change in the intensity of metal use due to forces
which it began a temporary decline. This decline
other than those related to per capita income. Most
is probably closely related to the transition away
importantly, new production technologies or long-
from central planning, with its emphasis on metal-
term price increases may lead to the introduction
intensive heavy industry. However, more recently,
of synthetic substitutes and to a reduction in the
China’s intensity of aluminium, copper and nickel
use of materials per unit of output, and, thus, tend
use has picked up again, and has tended to grow
to result in a downward shift in the intensity-of-
steeply over the past two or three years, undoubt-
use curve. Moreover, the mode of industrialization
edly due largely to rapid industrialization. Part of
strongly influences the evolution of the intensity
this recent increase coincides with very high rates
of metal use. This is because, for example, indus-
of investment, particularly investment in infra-
trialization that relies on heavy industry requires
structure. According to Morgan Stanley (2004: 29),
greater metal use than industrialization that relies
for example, the share in GDP of China’s invest-
on light industry; moreover, a more outward-
ment in infrastructure rose from an already high
oriented industrialization strategy requires the
level of about 15 per cent in 1997 to over 20 per
extended metal-intensive construction of port fa-
cent in 2002. This indicates that similar rates of
cilities.
economic growth can be associated with different
levels of intensity of metal use, depending on the
A comparative analysis of the intensity of use
rate and composition of investment. Thus the re-
of aluminium, copper and nickel can give some
cent rapid rise in China’s intensity of metal use
indication of a country’s current location on its
may well slow down once investment in infrastruc-
intensity-of-use curve. As shown in figure 2.1,
ture declines from its current high levels.
48
Trade and Development Report, 2005
Figure 2.1
INTENSITY OF METAL USE, SELECTED METALS AND COUNTRIES, 1960–2003
(Tons per GDP in $ million, PPP-adjusted)
Aluminium
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
1960
1965
1970
1975
1980
1985
1990
1995
2000
2003
Copper
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
1960
1965
1970
1975
1980
1985
1990
1995
2000
2003
Nickel
0.14
0.12
0.10
0.08
0.06
0.04
0.02
0.00
1960
1965
1970
1975
1980
1985
1990
1995
2000
2003
China
India
Japan
Republic of Korea
United States
Source: UNCTAD secretariat calculations, based on World Bureau of Metal Statistics Yearbook, various issues; International
Copper Study Group, Copper Bulletin, 11(4), 2004; Tilton, 1990; World Bank, Global Economic Prospects - Commodity
Market Briefs, 2004, and World Development Indicators online; and Penn World Tables.
Income Growth and Shifting Trade Patterns in Asia
49
Contrary to developments in China, India’s
level of investment in infrastructure, which has
intensity of aluminium, copper and nickel use has
held back growth in demand for transportation
remained relatively stable over the past four dec-
fuels.
ades. This difference is likely to reflect the two
countries’ different pace of industrialization and
By contrast, the evolution of China’s inten-
the relatively small share of investment in infrastruc-
sity of energy use does not correspond to the
ture in India’s GDP. Assuming current growth and
general pattern: it was highly volatile, but re-
industrialization trends will be
mained at a high level until the
maintained, Morgan Stanley
late 1970s when it started to
(2004: 15) estimates that In-
decline, a trend that was re-
dia is 5 to 20 years behind
The recent rise in China’s
versed only in 2000 (fig. 2.3).
China in per capita use of
intensity of metal use may
The income elasticity of en-
commodities such as alumin-
slow down once
ergy use in China between
ium, copper and steel.6
infrastructure investment
1980 and 2003 was 0.5 – only
declines from its current
slightly higher than in the
Figure 2.2 is a schematic
high levels.
United States (at 0.46) and
representation of the relation-
much lower than in India and
ship between the intensity of
the Republic of Korea (at 0.97
metal use on the one hand, and
and 1.22 respectively). The
per capita income and time on the other. The con-
decline in China’s intensity of energy use regis-
tinuous line in figure 2.2 reflects a locus of points
tered between the late 1970s and 2000 was mainly
on the different intensity-of-use curves for China,
due to two factors: technical change within indi-
India, Japan, the Republic of Korea and the United
vidual sectors (i.e. the change in the energy re-
States. The position of these countries on the con-
quired to produce a particular product) and
tinuous line should be taken as illustrative only,
structural change between sectors (i.e. shifts in
and not as a precise reflection of their actual lo-
the share of total output between sectors which
cations. Moreover, given the tendency of long-
may be more or less energy-intensive). In China,
term intensity-of-use curves to shift downwards,
gains in energy efficiency were brought about by
it is probable that the curves of late industrializers,
the move from central planning towards market-
such as China, will peak at a level below those of
mediated prices, enterprise ownership reform, and
early industrializers, such as the United States.
the introduction of energy-saving technologies;
these are generally credited for
Much of the reasoning
most of the decline in China’s
behind the intensity of metal
intensity of energy use (Zhang,
use also applies to the energy
2003; Fisher-Vanden et al.,
India is 5 to 20 years
sector. Hannesson (2002), for
2004).7
example, shows that the inten-
behind China in per capita
sity of use of energy first rises
use of commodities such as
While China’s energy use
and then falls after countries
aluminium, copper and
has risen at a slower pace than
reach a certain level of afflu-
steel.
its GDP, its absolute level of
ence. This means that energy
energy use has steadily in-
use tends to grow more slowly
creased since the 1960s, ex-
than income in mature, indus-
cept for the period between
trialized economies, while the opposite holds for
1997 and 2000, when it decreased in spite of rapid
countries where the share of industry in output
output growth. This was mainly due to a decline
continues to grow.
in the direct use of coal caused by a variety of fac-
tors, including the closure of many State-owned
In line with this general pattern, figure 2.3
factories that were large and inefficient energy
indicates relatively little change in India’s inten-
users, the elimination of small and inefficient
sity of energy use over the past four decades. This
power generators, and the switch to high quality
is probably largely due to the country’s relatively
coal (Sinton and Fridley, 2000). Energy use be-
slow pace of industrialization, as well as its low
tween 2000 and 2003 grew at an average annual
50
Trade and Development Report, 2005
Figure 2.2
has been declining (BP, 2005). While coal will
probably continue to be a major source of energy
for China, other sources of energy, such as oil (for
STYLIZED REPRESENTATION OF THE
transportation and industry), natural gas and hy-
RELATIONSHIP BETWEEN INTENSITY
droelectric power (growing in conjunction with
OF METAL USE AND PER
increasing use of household appliances) are also
CAPITA INCOME
likely to be increasingly used.
The future development of China’s energy
use will depend on a balance of opposing trends.
Republic of
On the one hand, continued rapid industrialization,
Korea
higher living standards, and improved transport
infrastructure will tend to increase China’s inten-
sity of energy use. On the other hand, despite the
Japan
China
country’s low average income elasticity of energy
use over the past three decades or so, the level of
energy use per unit of output remains relatively
United States
Intensity of metal use
India
Figure 2.3
Per capita income
INTENSITY OF ENERGY USE,
SELECTED COUNTRIES, 1965–2003
Source: UNCTAD secretariat.
(Tons of oil equivalent per GDP in $ million, PPP-adjusted)
600
rate of 16.2 per cent, significantly more than be-
tween 1990 and 1997, when it was 5.2 per cent.
500
As a result, for the first time since the late 1970s,
China’s income elasticity of energy use started to
400
exceed unity in 2001. This strong growth appears
to have been spurred largely by the substantial
300
number of steel mills and aluminium smelters that
came into operation in the late 1990s, as well as
200
by the growth in demand for energy-intensive
consumer goods, such as automobiles and home
appliances (Crompton and Wu, 2005).
100
One notable feature in both China and India
0
is the relatively high proportion of coal in total
1965
1975
1985
1995
2003
energy use: 69.0 per cent and 54.5 per cent, re-
China
spectively, in 2004. Oil ranked second, accounting
India
Republic of Korea
for 22.3 per cent of energy use in China and 31.7 in
Japan
United States
India. Although in China absolute levels of coal
Source: UNCTAD secretariat calculations, based on British
use have been increasing (except in the period
Petroleum, 2004; Penn World Tables; and World
1998–2000), in total energy use the share of coal
Bank, World Development Indicators online.
Income Growth and Shifting Trade Patterns in Asia
51
high for a country at its current level of economic
the energy-intensive production of fertilizer in-
development (fig. 2.3). This indicates considerable
put is an important cost factor. Taking account of
further potential for the adop-
these opposing factors, it is
tion of energy-saving technolo-
widely expected that the in-
gies (e.g. more energy-efficient
come elasticity of China’s en-
vehicles). The imposition of a
The extent of China’s future
ergy use will be substantially
vehicle fuel tax and further liber-
energy use will depend on
below unity in the next few
alization of energy prices could
a balance of opposing
years. For example, Crompton
also help cut the increase in en-
trends ... but it is likely to
and Wu (2005) estimate an
ergy demand. However, such
grow less than its income.
annual growth rate of 3.8 per
measures would need to be
cent between 2004 and 2010,
weighed against their adverse
while the International Energy
impact on the real incomes of
Agency (2004) estimates an
energy users, such as farmers who rely on diesel oil
average annual growth rate of 2.6 per cent annu-
for transportation and machinery, and for whom
ally from 2002 to 2030.
C. Domestic resource constraints and the
balance-of-payments constraint
Changes in the supply and demand patterns
Rapid economic growth and industrialization
of rapidly growing and industrializing countries
face two main constraints. A country’s domestic
are typically characterized by the accumulation
natural-resource endowment determines the
of capital (both physical and human), sectoral
degree to which its self-sufficiency in food con-
differences in productivity growth, a shift in
sumption and raw-material use is compatible with
household demand from food to manufactured
rapid industrial development and economic growth.
products and services, an initial rise and then de-
To the extent that the growing demand for food,
cline in per capita use of energy and industrial
energy, industrial raw materials, intermediate
raw materials as per capita income rises, and a
products and capital goods cannot be met from
growth in demand for machinery and intermedi-
domestic production, the pace of income growth
ate production inputs (Chenery, Robinson and
and industrialization will slow down unless im-
Syrquin, 1986). But the way in which changes in
ports grow. But the balance-of-payments con-
these patterns interact with shifts in the level and
straint limits import growth. Imports of food and
composition of a rapidly growing country’s ex-
inputs for industrial production (including raw
ternal trade depends on the country’s size, changes
materials, intermediate goods and capital goods)
in its domestic resource constraints and demand
cannot exceed what is earned from exports and
patterns relative to those of other countries, the
net inflows of financial capital. Hence a key de-
balance-of-payments constraint, and trade and
terminant of the dynamics of economic growth and
exchange rate policies.
industrialization in an open economy is the ca-
52
Trade and Development Report, 2005
pacity to secure the increased export revenues re-
ing relative factor endowments is to concentrate
quired to overcome domestic resource constraints
on labour, land and skills of the labour force, and
and the balance-of-payments constraint, translate
to omit capital (physical and financial), which,
these increased export earnings into investment
though of vital importance as an input to pro-
in new lines of production, and implement a co-
duction, has become highly mobile between
herent strategy of industrial upgrading. Where this
countries.10
occurs, rapid growth and industrialization increases
a country’s export capacity, and the higher export
Figure 2.4 shows the evolution of the land–
earnings can be used to finance the greater volume
labour and skill–labour resource ratios for several
of imports required for still further growth.
groups of economies over the past four decades:
the vertical axis measures the skill–labour ratio
(h), proxied by average adult years of schooling;
and the horizontal axis measures the land–labour
1.
Relative resource constraints and
ratio (n), proxied by square kilometres of land per
country size
100 adults. The groups include two main devel-
oping regions (sub-Saharan Africa and Latin
America (including the Caribbean)) and two
The evolution of domestic resource constraints
groups of developed countries, divided on the
during economic development is strongly influ-
basis of their land–labour ratios – land-scarce
enced by the size of a country, measured by popu-
developed countries include those of Western
lation, geographic area, or aggregate income.
Europe, while land-abundant developed econo-
Other things being equal, a larger population
mies include Australia, Canada, New Zealand,
makes the domestic resource constraint more sig-
Scandinavia and the United States. The figure also
nificant because of the associated higher demand
includes China, India and Japan, as well as the
for food. On the other hand, a large population
Republic of Korea and Taiwan Province of China
means greater availability of labour, and thus
taken as a group to represent the first-tier newly in-
improves a country’s supply
dustrializing economies (NIEs).
capacity, including for food
Three of the country groups
production. The size of a coun-
are land-abundant (sub-Saharan
try’s geographic area has an
Natural-resource
Africa, Latin America, and the
impact on domestic resources
endowments determine the
land-abundant developed coun-
because arable land, energy
degree to which self-
tries), while the other groups
sources and industrial raw ma-
sufficiency in food and raw
and individual economies are
terials are more likely to be
materials is compatible with
land-scarce. In terms of skill–
present in larger quantities and
labour ratios, the groups di-
rapid industrial
in greater variety in a large ter-
vide into three categories: (i) at
development and growth ...
ritory than in a small one.8 But
low levels of education (sub-
but the balance-of-payments
a large geographic area also
Saharan Africa and India),
constraint limits import
imposes greater demands on
(ii) at intermediate levels of
growth.
domestic resources, because it
education (China and Latin
requires greater quantities of
America), and (iii) comprising
raw material to develop the
the two highly educated de-
country’s physical infrastructure. Hence, countries
veloped-economy groups, as well as Japan and
with very large territories, such as China and In-
the Republic of Korea and Taiwan Province of
dia, need substantial investment to physically link
China.11
the domestic rural and urban markets.
One striking feature of figure 2.4 is how
A country’s relative resource endowment in-
much the composition of resources varies among
fluences the impact of the interplay between
the regions. The other striking feature is how lit-
country size and domestic resource constraints on
tle the pattern of variation changed between 1960
the country’s trade composition as its per capita
and 2000. There are some differences in the de-
income rises.9 A simplified approach to examin-
gree of movement upwards and leftwards, but for
Income Growth and Shifting Trade Patterns in Asia
53
Figure 2.4
RESOURCE COMBINATIONS OF COUNTRIES/REGIONS, 1960–2000 (AT 5-YEAR INTERVALS)
(Unweighted averages)
12
2000
10
2000
2000
Land-abundant
developed countriesa
2000
Japan
8
Land-scarce
1960
developed countriesb
1960
Rep. of Korea
2000
6
and Taiwan
2000
Prov. of China
1960
China
Latin America
2000
and the Caribbean
4
1960
verage years of schooling
A
1975
2000
1960
India
2
Sub-Saharan Africa
1960
1960
0
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Logarithm of square kilometres of land per 100 adults
Source: UNCTAD secretariat calculations, based on Barro and Lee, 2001; and World Bank, World Development Indicators.
Note: The figure includes all countries and economies with a population larger than one million for which comprehensive data
are available, except countries in the Middle East and North Africa, countries in South Asia other than India, and
economies in East Asia other than China, the Republic of Korea and Taiwan Province of China which are omitted so as
not to clutter the chart.
a Australia, Canada, New Zealand, Scandinavia and the United States.
b Western Europe.
the most part the positions of economies and
The figure further illustrates how relative
groups relative to one another were the same in
endowment positions may influence shifts in the
2000 as they had been in 1960. Moreover, it seems
composition of imports and exports as income
likely that this pattern of the past few decades will
rises. In resource-rich regions (such as sub-Saharan
persist over the next few decades; even large in-
Africa, Latin America, and the land-abundant de-
creases in school enrolment rates will feed through
veloped countries in the diagram), the shift of re-
only slowly to raise the average educational level
sources away from primary production is likely
of the labour force, and population growth rates
to lag behind that in the other regions at low in-
will not differ by enough to alter the ranking of
come levels. Moreover, these regions will tend to
regions by land–labour ratios. The figure also
maintain a relatively large share of primary com-
shows that, depending on the relative growth rates
modities in their exports even at relatively high
of their population and skills, China and India are
income levels. For those economies that have a
likely to move towards relative endowment posi-
comparative advantage in manufactures (such as
tions similar to those of Japan and the group
the Asian economies in the diagram), the compo-
comprising the Republic of Korea and Taiwan
sition of their manufactured exports in labour- and
Province of China.
skill-intensive products will be influenced by their
54
Trade and Development Report, 2005
relative skill–labour ratios. This implies that In-
China and India (as well as Japan and the Repub-
dia’s merchandise exports will consist largely of
lic of Korea), occurs along with a change in their
labour-intensive manufactures,
export composition from ag-
while those of Japan and the
ricultural goods to manufac-
Republic of Korea will com-
tures. It also suggests that,
prise largely skill-intensive
China and India combine a
depending on the country’s
manufactures, with China being
large relative supply of low-
relative endowment of skilled
in an intermediate position.
skilled labour with an ample
labour, the composition of
Moreover, for all these Asian
absolute supply of high-
manufactured exports changes
economies the share of primary
from an initial predominance
skilled labour, and may
commodities in their imports
of labour-intensive goods to an
therefore succeed in
will tend to increase as per
increasing share of more skill-
diversifying their
capita income rises.
intensive products. This sec-
manufactured exports at an
tion examines the differences
earlier stage of develop-
In addition to relative
and similarities of the shifts
ment than did the NIEs.
skill–labour ratios, the abso-
in the trade composition of
lute number of skilled workers
China, India, Japan and the
may influence the range of
Republic of Korea over the
manufactures that a country exports. China and
past four decades. The two preceding sections fo-
India are in a unique position in this respect: be-
cused on structural changes in the economies of
cause of their very large populations, they combine
China and India, associated with factor and pro-
a large relative supply of low-skilled labour with
ductivity growth on the supply side and income
an ample absolute supply of high-skilled labour.
growth on the demand side; this section looks at
For example, in 2000–2001, 12.1 million students
the impact of these structural changes, as well as
in China and 10.6 million in India were enrolled
trade and exchange rate policies, on their trade
in tertiary education, compared to about 4 million
composition.
in Japan and 3 million each in Indonesia and
the Republic of Korea. The number of university
China’s trade reforms, embedded in its over-
graduates in China was 1.95 million, compared
all reform strategy, have been gradual. Results
with about 1.01 million in Japan and about 0.5 mil-
from each reform have influenced the design of
lion each in Indonesia, the Republic of Korea and
the next stage of reform – an approach that in
Thailand. Moreover, in 2001, China had the sec-
China has sometimes been described as “crossing
ond largest number of researchers in the world,
the river by feeling the stones”. Major features of
its R&D personnel totalling almost one million,
China’s trade reform included the decentralization
slightly more than in Japan and about six times
of foreign trading rights by progressively increas-
more than in the Republic of Korea.12 This means
ing both the number of companies authorized to
that China and India may attain significant export
carry out trade transactions and the range of goods
diversification at an earlier stage of development
these companies are allowed to trade, greater
than did the NIEs, and they may simultaneously
transmission of international prices of traded goods
export a wider range of both labour- and skill-in-
to the domestic market, and the gradual removal
tensive manufactures.
of exchange rate distortions. As a result, China’s
foreign trade regime has increasingly come to rely
on traditional trade policies in the form of tariffs
and non-tariff measures. This shift in the kinds of
2.
Shifts in trade composition:
trade policy instruments used has been accompanied
experiences of Asian industrialization
by progressive trade liberalization: the exchange
rate was unified in 1994, the number of products
subject to quotas and licences was considerably
The above examination of shifts in compara-
reduced during the 1990s (Lardy, 2002), and tar-
tive advantage in the course of economic devel-
iffs were significantly lowered throughout the
opment suggests that rapid income growth in
reform process, with average tariffs falling from
relatively natural-resource-poor countries, such as
over 50 per cent in the early 1980s to about 16 per
Income Growth and Shifting Trade Patterns in Asia
55
cent on the eve of China’s accession to the WTO
duction of goods for export. Typically, neither the
(IMF, 2004b).
imported intermediate products nor the finished
goods have been entering China’s domestic mar-
Its WTO accession in December 2001 con-
ket. Concessional duties have also been granted
stitutes part of China’s ongoing reform process
to equipment imported by foreign firms as part of
(TDR 2002, chap. V), facilitating its emergence
their contribution to initial investment in affili-
as a major trading nation. It has also contributed
ates in China. These measures have contributed
to reducing trade tensions that have often accom-
to a sizeable expansion of its processing trade, the
panied the emergence of major new traders over
bulk of which involves foreign-funded enterprises
the past few decades. Nevertheless, there were
(FFE) based in China, owned mainly by investors
concerns by China’s policy-makers, particularly
from East Asia (TDR 2002; Lemoine and Ünal-
regarding the initial post-accession period, about
Kesenci, 2004).
the competitiveness of the agricultural sector,
which had enjoyed a relatively high degree of
India began trade reforms about a decade af-
border protection, and about the heavy-industry
ter China. Regardless of when exactly the reforms
sector (dominated by State-owned enterprises for
began,13 there is little doubt that they were under-
which the transformation and restructuring proc-
taken in what was by and large a market economy.
ess being undertaken was far from complete). As
Thus, unlike in China, there was no complex transi-
discussed in more detail below, China’s WTO-ac-
tion from a centrally planned to a market economy.
cession commitments in agriculture included the
The reforms required for greater trade integration
phasing-in of tariff rate quotas for a number of
were, nonetheless, substantial. As in China, they
bulk commodities and a reduc-
involved redressing the over-
tion of tariffs for other com-
valuation of the exchange rate
modities. Both these measures
(a process started in 1986 and
reached their committed lev-
completed with the switch to
China and India have
els in 2004. Other commit-
managed floating in 1993),
moved into leading
ments included limiting the
phasing out pervasive import
positions in world trade.
share of import quotas allo-
licensing, and reducing tariff
cated to State-trading enter-
protection. While import li-
prises, eliminating export sub-
censing for capital and inter-
sidies, and the use of science-based sanitary and
mediate goods was abolished in 1993, quantita-
phytosanitary (SPS) standards for imports. China
tive restrictions on imports of manufactured con-
also made far-reaching liberalization commitments
sumer goods and agricultural products were finally
in the services sector (Mattoo, 2004). It is clear
abolished only in 2001. Average tariff levels were
that the impact of trade liberalization on the ca-
reduced significantly, but at a level of about 22 per
pacity of domestic firms to withstand pressure
cent in 2004 (IMF, 2004c: 16) they remain higher
from foreign competitors very much depends on
than in most other developing countries. While
how the exchange rate is managed. China’s tight
the reform process has gone far, important aspects
exchange rate management, mainly designed to
of the reforms, particularly the removal in 2001–
avoid a nominal appreciation of its currency vis-
2002 of items with high export potential (such as
à-vis the dollar, has facilitated adjustment during
garments, shoes, toys, and auto components) from
the initial post-accession period.
the list of items reserved for small-scale produc-
tion, have only recently been implemented, and it
The selective use of duty exemptions and
may take some years before their outcomes are
rebates on value added tax payments, which have
reflected in economic performance (Ahluwalia,
supported its processing trade – primarily assem-
2002: 72).
bly operations – and foreign direct investment
(FDI), has perhaps been the single most impor-
In the wake of their adoption of reform pro-
tant trade policy instrument in China’s export
grammes, China and India have moved into
promotion policy. Tariff exemptions have been
leading positions in world trade. In 2004, China
concentrated in imports of intermediate products
was the world’s third largest exporter of mer-
used for assembly or transformation in the pro-
chandise goods and the ninth largest exporter of
56
Trade and Development Report, 2005
commercial services, with a share of 9.0 per cent
averages) from about 21 per cent in 2001 to 17 per
and 2.8 per cent, respectively, of total world ex-
cent in 2004, after having already declined from
ports. In the same year, India ranked 20th in world
42.2 per cent in 1992 to 23.6 per cent in 1998. Thus,
merchandise exports with a share of 1.1 per cent,
they argue, the implications of agricultural trade
and was the world’s 22nd largest exporter of com-
liberalization stemming from China’s accession to
mercial services with a share of 1.5 per cent.
the WTO may, on average, be best considered con-
However, in most years since 1995, India’s serv-
tinuations of past trends, and therefore unlikely
ices exports have grown much more rapidly than
to cause drastic changes in the country’s net agri-
its merchandise exports.14 The reforms in China
culture and food trade balances (see, for exam-
and India have not only supported trade growth,
ple, Huang and Rozelle, 2003).15
they have also contributed to a change in the com-
position of their trade. This is the focus of the
Examining the actual evolution of food self-
remainder of this section.
sufficiency in China and India, table 2.3 traces
the ratio of domestic production to domestic con-
sumption, for selected food products in China and
India from 1994 to 2002 (the last year for which
(a) Self-sufficiency in agriculture and energy
comprehensive data are available). It shows that
both China and India have been fairly successful
The fact that their comparative advantage in
in maintaining a high degree of food self-sufficiency.
agricultural products is poised to decline in China
The main exception to this pattern is the marked
and India has sometimes raised concerns about
decline of self-sufficiency in soybeans for both
their capacity to maintain food self-sufficiency.
countries, and in soybean oil for India. Regarding
For example, in the 1960s and 1970s there were
India, the decline in soybean self-sufficiency re-
frequent warnings of impending famines in India
flects the finding of a number of studies (e.g.
and in South Asia as a whole. This has contrib-
Gulati and Mullen, 2003) that oilseeds and edible
uted to fears that strongly growing food imports
oils are the only major commodities likely to be
by China and India could seriously upset world
adversely affected by trade policy reform in ag-
food markets. However, as
riculture. But given the rela-
a result mainly of the Green
tively wide gap between bound
Revolution, which started in
and actually applied tariffs, the
the mid-1960s, the aggregate
China has remained
Indian Government was able
supply of cereals (especially
overwhelmingly self-
to flexibly adjust import duties
maize, rice and wheat) more
sufficient in all major food
on edible oils; it was thus able
than doubled in South Asia
items, but even small
to reduce the difference be-
from the 1960s to the 1990s.
tween domestic and interna-
changes in self-sufficiency
tional prices that had grown
ratios can have a consider-
More recently, there have
partly in response to the sharp
able impact on the country’s
been concerns that the comple-
decline in international prices
agricultural trade balance.
tion of India’s phasing out of
of vegetable oilseeds and oils
quantitative restrictions by
between 1998 and 2002. It is
April 2001 and China’s acces-
likely that most of the decline
sion to the WTO might also have significant ad-
in China’s self-sufficiency in soybeans also results
verse effects on the two countries’ agricultural
from a combination of the fall in international
sectors and on their food self-sufficiency. This is
prices and domestic policy reform (i.e. the reduc-
because the effects from trade policy reform in
tion of the out-of-quota tariff from 114 per cent
agriculture come in addition to the adjustment
to 3 per cent and the phasing-out of import quo-
pressure resulting from the nutrition transition and
tas that the Chinese Government undertook in
the related shifts in private consumer demand for
2000 in anticipation of its WTO-accession com-
food, discussed above. But regarding China, many
mitments).
observers have noted that the country’s WTO-
accession commitments implied a reduction of over-
Although China has remained overwhelm-
all agricultural import tariffs (in terms of simple
ingly self-sufficient in all major food items, even
Income Growth and Shifting Trade Patterns in Asia
57
Table 2.3
FOOD SELF-SUFFICIENCY RATIOS IN CHINA AND INDIA, SELECTED PRODUCTS, 1994–2002
(Per cent)
China
India
Product
1994–1996
1999–2001
2002
1994–1996
1999–2001
2002
Wheat
90.0
96.1
99.1
97.0
107.7
104.3
Rice
98.5
101.1
99.5
103.1
110.7
81.2
Maize
100.2
97.9
105.9
100.5
99.6
100.8
Bovine meat
99.5
98.2
98.2
105.6
108.9
111.5
Mutton and goat meat
98.7
98.5
98.0
101.4
101.4
100.7
Poultry meat
97.1
95.2
97.5
100.0
100.0
100.1
Pig meat
101.3
99.5
99.7
100.2
100.1
100.2
Soybeans
82.7
59.8
50.1
102.2
103.7
62.5
Palm oil
14.9
11.0
7.0
0.0
0.0
0.0
Soybean oil
61.7
84.3
103.1
84.4
54.4
48.9
Milk
87.0
88.9
90.3
100.1
100.3
100.4
Pelagic fish
30.2
38.7
38.9
97.9
95.7
92.9
Demersal fish
89.4
85.6
83.8
100.2
100.8
100.6
Marine fish, other
107.6
143.8
162.4
151.0
172.6
170.8
Crustaceans
101.4
103.4
104.9
134.2
142.1
144.5
Bananas
92.6
91.3
94.1
100.0
100.0
100.1
Apples
100.9
102.3
106.1
100.9
100.1
100.0
Source: UNCTAD secretariat calculations, based on FAOSTAT.
Note: Self-sufficiency ratio = production divided by total availability.
Total availability = production + net imports + net stock changes.
small changes in self-sufficiency ratios can have
The table also shows that China’s food im-
a considerable impact on the country’s agricul-
ports increased significantly between 2002 and
tural trade balance, given the size of its economy.
2003, and that the rise in imports of seeds for soft
Table 2.4 shows the evolution of China’s imports
fixed oils (which include soybeans) accounted for
and exports for selected agricultural product cat-
most of this increase. According to China’s Cus-
egories between 1980 and 2003 (the last year for
toms Statistics reported by Gale (2005), China’s
which comprehensive data are available). It re-
soybean imports further increased in 2004 to reach
veals that China’s food trade balance has been in
about $7 billion, up from about $5 billion in 2003
surplus over the past few years and that, with an
and $2.2 billion in 2002. This corresponds to about
average annual growth rate of 5.4 per cent, its food
30 per cent of the rise in China’s import bill for
exports performed relatively well between 1990
agricultural products between 2002 and 2004. As
and 2003. Even though China’s food imports have
discussed in more detail below, this sharp increase
risen faster than its food exports over the past few
in the value of China’s soybean imports is partly
years, so far there has not been a sustained, dra-
due to the rise in world market prices for this item
matic growth in food imports, as some analysts in
and in shipping costs. However, the rise in inter-
the early 1990s had been expecting (e.g. Brown,
national primary commodity prices is partly the
1995).
result of China’s own growing demand for pri-
58
Trade and Development Report, 2005
Table 2.4
CHINA’S AGRICULTURAL TRADE BY MAJOR PRODUCT CATEGORY, 1980–2003
(Millions of dollars)
Grains, oilseeds
and fixed vegetable oils
Agricultural raw materials
Total
of which:
Total
of which:
Other food
Seeds
Horti-
products,
Rubber
Total
for soft
cultural
Livestock beverages
Total
and hides
agri-
Wheat
fixed oils
products
products and tobacco
food
Cotton
and skins
culture
Exports
1980
691
0
170
842
638
1 197
3 368
789
47
206
4 157
1987
1 332
1
640
1 290
1 659
1 471
5 752
1 685
777
140
7 437
1990
1 387
1
580
1 760
2 646
2 058
7 851
1 383
318
173
9 234
1995
1 242
2
494
3 399
4 758
2 854
12 254
1 343
49
95
13 597
2000
2 324
0
394
3 359
5 363
2 482
13 528
1 589
307
65
15 117
2001
1 788
47
412
3 777
5 887
2 744
14 196
1 256
82
78
15 452
2002
2 414
70
425
4 318
6 291
3 105
16 127
1 458
172
95
17 585
2003
3 528
265
532
5 249
7 071
3 352
19 201
1 604
135
103
20 805
Imports
1980
613
226
41
11
56
333
1 013
1 798
313
458
2 812
1987
2 063
1 362
62
55
138
879
3 135
2 576
13
460
5 711
1990
3 321
2 157
18
83
251
927
4 583
3 022
718
386
7 604
1995
6 176
2 026
104
185
784
1 917
9 062
6 385
1 487
1 168
15 446
2000
4 360
147
2 942
516
2 100
1 829
8 805
9 853
137
1 958
18 658
2001
4 530
121
3 194
675
2 180
1 802
9 186
10 133
117
2 246
19 320
2002
4 684
103
2 637
689
2 521
1 770
9 664
11 313
200
2 432
20 977
2003
8 854
77
5 514
871
3 098
1 866
14 689
14 866
1 218
3 339
29 555
Net exports
1980
78
- 226
129
832
582
864
2 355
-1 010
- 266
- 252
1 345
1987
- 731
-1 362
578
1 235
1 521
592
2 617
- 891
764
- 320
1 726
1990
-1 934
-2 156
562
1 676
2 395
1 131
3 268
-1 639
- 400
- 213
1 629
1995
-4 934
-2 025
390
3 215
3 975
937
3 192
-5 041
-1 438
-1 073
-1 849
2000
-2 036
- 147
-2 548
2 843
3 264
653
4 723
-8 264
170
-1 893
-3 541
2001
-2 742
- 75
-2 782
3 102
3 707
942
5 009
-8 878
- 35
-2 168
-3 868
2002
-2 271
- 33
-2 212
3 629
3 770
1 335
6 463
-9 855
- 27
-2 337
-3 391
2003
-5 326
188
-4 982
4 378
3 973
1 487
4 512
-13 262
-1 084
-3 236
-8 750
Memo item: Average annual growth, 1990–2003 (per cent)
Agricultural exports
4.9
Food exports
5.4
Agricultural imports
10.7
Food imports
9.4
Food imports, excluding
seeds for soft fixed oils
5.1
Source: UNCTAD secretariat calculations, based on United Nations Commodity Trade Statistics database (UN COMTRADE);
and estimates by the United Nations Statistical Office.
Note: Data reported for 1980 rely to a large extent on estimates. Cereals, oilseeds and vegetable oils include Standard
International Trade Classification (SITC) 04, 22 and 42. Horticultural products include SITC 05. Livestock products
include SITC 01, 02 and 03.
Income Growth and Shifting Trade Patterns in Asia
59
mary commodity imports. This implies that the
agricultural production would increase only from
country’s strong import demand has had a multi-
2 per cent to 6 per cent, such an outcome depends
plicative effect on the dollar value of commodities
largely on rapid productivity growth in agricul-
imported, and thus might
ture, which is an underlying
prove self-limiting.
assumption of the estimation
results. Indeed, while China’s
It is also worth highlight-
China’s agricultural trade
agricultural output has grown
ing that between 2000 and
balance in the future will
rapidly for several decades,
2003 wheat imports were
largely depend on
particularly since the rural re-
much lower than in the early
government policy.
forms that began in 1979 (Fan
1990s (table 2.4). According
and Zhang, 2002), its further
to more recent data (Gale,
growth would probably be
2005), this development was
necessary in order to meet fu-
sharply reversed in 2004 when wheat imports
ture increases in demand without strongly impair-
bounced back to reach about $1.6 billion. Accord-
ing food self-sufficiency. This is likely to require
ing to Gale (2005), government policies have been
greater investment in agricultural research (Huang,
highly responsible for these swings: from 1997 to
Li and Rozelle, 2004).
2003 China disposed of its ageing grain in gov-
ernment reserves while replenishing them in 2004,
Thus China’s agricultural trade balance in the
and government entities, the main importers of
future will largely depend on government policy.
wheat, increased imports of this commodity in an
In a sense, the new approach to agricultural policy
effort to curb the rising prices of domestic grain.
that was adopted in 2004 represents a reappraisal
of the role of agriculture in economic develop-
Regarding agricultural raw materials, ta-
ment. This reappraisal is reflected in China’s in-
ble 2.4 shows that cotton accounted for much of
troduction of its first national direct subsidies to
the surge in import values between 2002 and 2003.
farmers, the initiation of an eventual phasing out
This was closely related to the increasing use of
of a long-standing tax on farmers, subsidizing seed
imported cotton, not only because of China’s rap-
and machinery purchases, and increasing funding
idly growing clothing exports, but also partly
for agricultural infrastructure and research (Gale,
because of a poor domestic cotton harvest in 2003.
Lomar and Tuan, 2005). Moreover, if China up-
The net trade balance of hides and skins (used as
grades its export composition away from relatively
inputs for other natural-resource-intensive and
natural-resource-intensive and labour-intensive
labour-intensive manufactures, such as footwear
sectors such as clothing, footwear and leather
and leather goods) and of rubber (used for the rap-
goods, the recent increase in agricultural imports,
idly expanding production of
due to imported raw materials
vehicle tyres) has also consid-
for such exports, will be dra-
erably deteriorated over the
matically reversed.
past few years.
China’s energy demand is
likely to continue to outpace
Turning to an assessment
To sum up, even though
the future growth of
of China’s self-sufficiency in
China remains largely self-
domestic supply, so that
energy, it is useful to recall
sufficient in all major food
fuels will add substantially
that in 2004 the country was
items, the direction of change
the sixth largest producer of
to China’s total import bill.
in the country’s agricultural
oil and the leading producer of
trade is towards greater import
coal worldwide (BP, 2005). In-
dependence. Rosegrant et al.
deed, following oil discoveries
(2001: 74), for example, estimate that China will
in the 1960s, China’s domestic oil production has
become the world’s largest importer of agricul-
steadily increased over the past four decades, and
tural commodities in value terms by 2020, its im-
the share of fuels in total imports remained small
ports increasing from $5 billion in 1997 to $22 bil-
until about 1990. Since then, however, the expan-
lion in 2020. While this would imply that China’s
sion of domestic production has no longer kept
net agricultural imports as a percentage of total
pace with the rise in demand. As a result, China
60
Trade and Development Report, 2005
Figure 2.5
(b) Import composition
Sustained rapid growth and industrialization
CHINA: CONSUMPTION AND PRODUCTION
are generally accompanied by a rise in imports
OF OIL AND COAL, 1965–2004
(both in absolute value and as a share of total im-
(Million tons of oil equivalent)
ports) of primary commodities and, generally at
the early stages in industrialization, of capital
equipment and intermediate inputs. Shifts in im-
1100
port composition for Japan, the Republic of Korea,
1000
China and India over the past few decades are re-
flected in table 2.5. The table uses six broad
800
categories of products, based on a distinction be-
800
tween primary commodities and manufactures; the
700
latter are further categorized according to whether
they are labour- or resource-intensive, and whether
600
their production involves low-, medium- or high-
500
skill and technology intensity; a separate category
400
is the electronics sector.16
300
The table shows that, contrary to the experi-
200
ence of the Republic of Korea during its process
100
of rapid economic catch-up, the share of machin-
ery in the total imports of China and India has
0
declined over the past few years. While this may
1965
1975
1985
1995
2004
reflect substantial pent-up demand for state-of-the-
Oil production
Coal production
art technology, which, particularly in the case of
Oil consumption
Coal consumption
China, could result in rapidly rising high-technol-
ogy imports once the appropriate conditions are
in place both domestically and internationally,
Source: British Petroleum, Statistical Review of World Energy
country-specific factors have also played a sig-
2005.
nificant role.
Note: Coal production data are available only from 1981
onwards.
In the case of India, the decline in the pro-
portion of machinery in total imports is closely
associated with the relatively limited share of in-
became a net oil importer in 1993, and the gap
dustry in the country’s economic structure. In the
between the country’s domestic consumption and
case of China, it coincides with a sharp growth in
production has risen substantially over the past
the share of electronics parts and components. This
decade (fig. 2.5). By contrast, the production of
reflects the greater role that participation in inter-
coal, which, as already mentioned, continues to
national production networks has played in its
account for a large share of China’s total energy
recent industrialization and development strate-
use, has closely kept up with changes in the use
gies, as it has in many other developing countries.
of coal. However, given that China’s energy de-
In principle, becoming part of an international
mand is likely to continue outpacing the future
production network can give substantial impetus
growth of supply, fuels are likely to add substan-
to a developing country’s development and indus-
tially to China’s total import bill.
trialization strategy, mainly because such partici-
pation broadens the range of sectors on which
India’s energy use has depended heavily on
developing countries can base their quest for in-
imports, given the limited domestic energy re-
dustrialization. Given that product-specific char-
sources. Thus fuels have comprised one quarter
acteristics allow a partitioning of the production
to one third of the country’s total merchandise
process of a number of industrial sectors into vari-
imports.
ous slices, industrializing countries can focus on
Table 2.5
PRODUCT STRUCTURE OF IMPORTS OF SELECTED ASIAN COUNTRIES, 1965–2003
(Percentage of total merchandise imports)
Japan
Republic of Korea
Chinaa
Indiaa
Product group
1965 1975 1985 1995 2003
1965 1975 1985 1995 2003
1987 1995 2003
1975 1985 1995 2003
Primary commodities
80.5
83.0
74.7
45.8
42.1
48.4
49.4
42.8
31.9
35.8
18.0
20.4
20.1
44.3
45.4
42.3
45.4
All food products
22.7
18.0
14.1
16.4
12.5
15.1
14.2
5.8
5.5
5.6
7.4
7.0
3.6
31.9
8.4
4.6
5.8
Income Growth and Shifting Trade Patterns in Asia
Meat and meat preparations
0.6
1.2
1.5
2.9
2.3
0.0
0.2
0.1
0.6
0.9
0.0
0.1
0.2
0.0
0.0
0.0
0.0
Fish and seafood
0.9
2.0
3.7
5.3
3.4
0.0
0.1
0.3
0.6
1.1
0.1
0.5
0.5
0.0
0.0
0.0
0.0
Cereals and cereal preparations
9.4
5.7
3.1
1.6
1.4
12.1
9.5
2.9
1.5
1.1
1.9
2.8
0.1
29.1
0.6
0.1
0.0
Fruits and vegetables
1.8
1.1
1.5
1.9
1.6
0.1
0.2
0.2
0.4
0.5
0.1
0.1
0.2
1.4
1.3
1.6
1.5
Vegetable oilseeds and oils
4.7
2.7
1.8
1.0
0.8
0.9
1.0
1.2
0.7
0.5
1.0
2.1
2.1
0.6
3.9
2.3
3.8
Agricultural raw materials
20.4
9.5
7.2
6.3
3.0
22.2
11.4
7.9
5.5
2.5
6.3
5.0
3.7
2.5
3.4
4.3
3.3
Cotton
5.4
1.5
0.8
0.2
0.1
9.1
3.4
1.7
0.6
0.2
0.0
1.1
0.3
0.8
0.1
0.5
0.5
Rubber
1.6
0.3
0.4
0.4
0.3
1.9
0.8
0.7
0.6
0.3
0.9
0.6
0.6
0.2
0.5
0.6
0.4
Cork and wood
6.1
5.3
3.4
3.7
1.7
4.6
3.7
1.8
1.3
0.5
1.4
0.4
0.9
0.0
0.2
0.7
1.0
Minerals, ores and metals
17.4
11.0
9.0
6.7
5.0
4.2
4.7
5.3
6.4
5.6
3.0
4.5
5.6
5.4
7.0
7.5
4.3
Metalliferous ores and metal scrap
12.5
7.8
5.0
2.9
2.4
1.1
2.4
2.9
2.5
2.6
1.2
2.3
2.9
0.4
1.9
2.5
1.8
Non-ferrous metals
3.0
2.2
3.1
3.2
2.2
2.0
0.9
1.5
3.5
2.8
1.7
2.0
2.5
2.7
2.8
3.7
1.9
Fuels
20.0
44.5
44.4
16.4
21.6
7.0
19.1
23.8
14.5
22.1
1.3
3.9
7.2
4.4
26.6
25.9
32.0
Labour- and resource-intensive manufactures
1.8
4.0
5.7
14.0
12.2
6.8
5.3
5.0
7.7
6.8
12.9
14.4
6.9
4.0
8.2
9.7
13.5
Textiles
0.7
1.4
1.6
1.9
1.4
6.0
3.5
2.2
3.1
1.9
8.6
8.5
3.5
0.3
0.8
1.1
1.6
Clothing
0.1
0.9
1.6
5.7
5.2
0.1
0.1
0.1
0.8
1.5
0.0
0.8
0.3
0.0
0.0
0.0
0.1
Cork, wood and paper products
0.2
0.5
0.9
2.7
2.7
0.4
0.4
0.6
1.6
1.3
3.1
2.5
1.4
1.7
1.2
1.5
1.0
Non-metallic mineral manufactures
0.7
0.8
1.0
1.8
1.2
0.3
0.4
1.0
1.2
1.3
0.8
0.8
0.9
2.0
6.1
6.8
10.5
Low-skill and technology-intensive manufactures
2.5
0.8
1.9
3.2
2.5
8.9
9.7
16.2
7.7
5.7
13.8
7.5
6.7
9.8
8.9
5.6
5.2
Iron and steel
1.7
0.3
1.2
1.8
0.9
5.4
4.7
3.8
5.0
4.2
11.1
5.0
5.3
8.4
7.1
4.2
2.0
Ships and boats
0.4
0.2
0.2
0.1
0.0
1.6
3.4
11.1
1.2
0.3
0.5
0.8
0.2
0.1
0.3
0.3
1.9
Medium-skill and technology-intensive manufactures
5.2
3.8
4.4
10.2
11.5
10.3
14.3
13.5
20.7
15.4
27.7
26.2
20.1
15.8
17.0
16.6
10.4
Non-electrical machinery
4.2
2.7
2.7
4.0
5.0
7.9
11.1
10.8
16.7
9.2
19.2
20.8
12.6
11.6
14.0
12.9
7.4
Electrical machinery, excluding electronics
0.5
0.5
0.8
1.9
2.7
1.7
1.7
1.6
2.1
4.0
1.8
2.8
3.9
2.9
1.1
1.6
1.6
High-skill and technology-intensive manufactures
6.9
5.3
9.1
11.1
12.7
24.1
14.6
13.0
16.5
14.2
17.1
17.2
18.8
23.0
17.0
20.4
14.2
Electronics
1.9
1.9
2.8
12.3
16.0
1.0
6.1
8.7
13.9
20.1
8.3
12.7
26.2
1.9
3.2
4.3
9.4
Communications equipment (less parts thereof)
and household equipment
0.1
0.2
0.1
1.4
1.9
0.3
0.8
0.7
0.5
1.0
2.1
0.8
0.4
0.1
0.1
0.1
0.3
Computers and office machines (less parts thereof)
1.2
0.7
0.8
3.3
4.3
0.1
0.3
1.1
1.8
1.9
1.3
0.9
2.8
0.2
0.5
0.7
1.6
Parts and componentsb
0.6
1.0
1.9
7.6
9.8
0.7
5.1
6.9
11.6
17.2
4.9
11.0
23.0
1.5
2.6
3.5
7.4
Source: UNCTAD secretariat calculations, based on UN COMTRADE.
a Data for earlier years not available.
61
b Includes SITC 759, 764, 772 and 776.
62
Trade and Development Report, 2005
mastering just one facet of production, or on no
generally, as locally produced alternatives become
more than a limited subset of all the activities in-
available.
volved in making a final product. Thus it would
seem no longer necessary for producers to master
The different phases of rising and falling
entire production chains and organize them with-
shares of textiles and clothing in the four coun-
in single firms, which was
tries’ import composition reflect
the strategy that characterized
the important role of labour-
much of the earlier Asian in-
intensive exports during the
dustrialization episodes. On
In India, the decline in the
industrialization process.17
the other hand, it seems that in
share of machinery in total
While in Japan, the impor-
China this kind of production-
imports is closely
tance of textile imports has
sharing activity has developed
associated with the limited
remained stable over the past
mainly in the electronics sec-
share of industry in its
four decades, the share of cloth-
tor. Moreover, it is likely that,
economy ...
ing imports has significantly
with geographically dispersed
increased, in particular over
production sites, the spillovers
the past 10 years. Table 2.5
from engaging in subcontract-
also shows that in the Repub-
ing or hosting affiliates of transnational corpora-
lic of Korea there has been a continuous decline
tions (TNCs) are reduced because the package of
in the share of textile imports, but a steady rise in
technology and skills required at any one site is
the share of clothing imports, as in Japan earlier.
narrower, and because cross-border backward and
In China, the current decline in the importance of
forward linkages are strengthened at the expense
textile imports is similar to that experienced in
of domestic ones.
the Republic of Korea since the 1970s. While tex-
tiles have become more important in India’s im-
Indeed, the weakness of domestic backward
port basket, this rise has occurred from a very low
linkages (i.e. the scarcity of domestic supply of
level; overall, the share of textiles and clothing
suitable intermediate production inputs) has im-
items in India’s import composition has not
paired the development impact of assembly-based
changed significantly over the past few years.
export activities in a number of developing coun-
tries over the past few years (TDR 2002). More-
The sharp fall in the share of primary com-
over, this weakness tends to reduce a country’s
modities in the import composition of Japan and
relative cost advantage in assembly-based export
the Republic of Korea between 1985 and 1995 may
activities to those involving low unit-labour costs.
seem to be contrary to expectations of the change
Regarding China, it appears
in the comparative advantage
that, although the wage bill of
of rapidly growing countries
Japanese electronics compa-
with relatively poor natural-
nies operating in China is
resource endowments. How-
… while in China, this
much lower than at home, the
ever, for Japan in particular, it
decline reflects the greater
fact that intermediate produc-
is likely that this finding partly
role that participation in
tion inputs of the required
reflects continuous structural
international production
quality are often not available
change, as the share of indus-
from local suppliers signifi-
networks has played in
try in total output fell from
cantly reduces the financial
its recent industrialization
40 per cent to 34 per cent and
advantage of producing in
and development
that of services rose from 59 per
China rather than in Japan
strategies.
cent to 68 per cent between
(Marsh, 2004). However,
1985 and 1995 (UNCTAD
China’s recent strong invest-
Handbook of Statistics, vari-
ment in domestic manufactur-
ous issues, table 7.3). More-
ing capacity may significantly reduce its reliance
over, most of this decline was due to falling oil
on imported parts and components in the elec-
prices during the second half of the 1980s. In the
tronics industry and strengthen the country’s pat-
period between 1965 and 1985, much of the de-
tern of domestic linkages in industry more
cline in the share of primary commodities in the
Income Growth and Shifting Trade Patterns in Asia
63
total imports of Japan and the Republic of Korea
data with the rise in imports by China and India
occurred in the agricultural sector. This might
over the period 1990–2000,18 as well as with prod-
partly reflect the rise in domestic production as a
uct-specific projections for imports by China and
result of the Green Revolution. But several ob-
India up to 2010 and, in a few instances, 2020.
servers have also noted a general tendency among
countries towards agricultural protection during
Regarding China, the rise in imports of the
the course of their industrialization (e.g. Timmer,
selected primary commodities during the period
2002).
1990–2000 is similar to that of Japan during its
first two decades of post-war economic catch-up
Table 2.5 further indicates the growing im-
and greater trade integration. However, it is be-
portance of vegetable oilseeds and oils in the im-
low that of the Republic of Korea during the com-
port composition of both China and India, as men-
parable periods. The two main exceptions to this
tioned earlier. But given that much of the imported
general pattern are the very rapid rise in China’s
oilseeds (and soybeans) are used as animal feed,
imports of petroleum and soybeans. But given that
they have contributed to limiting meat imports.
China is itself an oil and coal producer, with a
This is in contrast to Japan and the Republic of
high share of coal in its energy use, the recent rise
Korea, where meat imports have risen while im-
in petroleum imports started from very low lev-
ports of vegetable oilseeds have remained low.
els. Except for cotton, the rise in imports of the
Moreover, the table highlights the large share in
selected primary commodities in table 2.6 has been
total imports of fuels and a number of raw materials
substantially smaller in India than in China. The
(such as cotton, rubber, wood,
major reason for this is likely
iron ore and non-ferrous met-
to be India’s slower pace of in-
als) during economic growth
dustrialization compared to
and industrialization. For ex-
In China growth in imports
China’s.
ample, fuels continue to ac-
of energy and raw materials
count for about one fifth of the
will remain strong for
Looking at import trends
total imports of Japan and the
several years.
for Japan and the Republic of
Republic of Korea and their
Korea reveals that the growth of
share in China’s imports have
Japan’s imports (especially by
increased fivefold over the past
volume) continuously slowed
15 years. The share of minerals, ores and metals
down between 1955 and 1995, while those of the
has fallen sharply in Japan’s imports, while it ap-
Republic of Korea increased between the first and
pears to have reached a peak in the imports of the
the second decade of economic catch-up, and
Republic of Korea and continues to rise in China’s
subsequently declined. This suggests that imports
imports. This pattern is most probably determined
of commodities and raw materials rise particularly
by the intensity-of-metal-use cycle associated with
fast during the early catch-up phase.19
industrialization and de-industrialization, discussed
above. Finally, the decline in the share of cotton
Does this mean that the magnitude of the rise
in the imports of Japan and the Republic of Korea
in China’s imports over the next two decades is
over the past four decades is related to shifts in
likely to be smaller than it was during the period
the importance of textiles and clothing in the two
1990–2000? The product-specific projections in
countries’ exports, as discussed below.
table 2.6 indicate that the volume of China’s pri-
mary imports is likely to grow less on average than
Table 2.6 illustrates the potential magnitude
it did between 1990 and 2000. However, when
of change in imports of selected products by China
China started integrating into the world economy,
and India over the next two decades. For Japan
its per capita income was much lower than that of
and the Republic of Korea, it shows the magni-
Japan and the Republic of Korea when they be-
tude of the rise in import volumes and values of
gan their rapid integration. Consequently, China
selected primary commodities during the first and
can be expected to maintain a relatively strong
second decades of their post-war economic catch-
growth in imports of energy and raw materials for
up and greater trade integration, as well as during
a number of years to come in order to maintain its
the subsequent 20-year period. It compares these
growth momentum.
64
Table 2.6
MAGNITUDE OF CHANGE IN SELECTED RAW MATERIAL IMPORTS BY JAPAN, THE REPUBLIC OF KOREA, CHINA AND INDIA, SELECTED PERIODS
Japan
China
1955–1965
1965–1975
1975–1995
1990–2000
2000–2010
2000–2020
Product
Volume
Value
Volume
Value
Volume
Value
Volume
Value
Volume
Volume
Soybeans
2.3
2.3
1.8
4.2
1.4
1.5
11 490.5
7 072.6
1.5a
2.5b
Natural rubber and similar natural gums
2.3
1.4
1.4
1.7
2.4
6.9
2.5
2.0
2.3
..
Wood, lumber and cork
..
8.0
..
5.3
..
3.9
..
5.2
..
..
Cotton
1.5
1.2
1.0
1.9
0.5
0.9
0.6
0.2
3.4
..
T
rade and Development Repor
Iron ore and concentrates
7.1
6.4
3.4
4.2
0.9
1.4
4.9
4.7
5.0c
..
Ores and concentrates of non-ferrous base metals
5.3
8.6
3.2
6.1
0.8
2.7
4.0
4.3
2.1d
5.6d
Coal, coke and briquettes
6.0
4.8
3.6
12.8
2.0
1.9
..
0.9
..
..
Petroleum, crude and partly refined
9.9
7.0
3.1
18.8
1.0
1.5
24.0
35.1
2.5e
4.1e
Petroleum products
..
3.4
..
4.4
..
4.2
6.0
6.5
..
..
Republic of Korea
India
1964–1970
1970–1980
1980–2000
1990–2000
2000–2010
2000–2020
Volume
Value
Volume
Value
Volume
Value
Volume
Value
Volume
Volume
t, 2005
Soybeans
3.6
3.3
18.4
48.5
2.7
2.0
..
..
1.1
..
Natural rubber and similar natural gums
2.7
2.8
4.6
13.6
2.8
1.3
0.2
0.2
3.0
..
Wood, lumber and cork
..
6.8
..
7.0
..
1.0
..
1.9
..
..
Cotton
1.7
1.7
3.0
9.5
1.0
0.7
159.0f
111.5f
1.1
..
Iron ore and concentrates
25.1
149.3
121.3
168.8
4.3
5.5
2.7
2.6
..
..
Ores and concentrates of non-ferrous base metals
38.0
25.0
13.7
31.8
6.3
7.2
6.8
3.0
..
..
Coal, coke and briquettes
..
1.2
..
147.8
..
4.9
..
2.6
..
..
Petroleum, crude and partly refined
12.4g
9.4
2.8
44.9
4.9
4.5
3.6
4.4
1.6e
2.3e
Petroleum products
..
0.6
33.6
69.7
8.0
9.5
..
0.5
..
..
Source: Trade data for Japan from Japan Statistics Bureau; data for the Republic of Korea, China and India from UN COMTRADE. Projections for rubber and cotton from FAO, 2003;
soybeans from FAO, 2003, and Rosegrant et al., 2001; iron ore from UNCTAD, 2004b; total extraction industries from van Meijl and van Tongeren, 2004; and petroleum from
IEA, 2004b.
Note: The numbers in the table indicate by how many times imports increased, e.g. “2” indicates a doubling of imports.
a
Oil meal.
b
1997–2020.
c
Projection up to 2009.
d
Total extractive industries.
e
Projections over base year 2002.
f
1979–1981 to 1989–1991.
g
1965–1970.
Income Growth and Shifting Trade Patterns in Asia
65
(c) Export composition
cent in 1959, with the vast bulk of the rise occur-
ring after the Second World War.
The sustained growth of exports that has been
a characteristic common to all industrialization
To examine the links between industrializa-
episodes in Asia over the past five decades would
tion and export upgrading in Asia, table 2.7 uses
not have been possible in the absence of shifts in
the six broad product categories listed in table 2.5.
export composition. The accumulation of capital,
The table shows that Japan, the Republic of Ko-
both physical and human, raises the productivity
rea and China (but not India, as discussed later)
of labour, and thus tends to be associated with
have indeed been successful in upgrading the
higher wages, even though there is no direct link
composition of their merchandise exports from
between sector-specific productivity growth and
primary commodities to manufactures. Within
wage increases (TDR 2004, chap. IV, annex 1).
manufactures, the early stages of rapid growth
As a result of the ensuing change in comparative
and industrialization saw a high share of labour-
advantage, industrializing countries need to up-
intensive items, particularly clothing, while further
grade their export structure towards products with
industrial development in Japan and the Republic
a comparatively higher potential for productivity
of Korea was accompanied by a strong rise in the
growth in order to sustain output growth.
share of electronics, as well as other, more skill-
intensive manufactures, particularly cars.
In this context, it is important for domestic
firms to enter export markets in sectors with high
The sequence of these changes has been
productivity and market potential, and to use
broadly similar for all three countries, although it
the export proceeds to finance
occurred at different periods
imports of the capital goods,
of time. The share of primary
intermediate imports and pri-
commodities in Japan’s mer-
mary commodities needed for
China’s exports continue to
chandise exports had already
further productivity increases
include a large proportion
begun falling sharply before
and industrialization. Even
of imported inputs ... but
the Second World War and the
though productivity and mar-
there are indications of a
importance of textiles and cloth-
ket potentials vary within broad
rise in the share of
ing reached its peak in the
product categories, there is
domestic value added in
1950s. The table shows that
widespread agreement that
China’s processing trade.
textiles, as well as iron and
manufactures, particularly of
steel, still accounted for a size-
the skill-intensive type, have
able share of Japan’s exports
a more favourable potential
in the mid-1960s, but by the
than other products. This is because primary sec-
mid-1980s, with the rise of the automobile indus-
tors face adverse terms-of-trade movements in the
try, road motor vehicles became the single most
long run, as well as limits to raising productivity;
important export item. At the same time, exports of
and markets for labour-intensive manufactures ex-
capital goods, in particular non-electrical machin-
ported by developing countries risk becoming
ery and electronics began to gain in importance.
rapidly oversupplied.
It is noteworthy that the share of finished products
in the electronics sector peaked in the mid-1980s,
The growth in the share of manufactures in
and subsequently parts and components of elec-
the export composition of rapidly industrializing
trical and electronic products, together with road
countries is a recurrent feature. For some of the
motor vehicles, became the most important items
now developed countries, such as Canada, Japan,
in Japan’s merchandise exports. Protectionist ten-
Sweden and the United States, the proportion of
dencies in Japan’s main export markets (i.e. the
manufactured exports rose sharply over the first
United States and Western Europe), the apprecia-
six decades of the twentieth century. In Canada
tion of the yen following the Plaza Accord of 1985,
and the United States it increased continuously
and increased competition from the NIEs played
up to the mid-1950s, when it stabilized, while in
a significant role in the evolution of Japan’s ex-
Japan and Sweden it continued to rise. In Japan,
port pattern (see, for example, Balassa and Noland,
it doubled over the 60-year period to reach 88 per
1988).
66
Table 2.7
PRODUCT STRUCTURE OF EXPORTS FROM SELECTED ASIAN COUNTRIES, 1965–2003
(Percentage of total merchandise exports)
Japan
Republic of Korea
Chinaa
Indiaa
Product group
1965 1975 1985 1995 2003
1965 1975 1985 1995 2003
1987 1995 2003
1975 1985 1995 2003
Primary commodities
8.8
4.4
2.7
2.8
2.9
40.6
18.4
8.7
6.7
7.3
37.7
15.7
9.2
55.1
41.8
25.6
23.0
All food products
4.4
1.5
0.8
0.5
0.5
16.7
13.2
4.1
2.3
1.4
15.6
8.3
4.4
37.7
25.3
19.0
11.4
Agricultural raw materials
2.3
1.4
0.6
0.6
0.5
8.6
1.6
0.7
1.3
0.9
6.3
1.8
0.7
4.0
2.8
1.3
1.3
Minerals, ores and metals
1.7
0.4
0.9
1.1
1.4
14.3
1.3
0.7
1.0
1.5
3.4
2.1
1.6
12.3
7.6
3.6
4.4
Fuels
0.4
1.1
0.3
0.6
0.4
1.1
2.2
3.1
2.0
3.6
12.4
3.6
2.5
1.1
6.0
1.7
5.9
T
rade and Development Repor
Labour- and resource-intensive manufactures
23.9
8.7
5.5
3.8
3.3
41.4
48.7
32.0
19.0
10.0
35.7
37.3
27.7
27.8
42.2
48.5
40.3
Textiles
13.7
5.3
2.8
1.7
1.4
15.1
13.0
8.4
10.1
5.6
16.2
9.5
6.2
13.8
11.6
14.0
11.0
Clothing
3.4
0.6
0.4
0.1
0.1
11.8
22.6
14.7
4.1
1.9
14.5
16.3
11.9
4.5
10.2
13.2
10.7
Footwear, leather and travel goods
1.4
0.4
0.2
0.1
0.0
2.4
5.5
6.8
3.0
0.9
2.4
6.8
4.5
5.3
6.8
4.4
2.9
Cork, wood and paper products
2.2
1.0
0.8
0.7
0.7
10.5
5.4
0.9
1.3
1.1
1.4
2.4
3.3
0.4
0.2
0.5
0.7
Non-metallic mineral manufactures
3.2
1.3
1.2
1.2
1.1
1.6
2.1
1.1
0.6
0.5
1.2
2.3
1.8
3.8
13.4
16.4
14.9
Low-skill and technology-intensive manufactures
30.6
35.7
15.3
9.5
9.0
8.7
10.3
28.8
13.0
11.8
4.0
8.8
7.2
6.1
2.5
6.2
9.2
Iron and steel
15.4
18.5
7.8
3.9
3.8
7.3
4.6
6.0
4.5
4.1
1.1
3.7
1.2
2.7
0.5
3.3
5.1
Fabricated metal products
3.6
3.3
2.0
1.7
1.6
1.3
2.5
5.0
3.0
1.6
2.2
3.0
3.3
2.1
1.4
1.9
3.3
Simple transport equipment
2.7
3.1
2.0
1.4
1.5
0.0
0.6
1.2
1.0
0.2
0.3
1.5
2.0
1.2
0.6
1.1
0.6
Ships and boats
8.9
10.9
3.4
2.5
2.2
0.0
2.7
16.7
4.5
5.8
0.4
0.6
0.7
0.1
0.0
0.0
0.2
Medium-skill and technology-intensive manufactures
15.0
27.4
40.8
41.8
45.0
2.8
5.6
7.4
20.5
22.8
6.4
8.8
12.1
5.7
5.8
6.3
8.4
t, 2005
Rubber and plastic products
1.9
1.4
1.3
1.5
1.6
0.7
3.5
1.9
1.8
1.6
0.5
2.2
2.2
0.5
0.8
1.7
1.4
Non-electrical machinery
7.1
10.8
13.4
18.8
17.2
1.4
0.6
2.0
5.9
6.9
1.4
3.2
4.9
3.0
3.0
2.2
3.6
Electrical machinery excluding electronics
2.8
2.8
3.3
4.8
4.7
0.2
1.4
1.4
5.4
2.4
0.6
3.0
4.2
1.1
1.0
0.7
1.4
Road motor vehicles
3.2
12.4
22.7
16.6
21.5
0.5
0.1
2.1
7.4
11.8
3.9
0.4
0.6
1.1
0.9
1.8
2.0
High-skill and technology-intensive manufactures
9.8
11.0
9.4
12.6
15.2
0.5
3.1
5.2
8.9
10.4
7.8
8.8
7.1
2.8
4.2
8.6
12.4
Industrial chemicals
6.0
6.8
4.1
6.4
7.7
0.2
1.2
3.0
7.0
8.5
5.0
5.0
3.8
1.8
2.2
5.9
8.5
Pharmaceuticals
0.4
0.2
0.2
0.4
0.7
0.0
0.2
0.1
0.2
0.2
1.1
1.1
0.7
0.7
1.5
2.3
3.2
Aircraft
0.1
0.0
0.1
0.1
0.3
0.1
0.3
0.8
0.2
0.2
0.1
0.1
0.1
0.0
0.2
0.0
0.1
Scientific instruments
3.3
3.9
5.0
5.6
6.4
0.2
1.4
1.3
1.4
1.5
1.6
2.6
2.6
0.3
0.4
0.3
0.6
Electronics
7.5
10.9
23.5
27.5
22.6
0.9
9.4
13.5
29.1
35.8
3.4
12.3
30.3
0.8
0.8
1.9
1.9
Communications equipment (less parts thereof)
and household equipment
5.0
5.7
9.2
2.6
3.7
0.8
2.9
5.8
5.2
4.2
2.3
4.4
6.0
0.4
0.1
0.2
0.3
Computers and office machines (less parts thereof)
0.3
1.2
4.8
4.9
2.0
0.0
0.4
1.4
3.4
5.0
0.3
2.1
9.9
0.1
0.1
0.3
0.3
Parts and componentsb
2.3
4.1
9.4
20.0
17.0
0.1
6.1
6.3
20.5
26.5
0.7
5.8
14.4
0.3
0.5
1.3
1.3
Other manufactures
4.4
1.9
2.7
1.9
1.8
5.0
4.6
4.4
2.7
1.7
5.1
8.1
6.2
1.6
2.6
2.8
4.7
Source: UNCTAD secretariat calculations, based on UN COMTRADE.
a Data for earlier years not available.
b Includes SITC 759, 764, 772 and 776.
Income Growth and Shifting Trade Patterns in Asia
67
In the Republic of Korea, primary commodi-
nomic integration in the 1950s. On the other hand,
ties accounted for about 40 per cent of merchan-
China, and earlier, during the 1970s and 1980s,
dise exports even in the mid-1960s, while labour
the Republic of Korea, were able to take advantage
and resource-intensive manufactures (mainly,
of participation in the labour-intensive segments
textiles, clothing and cork, wood and paper prod-
of international production networks. In this con-
ucts) constituted another 40 per cent. The decline
text, the Republic of Korea imported mainly
in importance of primary commodities in the
technology and equipment that fed into exports
1970s, and clothing in the 1980s and 1990s, was
with a high domestic value-added content (TDR
accompanied by a rise in the share of transport
2002). By contrast, China has relied relatively
equipment, machinery, industrial chemicals and
more on the assembly of final products – the most
electronics. In electronics, the shares of finished
labour-intensive segment of production – from
products, and parts and components rose fairly
imported parts and components, and its exports
evenly during the 1980s; thereafter, the rapid in-
continue to include a large proportion of imported
crease in the share of parts and components has
inputs.
made electronics the single most important export
item in the country’s export composition. The fall-
However, there are indications that suggest
ing shares of clothing and of finished products in
a rise in the share of domestic value added in Chi-
the electronics category have been spurred by the
na’s processing trade. According to data from
increasing importance of production networks
China’s Customs Statistics, the export–import ra-
with assembly operations located in China.
tio of processing with imported materials has been
rising steadily, from 1.2 in 1994 to about 1.5 in
As for China, following the international oil
1998–2001, and 1.7 at the end of 2004. The elec-
price hikes of the 1970s, fuels constituted a sub-
tronics sector is likely to have contributed most
stantial proportion of its export earnings. As a
to upgrading in processing trade, given that an
result, primary commodities, including also a large
increasing share of parts and components used
share of food products, continued to account for
in such trade comes from domestic production,
the highest share of China’s total merchandise
in particular those traded between different for-
exports until the mid-1980s. Thereafter, the rapid
eign affiliates located in China, rather than being
rise in domestic demand for energy products and
imported (Lemoine and Ünal-Kesenci, 2004:
the sharp fall in international oil prices substan-
840–841).
tially reduced China’s earnings from primary
commodity exports. Labour- and resource-inten-
Most important for the dynamism of domes-
sive manufactures (mainly textiles, clothing and
tic value added in China’s electronics exports is
footwear), chemicals, machinery and, increas-
the recent massive geographic dispersion of chip
ingly, electronics have since accounted for the bulk
design (a process that creates the highest value in
of China’s merchandise exports. Unlike Japan and
the electronics industry) away from developed
the Republic of Korea, China’s electronics exports
countries towards leading Asian electronics ex-
continue to be fairly evenly spread between fin-
porting countries, including China (Ernst, 2004).
ished products and parts and components. This
The adoption of modular design methodology (an
reflects the fact that a large proportion of China’s
approach pioneered in the automobile industry
assembly operations are based on inputs imported
some two decades ago) has facilitated the reuse
from other countries, including Japan and the Re-
of design building blocks, and thus the disinte-
public of Korea.
gration and geographic dispersion of design teams
to multiple locations with different, yet comple-
Despite the similarities in the broad evolu-
mentary, specialization profiles. This has improved
tion of the export structure of the latecomers to
design productivity and enabled an improved
industrialization and the leaders, the changes are
management of the rapidly growing cost of chip
based on rather different production structures and
design, which increasingly reflects complex de-
are related in different ways to their import struc-
sign requirements. The attractiveness of Asian
tures. Upgrading in Japan’s export composition
developing countries, particularly China, as new
emanated from a strong indigenous technological
locations for chip design stems from a combina-
base, developed prior to the country’s global eco-
tion of factors, including their relatively low wages
68
Trade and Development Report, 2005
for skilled labour, policy incentives in the form
The introduction of price ceilings on the do-
of tax rebates20 and, not least, proximity to the
mestic market, on the other hand, seems to have
providers of design and engineering support serv-
had a positive impact on India’s exports of phar-
ices, as well as the rising number of end-users in
maceuticals (Amsden, 2001: 156).21 These ceil-
the rapidly growing markets of Asian developing
ings tended to make exports more profitable, and
countries.
thus provided an incentive for domestic pharma-
ceutical firms to engage in export activities. They
Unlike the strong upgrading in China’s ex-
also helped boost innovation, because local firms
port composition, there has been little change in
that manufactured new medicines on the basis of
India’s merchandise export structure. While simi-
indigenous technologies were exempted from
lar to the other countries in
price controls for five years.
that the share of primary com-
However, domestic innova-
modities has declined and that
tiveness in India’s pharmaceu-
of textiles and clothing has in-
So far, India has not
tical sector owes most to the
creased, these shifts have not
experienced a manu-
Indian Patents Act of 1970.
been as far-reaching as in the
facturing export boom of
One stated objective of that
other three countries. Four re-
the kind seen in other
Act was the development of an
source- and labour-intensive
independent and self-reliant
rapidly growing Asian
products – food products, non-
pharmaceutical industry (Jha
economies.
metallic mineral manufactures
et al., 2005: 12). The Act fa-
(i.e. gems, jewellery and re-
cilitated the acquisition of for-
lated products), textiles and
eign technology, as it pro-
clothing – jointly continue to account for about
tected production processes but not products (i.e.
half of India’s merchandise exports. Such a struc-
it permitted reverse engineering, whereby mol-
ture is typical of a country at an early stage of
ecules can be reconstituted using production tech-
industrialization. However, as mentioned above,
niques that are different from the inventor’s tech-
since a number of important trade policy reforms
nique). This enabled India to become the world’s
have been implemented only recently, it is prob-
leading exporter of generic medicines, and for
able that the main changes in India’s export
Indian companies to capture 65 per cent of the
structure that would be expected to accompany
domestic market in pharmaceutical products, com-
trade reform have yet to occur.
pared to 25 per cent in 1971 (Chauvin and Lemoine,
2003: 36).
Two of India’s policy instruments, namely
price controls and reserving market segments for
Export prospects for India’s pharmaceutical
small-scale firms, have had noticeable, but widely
industry depend to a large extent on the effects of
varying, impacts on the composition of its mer-
the new Patent (Third Amendment) Act 2005. In-
chandise exports. It is often argued that the
dia had to change its patent legislation to comply
relatively small share of labour-intensive manu-
with its obligations under the WTO Agreement on
factures in India’s merchandise exports is partly
Trade-Related Aspects of Intellectual Property
due to the reserving of market segments for small
Rights (TRIPS). The new Act provides for the
firms. Small-scale firms in labour-intensive manu-
granting of product patents. However, it affects
facturing sectors, where production is often also
only newly invented medicines, whereas specific
scale intensive, have been neither innovative nor
regulations apply to those medicines that were
agents of industrial diversification. This has con-
invented between 1995 and 2005. India was al-
tributed to sidelining India from mass markets that
lowed to delay the patenting of pharmaceutical
require long production runs and goods of a stand-
products until 2005, but had to establish a system
ard quality. As a result, the share of clothing in
(a so-called “mailbox”) for receiving and filing
India’s merchandise exports, for example, has re-
patent applications starting in 1995. The Indian
mained relatively small. Yet India’s relatively
patent office will decide whether these mailbox
abundant supply of low-skilled labour gives it a
applications meet the patentability criteria laid
comparative advantage for the production of la-
down in the Act, and accept or reject them ac-
bour-intensive manufactures (fig. 2.4).
cordingly. If the application is accepted, Indian
Income Growth and Shifting Trade Patterns in Asia
69
companies can continue producing such medicines
India’s high absolute number of high-skilled
after payment to the patent-holder of a “reason-
labour supported the rise in its exports of soft-
able” royalty, provided that they made “significant”
ware and IT-enabled services. Singh (2003: 28),
investment and were producing and marketing the
for example, reports that about 140,000 Indian
concerned medicines prior to 2005.22 Moreover,
engineers graduate every year, the largest number
exports to countries with no manufacturing capac-
in the world after the United States, and that every
ity of patented medicines produced in India
year about 100,000 new IT professionals are added
through a compulsory licence will be possible
to the workforce. However, the number of gradu-
based solely on the notification by the importing
ates available for employment in domestic com-
country, in accordance with the implementation
panies has suffered from outward migration of
of the Doha Declaration on the TRIPS Agreement
graduates to the United States and elsewhere. But
and Public Health.23 If the granting of such com-
the strong growth of Indian software and IT-
pulsory licences does not lead to protracted liti-
enabled services exports, destined mainly to the
gation processes between the patent-holder and
United States, is probably mainly due to other
the producers of generic medicines, India can con-
advantages that are specific to the sector, in par-
tinue supplying the developing world with, for
ticular: networks of Indian engineers recruited by
example, affordable antiretrovirals for the treat-
firms in the United States during the 1980s, wide-
ment of HIV/AIDS.
spread command of the English language, the
country’s convenient location (in terms of time
So far, India has not experienced the kind of
zones) with respect to the United States, minimal
manufacturing export boom that has characterized
regulation, the fact that transport by telecommu-
the other rapidly growing economies in Asia. By
nications makes the services industry less vulner-
contrast, it has become a leading exporter, par-
able to current infrastructure constraints (such as
ticularly to the United States, of software and
poor water and road transport), and, perhaps most
so-called information-technology (IT)-enabled
importantly, the relatively low development of
services. These services cover many different
India’s manufacturing sector, which strongly re-
kinds of data processing and
duces the opportunity costs for
voice interactions that use
skilled workers to work in the
some IT infrastructure as in-
software sector. But specific
puts. India’s software exports
The share of software and
demand-related events have
have increased about sixfold
IT-enabled services in
also played a crucial role in the
since the early 1990s, and
India’s export earnings may
rise of India’s IT-related serv-
were worth almost $30 billion
not continue to rise
ices exports: the adoption of a
in 2003. Given the relatively
substantially over the
common currency in Western
slower growth of merchandise
medium term.
Europe, which required a large
exports, the share of software
amount of data to be converted
and IT-enabled services in In-
into euros, and the large num-
dia’s total export earnings
ber of Y2K-related projects in
increased from about 20 per cent in 1990 to more
the late 1990s (Arora and Gambardella, 2004). The
than 30 per cent in 2003. This improved India’s
specific importance of these events lies in the fact
share in total developing-country services exports
that they occurred just when some developed
from about 3 per cent in 1990 to about 7 per cent
countries were experiencing a shortage of labour
in 2003. But it is also interesting to note that
possessing specialized skills during the IT-indus-
China’s services exports have increased about
try’s unprecedented expansion. As a result, United
eightfold since 1990, reaching a level of about
States firms, for example, outsourced IT-related
$47 billion in 2003, and they correspond to a share
activities to countries where skilled workers were
of 8 per cent in total developing-country services
more readily available, and at wages well below
exports. Given the strong increase in China’s mer-
those of their domestic counterparts.
chandise exports, the contribution of services to
the country’s total export earnings rose only mar-
It is highly uncertain whether the share of
ginally, from 9 to 10 per cent over the same period
software and IT-enabled services in India’s export
of time.
earnings will continue to rise substantially over
70
Trade and Development Report, 2005
the medium term. This is because of strong com-
2000). Also, greater automation of software de-
petition in the software market from producers
velopment may reduce the scope of outsourcing
with equally well-educated labour forces (in Cen-
such activities from developed to developing
tral and Eastern Europe, as well as elsewhere in
countries. Over the next few years, the absolute
Asia), and, following the bursting of the IT-bubble,
value of India’s software and IT-enabled services
the shortage of software engineers in developed
exports may continue to grow, because of the self-
countries has eased. Moreover, it is widely ex-
perpetuating momentum of connections and
pected that an improvement in transport facilities
experience, in particular if the Indian industry
and continued economic reforms could reduce the
succeeds in upgrading towards systems architec-
current disadvantages of other Indian sectors in
ture, design, development and technology strategy
exporting, so that resources could be diverted away
services (Chadwick, 2003). However, export dyna-
from the software sector (Wood and Calandrino,
mism in other sectors is likely to become stronger.
D. World market shares and prices
The discussion in sections B and C focused
ation around a long-term downward trend (fig. 2.6).
on the evolution of domestic consumption and
This downward trend was particularly strong be-
external trade in China and India, with an empha-
tween the mid-1970s and late 1980s. It has been
sis on volumes and trade composition. However,
most pronounced for those commodity groups that
it is clear that the values associated with traded
are of export interest to developing countries, such
volumes depend on prices. Given that a simulta-
as tropical beverages, food and vegetable oilseeds
neous expansion of the internationally traded
and oils. By contrast, since 2002, commodity
volumes of a specific good by a large number of
prices of all commodity groups have surged both
countries, or even by large individual countries
in real and, in particular, nominal terms (table 2.8).
such as China and India, can have a significant
But this price increase is most marked for miner-
impact on international prices, this section high-
als, ores and metals, reflected by the fact that the
lights the effects that greater trade integration by
UNCTAD price index for this commodity group
China and India has had over the past few years.
(as well as individually for a number of metals
such as copper, iron ore and nickel) approached
all-time record levels in nominal terms at the end
of 2004 and early 2005.
1.
The growing impact of China and India
on global primary commodity markets
The long-term downward trend of real prices
for primary commodities has been related to the
relatively low income elasticity of demand that
The evolution of real commodity prices – i.e.
characterizes many primary commodities. It has
nominal prices deflated by the unit value index of
also been related to the transmission of produc-
manufactures exported by developed countries –
tivity growth in primary production to lower prices
has been characterized by sizeable short-term vari-
in the commodity-consuming industrialized coun-
Income Growth and Shifting Trade Patterns in Asia
71
Figure 2.6
NON-FUEL PRIMARY COMMODITY PRICES, NOMINAL AND REAL,
BY COMMODITY GROUP, 1960–2004
(Index numbers, 2000 = 100)
All commodities
Tropical beverages
350
600
550
300
500
450
250
400
200
350
300
150
250
200
100
150
50
100
50
0
0
2004
2004
1960
1970
1980
1990
2000
1960
1970
1980
1990
2000
Food
Vegetable oilseeds and oils
450
500
400
450
350
400
300
350
300
250
250
200
200
150
150
100
100
50
50
0
0
2004
2004
1960
1970
1980
1990
2000
1960
1970
1980
1990
2000
Agricultural raw materials
Minerals, ores and metals
250
250
200
200
150
150
100
100
50
50
0
0
2004
2004
1960
1970
1980
1990
2000
1960
1970
1980
1990
2000
Nominal price
Real price
Source: UNCTAD, Commodity Price Bulletin, various issues; and United Nations Statistics Division, Monthly Bulletin of Statistics,
various issues.
72
Trade and Development Report, 2005
Table 2.8
WORLD PRIMARY COMMODITY PRICES, 1999–2004
(Percentage change over previous year)
Commodity group
1999
2000
2001
2002
2003
2004
All commoditiesa
-14.0
2.0
-4.0
1.0
8.2
20.0
Food and tropical beverages
-17.4
0.0
0.0
1.0
2.0
13.6
Tropical beverages
-21.3
-15.3
-21.0
12.7
5.6
6.4
Coffee
-21.3
-25.1
-29.0
4.7
8.7
19.8
Cocoa
-32.1
-22.1
22.7
63.3
-1.3
-11.8
Tea
-7.0
6.7
-20.1
-9.6
8.4
2.0
Food
-16.9
2.0
3.0
-1.0
2.0
14.4
Sugar
-30.0
30.4
5.6
-20.3
2.9
1.1
Beef
6.2
5.6
10.0
-0.3
0.5
17.8
Maize
-10.0
-2.8
1.1
10.5
6.4
5.0
Wheat
-11.0
3.1
9.0
16.5
-0.8
7.1
Rice
-18.7
-18.0
-15.0
10.6
4.3
23.5
Bananas
-9.9
-2.3
38.8
-9.6
-28.7
39.9
Vegetable oilseeds and oils
-26.5
-20.0
-6.0
24.5
17.1
13.1
Soybeans
-17.4
5.3
-8.0
8.7
25.0
16.0
Agricultural raw materials
-10.2
3.1
-4.0
-2.1
19.1
9.8
Hides and skins
-6.3
11.1
5.0
-2.9
-16.7
-1.2
Cotton
-18.6
11.5
-19.0
-3.6
37.2
-3.3
Tobacco
-7.1
-3.8
0.0
-8.0
-3.3
3.4
Rubber
-12.6
7.9
-14.1
33.1
41.7
20.3
Tropical logs
-7.2
3.7
6.4
-10.5
20.1
19.2
Minerals, ores and metals
-2.2
12.4
-11.0
-2.2
12.6
39.8
Aluminium
0.3
13.8
-6.8
-6.5
6.1
19.9
Phosphate rock
4.6
-0.4
-4.5
-3.3
-5.9
7.8
Iron ore
-9.2
2.7
4.5
-1.1
8.5
17.4
Tin
-2.9
1.0
-18.0
-8.5
20.0
74.4
Copper
-4.9
15.3
-13.0
-1.1
14.1
61.1
Nickel
29.9
43.7
-31.2
14.0
42.2
43.5
Tungsten ore
-9.3
12.1
45.5
-41.8
18.0
22.9
Lead
-5.0
-9.7
4.9
-5.0
13.8
72.0
Zinc
4.6
4.0
-21.0
-12.0
5.2
29.1
Crude petroleum
38.7
55.6
-13.3
2.0
15.8
30.7
Source: UNCTAD, Monthly Commodity Price Bulletin, various issues.
Note: This table has been revised from TDR 2004, table 2.2, because the base year for the commodity price index has been
changed to 2000.
a Excluding crude petroleum.
tries, rather than to higher wages in the commod-
presence of credit rationing, and to the disman-
ity-producing developing countries. Substitution
tling of international commodity agreements) have
of raw materials by synthetics and, particularly
also had an adverse effect on commodity prices.
since the mid-1980s, sharp increases in the sup-
ply of primary commodities (owing to the need of
Much of the short-term variations in com-
many developing countries to maintain export rev-
modity prices have traditionally been attributed
enues to service growing debt obligations in the
to fluctuations in the real exchange rate of the
Income Growth and Shifting Trade Patterns in Asia
73
dollar24 and to the state of the business cycle in
material-intensive industrial sector (TDR 2003),
the developed countries. However, it is clear that,
which liberated production and processing capaci-
in addition to mere short-term effects related to
ties to meet the growing demand for primary com-
the business cycle, demand
modity imports by Japan and
conditions in commodity-con-
the NIEs.
suming countries also have
long-term price effects result-
Since 2002, commodity
Figure 2.7 shows the
ing from shifts in the share of
prices have surged, driven
change in world import shares
industry in total income. Thus,
by strong demand and
of China and India between
structural change in developed
emerging supply
1990 and 2003 for selected
countries away from raw-mate-
constraints.
commodities that are important
rial-intensive industrial pro-
during rapid industrialization
duction to services has con-
and per capita income growth.
tributed to the long-standing
It shows that by 2003 China
price decline of primary commodities over the past
had become a major importer of most of these
three decades. More recently, the growing impor-
commodities, resulting in their shares increasing
tance of manufacturing in a number of develop-
considerably from very low levels in 1990. Chi-
ing countries is poised to have an opposite effect.
na’s imports of iron ore and soybeans in 2003 are
the most outstanding examples, accounting for
The recent upward movement in commodity
28.7 per cent and 32.1 per cent, respectively, of
prices has been driven by very strong demand and
total world imports. The share of India in world
emerging supply constraints. Rising imports by
imports of all these commodities also increased
China, and, for some commodities also by India,
(except for copper and natural rubber), although
have been the main sources of additional demand.
at lower levels than those of China.
Sustained industrialization and income growth
have led to China’s emergence as the world’s larg-
In order to examine the possible influence of
est consumer of many primary commodities.
growing commodity imports by China and India
While China is also a major producer of several
on world commodity prices, figure 2.8 depicts the
commodities, in many cases domestic producers
net trade (in value terms) of the two countries
have been unable to satisfy the growing domestic
against the prices of some representative com-
demand. The resulting surge in China’s imports,
modities of the different commodity groups
particularly since 2002, has occurred in the con-
between 1990 and 2004. For most commodities,
text of largely stagnating demand for primary
China’s net trade position has been moving in-
commodities in developed countries and short-
creasingly into deficit, in particular since 2000, a
term supply constraints. These constraints are, at
trend associated with price increases that acceler-
least partly, the result of sluggish investment in
ated between 2002 and 2004. For India too, the
primary commodity produc-
figure shows growing net trade
tion and processing capacities
deficits with recently rising
that followed the decline of
commodity prices, particularly
commodity prices from their
Rising imports by China,
of petroleum, but also of nickel.
previous short-term peak be-
and, for some commodities
tween 1994 and 1997.
also by India, have been
The changes in China’s
the main sources of
net trade position for a number
The current situation
of primary commodities has
additional demand.
therefore contrasts with that
made the country a key par-
prevailing when primary com-
ticipant in the world trade of a
modity imports by Japan and
range of products. For exam-
the NIEs were increasing rapidly. The growth of
ple, China has become the world’s largest importer
import demand from these economies was smaller
of natural rubber (driven by higher demand for
in magnitude. Moreover, it occurred when a
tyres), tropical sawn wood, pulp and paper, and
number of developed countries had started to ex-
soybeans (resulting from rising demand for its use
perience structural change away from the raw-
as animal feed, as discussed earlier);25 its imports
74
Trade and Development Report, 2005
Figure 2.7
SHARES IN WORLD IMPORTS OF SELECTED PRIMARY COMMODITIES,
CHINA AND INDIA, 1990 AND 2003
(Per cent)
35
30
25
20
15
10
5
0
Copper
Iron ore
Nickel
Crude
Cotton
Natural
Soybeans
Total
petroleum
rubber
primary
commodities
India 1990
India 2003
China 1990
China 2003
Source: UNCTAD secretariat calculations, based on UN COMTRADE.
Note: India’s imports of soybeans were negligible.
of iron ore rose tenfold between 1990 and 2003,
industry, strongly influenced the sharp rise in in-
accounting for almost 80 per cent of the expan-
ternational cotton prices in 2003. Since then,
sion of this commodity’s world imports (in volume
growing cotton production in all the major pro-
terms) during this period. This is closely related
ducing countries, including China, has eased price
to the rapid growth of steel production and use.
pressures on world cotton markets. But sustained
While China’s domestic production had covered
high world oil prices will make cotton an increas-
about 85 per cent of domestic consumption, by
ingly attractive substitute for man-made fibres in
2003 this share fell to about 45 per cent, making
clothing production, thus boosting demand for this
the country the world’s largest iron ore importer.
commodity. The future dynamism of China’s
UNCTAD (2004b) expects China to remain the
clothing exports will be a key determinant of its
most dynamic force in the global iron ore market
cotton imports. But if the growing clothing ex-
for many years to come.
ports of China are associated with production
relocation from other countries, the resulting ad-
Changes in world cotton prices are closely
ditional demand from China should be matched
related to the evolution of the Chinese market. This
by reduced cotton consumption in other countries,
is because China accounts for about one fourth of
as a result of their lower clothing production, and
world production and, as the world’s leading cot-
thus may not push up prices.
ton consumer, it represents approximately one
third of total world consumption and over one
Between 2003 and 2004, China’s petroleum
fourth of total world imports (in volume terms).
imports increased by more than 40 per cent, ac-
Thus, China’s bad harvest, combined with its in-
counting for more than 30 per cent of the incre-
creasing demand for cotton for its booming clothing
mental global oil demand (IEA, 2005). Since 1999,
Income Growth and Shifting Trade Patterns in Asia
75
Figure 2.8
NET TRADE BY CHINA AND INDIA AND WORLD PRICES,
SELECTED PRIMARY COMMODITIES, 1990–2004
(Billions of dollars and index numbers 2000 = 100)
Source: UNCTAD secretariat calculations, based on UN COMTRADE; and UNCTAD, Commodity Price Bulletin, various issues.
Note: India’s trade of soybeans was negligible. Trade data available only to 2003.
76
Trade and Development Report, 2005
India’s petroleum trade deficit has also markedly
cause of concerns that past episodes of over-
increased, its value exceeding that of China’s defi-
investment, and the consequent dramatic fall in
cit. But there has also been a strong increase in oil
prices, may be repeated, and because of a steep
imports by the United States,
rise in the discovery cost per
which is by far the world’s lead-
unit of metal due to a decline
ing oil consumer, accounting
in discovery rates and in the
for over one fourth of total
average size of discovered de-
Supply constraints in the
world oil consumption and im-
posits.28 Contrary to the time
metals and energy sectors
ports. Continuous growth of
lag in supply response to the
have played a key role in
its oil consumption, combined
rise in world metal prices, tight
the strong price reaction of
with a lower level of its self-
supply conditions tend to be
commodity markets.
sufficiency in oil, made the
short-lived for most soft com-
United States the second larg-
modities.29
est source of incremental oil
demand after China for the period 1995–2004; the
In conclusion, the strong Asian demand for
two countries accounted for 19.9 per cent and
primary commodities may persist for several years
24.3 per cent, respectively (Brook et al., 2004).
to come. This could lead to a substantial rise in
the volume of international trade in some primary
While the growing demand from China and
commodities, particularly petroleum, copper, iron
India has clearly had a significant impact on the
ore, nickel, natural rubber and soybeans. Conse-
recent rise in international commodity prices, a
quently, the prices for these commodities might
number of other factors have also played a part.
remain, for some time, at levels above their aver-
For example, many raw material producers
ages for the period since the mid-1980s. These
succeeded in raising dollar prices in order to com-
factors combined could boost the volume and/or
pensate for the negative effect of the depreciation
prices of other developing countries’ primary ex-
of the dollar on their export earnings. Moreover,
ports. On the other hand, developed countries still
speculators have at times taken substantial posi-
account for two thirds of non-fuel commodity
tions on commodity exchanges to benefit from
imports, and they are likely to remain a dominant
frequent punctuations in the general upward price
influence in commodity markets for many years
movements, as prices have reacted with substan-
to come (United Nations, 2004b). Thus it is unlikely
tial volatility to news of emerging or easing supply
that the growing imports of primary commodities
constraints.26
by China and India will cause a reversal of the
long-term decline in their real prices.
Emerging supply constraints, particularly in
the metals and energy sectors, have played a key
Rising prices of China’s commodity imports
role in the strong price reaction of commodity
have considerably increased its import bill. In
markets to the rising demand from China, India
2004 alone, the surge in the prices of a number of
and other major importers, in-
primary commodities (such as
cluding for replenishing in-
copper, iron ore, nickel, petro-
ventories. However, additional
leum and rubber), combined
supply capacity is due to go
The long-term downward
with a rise in their import vol-
on-stream following a recent
trend in real commodity
umes, resulted in an increase
increase in investment in pro-
prices is unlikely to be
in China’s import bill for pri-
duction and processing ca-
reversed by higher demand
mary commodities by almost
pacities, as well as in explora-
from China and India.
$50 billion (a year-on-year in-
tion.27 As a result, it is widely
crease of almost 60 per cent).30
expected that by the end of
Moreover, while data on price
2005 many commodity prices
inflation of raw materials in
will start falling. Prices may, nonetheless, remain
China are not available, there can be little doubt
at levels above their averages since the mid-1980s,
that the sharp increase in prices of primary com-
as the mining industry is likely to be more cau-
modity imports has considerably exceeded domes-
tious when planning new investment. This is be-
tic consumer price inflation, which has remained
Income Growth and Shifting Trade Patterns in Asia
77
below 4 per cent despite a sharp rise between 2002
market share of clothing exports consistently de-
and 2004. Consequently, a number of enterprises
clined while those of the Republic of Korea and
whose activities contain a large input of imported
Taiwan Province of China first rose and then fell,
primary commodities have suffered a profit squeeze.
giving way to China and other countries, includ-
ing Viet Nam. The table also shows that the fall in
world market shares of clothing exports from the
Republic of Korea and, less markedly, from Tai-
2.
The role of textile and clothing
wan Province of China was initially accompanied
exports
by a rise in these economies’ world market shares
of other manufactured exports.
Much of the recent attention on the impact
It is clear that, apart from shifts in relative
of China’s growing exports on world trade flows
unit labour costs, access conditions in the mar-
has focused on textiles and clothing. For this rea-
kets of the United States and the EU have shaped
son, this sector is examined here.
the relocation of production activities in the tex-
tiles and clothing industry across East Asian coun-
The production of textiles and clothing re-
tries. Indeed, the rapid growth of textiles and
lies on relatively simple technology and a com-
clothing exports first from Japan and then from
paratively large input of low-skilled labour. There-
the Republic of Korea, as well as a number of other
fore, countries with a relatively abundant supply
Asian developing economies, stirred protectionist
of such labour and a relatively scarce supply of
sentiments in North America and Western Europe.
natural resources per worker have a comparative
In 1956 the Japanese Government imposed so-
advantage in these industries. Thus textiles, and
called “voluntary export restraints” (VERs) on
especially, clothing production, have often pro-
cotton products to the United States for the first
vided the “natural” entry point for industrializa-
time in the post-war period. Subsequently, exports
tion and for diversification of exports away from
of cotton textiles from Japan and other major Asian
primary commodities. Indeed, these industries
economies, such as Hong Kong (China), India,
have led industrial development, creating a wide
Pakistan, the Republic of Korea and Taiwan Prov-
range of production, employment and export op-
ince of China encountered discriminatory quantita-
portunities across the developing world over the
tive restrictions under the Short-term and Long-term
past five decades. In particular, they have played
Arrangements on Cotton Textiles. Japan and the
a key role in export growth and industrialization
three East Asian economies responded to these
in East Asia over the past five decades.
external pressures by shifting their production of
textile materials from cotton to synthetic fibres.
The “flying geese” paradigm has often been
However, the new VER arrangements for wool and
used to describe the pattern of the spread of la-
man-made fibre products between the above four
bour-intensive production and exports in East
Asian exporters and the United States, which were
Asia. It explains the life cycles of various indus-
concluded in 1971–1972, paved the way, in 1974,
tries in the course of economic development, and
for the Arrangement on International Trade in
the relocation of industries from one country to
Textiles, better known as the Multi-Fibre Arrange-
another through trade and FDI in response to shifts
ment (MFA). The MFA formally governed quan-
in competitiveness (TDR 1996). The “flying geese”
titative restrictions on trade in textiles and clothing
paradigm considers rising labour costs during the
until 1994, when it was succeeded by the Uru-
process of economic development to be the main
guay Round Agreement on Textiles and Clothing
reason for the gradual erosion of export competi-
(ATC) (UNCTAD, 1994a, chap. V). With the full
tiveness in the relatively more advanced countries.
implementation of the ATC at the beginning of
2005, all textile and clothing products became
Table 2.9 reflects the flying geese pattern in
subject to all the multilateral disciplines under the
its comparison of the evolution over the past four
rules of the WTO. This terminated the series of
decades of world market shares in clothing and
trade-distorting regimes that had governed the tex-
total manufactures of some major developed coun-
tiles and clothing trade for about four decades and
tries and developing Asian economies. Japan’s
put an end to its status as the only sector of inter-
78
Table 2.9
SHARES IN WORLD EXPORTS OF MANUFACTURESa OF SELECTED ASIAN DEVELOPING ECONOMIES AND
MAJOR DEVELOPED COUNTRIES, 1962–2003
(Percentage)
Taiwan Province
United States b
United Kingdom
Germany c
Japan
Republic of Korea
of China
China
Total
Total
Total
Total
Total
Total
Total
manu-
manu-
manu-
manu-
manu-
manu-
manu-
T
Period
factures Clothing factures Clothing factures Clothing factures Clothing factures Clothing factures Clothing factures Clothing
rade and Development Repor
1962–1965
19.2
5.5
12.2
6.0
18.2
7.9
7.1
11.7
0.1
0.3
0.2
0.5
..
..
1966–1970
17.2
5.1
9.6
5.1
18.3
7.7
9.1
9.6
0.2
2.5
0.4
2.1
..
..
1971–1975
14.4
3.1
7.8
4.3
19.3
8.0
11.1
4.1
0.7
6.5
0.8
5.6
..
..
1976–1980
13.8
3.4
7.6
5.2
17.8
8.7
12.2
1.9
1.5
10.1
..
..
..
..
1981–1985
14.5
2.9
6.3
4.1
14.8
7.3
14.9
1.8
2.3
11.2
..
..
0.9
5.5
1986–1990
11.9
2.3
6.1
3.0
15.5
6.9
13.5
0.9
2.7
9.9
2.8
4.4
1.5
7.8
t, 2005
1991–1995
13.1
3.5
5.4
2.7
13.2
5.4
12.2
0.5
2.9
4.7
2.9
2.9
2.9
13.7
1996–2000
13.3
4.6
5.3
2.5
10.8
4.2
9.4
0.3
3.0
2.6
2.8
1.8
3.9
16.5
2001–2003
12.0
3.0
5.1
1.9
11.1
4.1
8.1
0.3
3.1
2.0
2.6
1.2
6.2
20.8
Source: UNCTAD secretariat calculations, based on UN COMTRADE.
a SITC 5–8 less 68.
b Including Puerto Rico for 1962–1980.
c Including eastern Länder after 1991.
Income Growth and Shifting Trade Patterns in Asia
79
national trade in industrial goods that had re-
Indeed, evidence from United States apparel
mained outside multilateral rules since the con-
imports suggests a positive relation between the
clusion of the Uruguay Round.
rise in China’s market share and the decline in
import unit values (table 2.10). The rise of China’s
While there are many similarities in the suc-
share in United States imports between 2001 and
cessive rise and fall of production and export ac-
2004, by about 50 per cent in value terms, corre-
tivities in textiles and clothing
sponds to a more than dou-
across East Asia, there is also
bling of its market share in
one major distinction between
volume terms, as the unit value
these cycles. When Japan
China’s increasing
of China’s imports fell by more
emerged as a major textile and
participation in international
than one third during this pe-
clothing exporter during the
trade could contribute to a
riod. However, from the Greater
first three decades of the twen-
decline in the unit values of
China area (comprising main-
tieth century, it did not face
some of its major export
land China, Hong Kong (China),
much competition from any
items.
Macao (China), and Taiwan
other newly emerging major
Province of China), these im-
clothing exporters. By con-
ports increased much more
trast, the rapid growth of tex-
modestly, by about 20 per cent
tile and clothing exports in the second wave of
in value and 45 per cent in volume. This implies
Asian economic catch-up occurred among the en-
that the unit value of imports from the Greater
tire group of NIEs, giving rise to fears that the
China area declined only by about one fifth. Part
risk of a fallacy of composition could arise if an
of the rise in mainland China’s market share was
increasing number of developing countries were
due to a shift towards direct exports (i.e. bypass-
trying to achieve the same export–GDP ratio
ing middlemen in Hong Kong (China), Macao
(Cline, 1982). According to the fallacy of compo-
(China) and Taiwan Province of China).
sition (sometimes also called the “adding-up prob-
lem”), what is viable for one small exporter act-
The middlemen factor aside, there has clearly
ing in isolation may not be viable for a group of
been a genuine growth of exports from China to
exporters acting at the same time. If all, in par-
the United States. Yeung and Mok (2004) note that
ticular large, developing countries try to substan-
in 1998 the Chinese Government implemented a
tially increase their exports of labour-intensive
restructuring, downsizing and efficiency policy
manufactures, they risk not
leading to the closing down of
only encountering rising pro-
a number of firms and to fierce
tective resistance from devel-
competition among Chinese
oped countries, but also losses,
Exploiting its current export
producers for export market
as the falling prices of those
market potential in textiles
shares. These factors com-
manufactures will not be com-
and clothing may not be in
bined may have enabled some
pensated by a sufficient in-
China’s own development
Chinese firms to export a larger
crease in the volume of ex-
interest.
share of their output at lower
ports (TDR 2002; see also Kap-
prices. The surge in China’s
linsky, 2004). Indeed, the rise
clothing exports may even have
of China’s clothing exports oc-
led to a glut in the United States
curred at a time when several developing coun-
market as indicated by the decline, albeit small,
tries had adopted more outward-oriented devel-
in the unit value of United States imports from
opment strategies, and many had developed pro-
the rest of the world between 1998 and 2002.31
duction and export activities in the clothing sec-
tor partly as a reaction to the quota regulations
This evidence indicates that China’s increas-
under the MFA. This simultaneous move of many
ing participation in international trade, and its
developing countries towards clothing exports,
consequent weight in international markets due to
combined with the large size of the Chinese econo-
the very large size of its economy, could contribute
my, may have accentuated the risk of a fallacy of
to a decline in the unit values of some of its cur-
composition.
rently major export items. However, it is not clear
80
Trade and Development Report, 2005
Table 2.10
UNITED STATES APPAREL IMPORTS FROM SELECTED SOURCES,
MARKET SHARES AND UNIT VALUES, 1995–2005
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005 a
Value-based market shares (per cent)
Greater China area
30.3
28.5
26.7
24.6
22.9
21.3
20.8
21.4
22.6
24.3
27.6
Mainland of China
10.2
10.4
10.5
8.9
8.6
7.9
8.2
9.8
11.9
13.8
21.2
Hong Kong, China
12.1
10.6
9.2
9.2
8.4
7.8
7.5
6.8
6.1
5.9
3.5
Macao, China
2.2
2.1
2.2
2.1
2.0
2.0
2.0
2.0
2.1
2.2
1.4
Taiwan Province of China
5.9
5.4
4.8
4.4
3.9
3.6
3.2
2.8
2.6
2.4
1.6
Other Asia
Bangladesh
3.1
3.1
3.4
3.4
3.3
3.7
3.7
3.3
3.0
3.1
3.3
India
3.2
3.3
3.1
3.1
3.0
3.1
3.0
3.3
3.3
3.4
5.0
Indonesia
3.4
3.6
3.7
3.4
3.3
3.6
3.9
3.6
3.5
3.7
4.2
Pakistan
1.6
1.5
1.4
1.4
1.4
1.6
1.6
1.5
1.7
1.8
1.7
Republic of Korea
4.7
3.8
3.5
3.9
4.1
4.0
3.9
3.6
3.0
2.8
1.7
Viet Nam
0.0
0.1
0.1
0.1
0.1
0.1
0.1
1.6
3.9
4.0
3.6
Sub-Saharan Africa
Kenya
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.2
0.3
0.4
0.4
Lesotho
0.2
0.2
0.2
0.2
0.2
0.2
0.4
0.6
0.6
0.7
0.6
Mauritius
0.6
0.5
0.4
0.5
0.5
0.4
0.4
0.4
0.4
0.4
0.3
Mexico
7.4
9.8
11.8
13.5
14.8
14.7
13.8
13.0
11.3
10.3
9.5
Volume-based market shares (per cent)
Greater China area
26.3
24.3
21.6
20.2
18.4
17.3
17.2
19.0
21.4
23.7
29.0
Mainland of China
9.3
8.9
8.3
7.1
6.5
5.8
6.1
9.1
12.1
14.9
24.4
Hong Kong, China
8.9
7.9
6.5
6.7
6.0
5.7
5.7
4.8
4.2
3.7
1.9
Macao, China
1.7
1.6
1.6
1.6
1.5
1.6
1.7
1.8
2.0
2.2
1.1
Taiwan Province of China
6.5
5.9
5.2
4.8
4.5
4.2
3.8
3.3
3.1
2.9
1.6
Other Asia
Bangladesh
5.6
5.5
5.9
5.8
5.5
6.0
6.0
5.4
4.8
4.7
5.0
India
2.8
3.1
2.8
2.8
2.7
2.5
2.5
2.9
2.8
3.1
4.2
Indonesia
3.4
3.4
3.5
3.4
3.1
3.3
3.7
3.4
3.3
3.5
4.0
Pakistan
1.7
1.7
1.7
1.7
1.7
2.1
2.2
2.2
2.4
2.6
2.6
Republic of Korea
3.7
3.0
2.8
3.6
3.8
3.7
3.9
3.8
3.1
3.1
1.5
Viet Nam
0.1
0.1
0.1
0.1
0.1
0.2
0.2
1.8
3.9
3.9
3.4
Sub-Saharan Africa
Kenya
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.2
0.3
0.4
0.4
Lesotho
0.2
0.2
0.2
0.2
0.2
0.2
0.3
0.5
0.6
0.6
0.5
Mauritius
0.5
0.4
0.3
0.3
0.3
0.2
0.3
0.3
0.2
0.2
0.2
Mexico
8.4
11.4
13.7
15.4
16.4
15.8
14.2
12.5
10.5
9.5
8.6
Unit values ($ per square metre)
Greater China area
Mainland of China
4.1
4.4
4.7
4.7
4.8
4.8
4.7
3.6
3.2
3.0
2.7
Hong Kong, China
5.1
5.1
5.3
5.1
5.1
4.9
4.6
4.7
4.7
5.2
5.5
Macao, China
4.9
4.9
5.3
4.9
4.9
4.5
4.2
3.6
3.4
3.2
4.0
Taiwan Province of China
3.4
3.4
3.5
3.4
3.1
3.1
2.9
2.7
2.7
2.7
3.1
Other Asia
Bangladesh
2.1
2.1
2.2
2.2
2.2
2.2
2.2
2.0
2.0
2.1
2.0
India
4.3
3.9
4.3
4.2
4.1
4.5
4.3
3.7
3.8
3.6
3.7
Indonesia
3.8
4.0
4.1
3.8
3.8
3.9
3.7
3.4
3.5
3.4
3.3
Pakistan
3.6
3.5
3.2
3.1
3.1
2.8
2.7
2.3
2.3
2.2
2.0
Republic of Korea
4.7
4.8
4.7
4.1
3.9
3.9
3.5
3.2
3.1
2.9
3.5
Viet Nam
1.3
1.8
1.8
1.7
1.7
1.6
1.7
2.8
3.2
3.3
3.3
Sub-Saharan Africa
Kenya
2.6
2.6
3.0
3.3
3.1
3.5
3.5
3.6
3.6
3.8
3.5
Lesotho
3.6
4.3
4.1
4.2
4.3
4.1
4.2
3.8
3.8
4.1
3.9
Mauritius
4.1
4.8
5.4
6.3
6.0
6.2
5.8
5.4
6.0
6.1
5.6
Mexico
3.3
3.2
3.2
3.3
3.3
3.3
3.4
3.4
3.5
3.5
3.4
Memo item:
World, excluding China
3.7
3.7
3.7
3.7
3.5
3.5
3.4
3.3
3.3
3.3
3.2
Source: UNCTAD secretariat calculations, based on data from United States Department of Commerce, Office of Textiles and
Apparel (OTEXA).
a January to May.
Income Growth and Shifting Trade Patterns in Asia
81
whether, as some contend, there is likely to be a
the effects of previously strict family planning
further strong rise in China’s share in world cloth-
policies, which have resulted in fewer entrants to
ing exports.
the labour market. Consequently, exporting firms
in the coastal areas are finding it increasingly dif-
Indeed, it is not clear whether fully exploit-
ficult to recruit workers unless they offer higher
ing its current export market potential in textiles
wage incentives (Financial Times, 5 July and
and clothing is in China’s own developmental in-
3 November 2004).
terest. Figure 2.4 above indicates that China’s
comparative advantage is not in low-skill, labour-
The fact that in China most labour-intensive
intensive production, such as clothing, but in
activities have been heavily concentrated in the
manufacturing sectors with a higher skill content.
coastal areas raises the question as to whether in
Important clothing exporters from South Asia
the years to come a similar relocation pattern will
(such as India) have an unu-
occur across the different prov-
sual combination of relatively
inces within China (as well as
low levels of skill per worker
moving further afield to, for
and land per worker that gives
Relocation of labour-
example, Viet Nam). This could
them a strong comparative ad-
intensive production to the
facilitate the upgrading of
vantage in labour-intensive
Chinese hinterland could
clothing exports of the coastal
manufactures, which use little
provinces towards higher value-
contribute to employment
of either skill or land per unit
added products, for which short
creation and poverty
of labour. Moreover, since there
turnover periods and speed to
alleviation.
has been hardly any change in
market play a more important
the relative endowment posi-
role in export competitiveness.
tions of the various country
Moreover, the relocation of
groups, there is little reason to anticipate a large
labour-intensive production to the Chinese hin-
move of South Asian countries away from, and of
terland could make a valuable contribution to em-
China towards, a comparative advantage in labour-
ployment creation and poverty alleviation, while
intensive manufactures. Instead, rising incomes in
also serving as a supply base for pent-up domes-
China are likely to be associated with higher wages
tic demand. But for the country as a whole, a gen-
for low-skilled workers so that the share of skill-
eral upgrading of its export basket towards more
intensive items in China’s manufactured exports
skill-intensive manufactures is likely to facilitate
is likely to increase. Indeed there are indications
the financing of its growing imports of primary
of rising wages in China’s coastal provinces. This
commodities, required to sustain the country’s con-
is partly because of the growing reluctance of
tinued economic catch-up and industrialization proc-
workers to migrate to coastal provinces to work
ess. As discussed above, such a process seems to
in export-oriented production, and partly due to
be already under way in the electronics sector.
82
Trade and Development Report, 2005
Notes
1
Rising incomes and industrialization also boost the
7
While the studies generally agree that gains in en-
demand for capital equipment and intermediate pro-
ergy efficiency are the key determinant, their find-
duction inputs. But the higher demand for these lat-
ings differ as to the relative importance of struc-
ter goods is usually met by imports, as discussed in
tural change. The importance given to structural
section C.
change is higher in studies that employ firm-level,
2
In Japan, per capita calorie intake increased only
rather than sectorally aggregated, data.
slowly after the Second World War – given the al-
8
While there is clearly no one-to-one relationship be-
ready high level of per capita income – and peaked
tween the size of a country’s territory and the eco-
around 1970–1975. By contrast, the shift in the com-
nomic value of its natural resources, technological
position of food consumption continued, with a ris-
progress has increasingly narrowed the differences
ing share of household expenditure on animal prod-
in the relative economic values of different sorts of
ucts, mainly marine fish and, more recently, meat,
land. For example, Diamond (1997) points out that
dairy products and products with a high sugar con-
North Americans could realize the agricultural po-
tent. The Republic of Korea experienced a similar
tential of the western prairies only once they had
change in dietary structure, but with a time lag of
steel ploughs and draft animals; and it required
about 20 years. While at the end of the 1960s cere-
modern geologic prospecting technology for the
als still accounted for more than half of total calorie
pastoralists in the Middle East to discover the fuel
intake in the Republic of Korea, their share fell to
resources under their sand.
less than 30 per cent by the mid-1990s. At the same
9
While comparative advantage for broad product cat-
time, the intake of animal products increased sig-
egories largely depends on differences in the rela-
nificantly: meat and poultry consumption, for ex-
tive abundance of factor endowments, comparative
ample, increased tenfold between 1969 and 1995
advantage at a less aggregate level is heavily influ-
(Popkin, 1993; and Kim, Moon and Popkin, 2000).
enced by industry-specific changes in relative lev-
3
All data from FAOSTAT.
els of unit labour costs. These changes can be the
4
Rosegrant et al. (2001: 75) project that between 1997
result of uneven productivity growth across indus-
and 2020 the increase in per capita calorie intake in
tries combined with more even growth in wage rates
China will be only about two thirds that in India.
and, more generally, of changes in the nominal ex-
5
Data are from the World Bureau of Metal Statistics,
change rate (TDR 2004).
various; World Bank, 2004a; International Iron and
10
One advantage of this formulation is that, contrary
Steel Institute, 2004; International Copper Study
to some other variants of the Heckscher-Ohlin trade
Group, 2004; and World Bank, World Development
theory, it requires a much weaker and more plausi-
Indicators online database: http://publications.
ble assumption of efficiency and factor-price equali-
worldbank.org/WDI/.
zation, namely, that in all countries the ranking of
6
Figure 2.1 also shows that the intensity of metal use
goods in terms of resource input combinations is
in the Republic of Korea increased throughout the
similar – for example, that the land–labour input
period 1960–2003, even though the pace of growth
ratio in agriculture is always higher than in manu-
slowed down considerably over the past decade,
facturing and that the skill–labour input ratio in
particularly for aluminium and copper. This indi-
manufacturing is always higher than in agriculture.
cates that the Republic of Korea is approaching the
11
It is clear that there is a variation, sometimes wide,
peak of its intensity-of-use curve. The intensity of
in terms of both the land–labour ratio and, less so,
metal use in both Japan and the United States has
the skill–labour ratio, among the countries within
declined over the past two decades, as anticipated
all the country groups; nonetheless, regional aver-
by the intensity-of-use hypothesis for mature, in-
ages provide a useful broad-brush starting point for
dustrialized economies.
further analysis.
Income Growth and Shifting Trade Patterns in Asia
83
12
Data from UNESCO Institute of Statistics, Statisti-
20
According to Ernst (2004), chips designed by for-
cal tables online: http://www.uis.unesco.org/;
eign or domestic companies in China are eligible
UNESCO, 2003; and OECD, 2003.
for a 14 per cent rebate on the nominal 17 per cent
13
Rodrik and Subramanian (2004: 19) argue that the
value-added tax on sales of imported or domesti-
reforms of the 1980s “were not pro-liberalization
cally produced chips.
but pro-business in the important sense that they
21
These price ceilings were introduced mainly to guar-
served to boost the profits of existing businesses
antee widespread access to medicines, in spite of
without threatening them with real competition”,
the virtual absence of health insurance coverage.
and that this attitude change of the Government and
22
The Act does not include a clear definition of what
the associated pro-business policy changes, imple-
“significant investment” and a “reasonable royalty”
mented in a very haphazard and gradual manner,
actually are.
elicited a large productivity response, particularly
23
The relevant decision of the WTO is contained in
in manufacturing. This was followed by a sustained
document WT/L/540 of 2 September 2003. This de-
rise in exports from 1987 onwards. Panagariya
cision introduced a waiver of the TRIPS Agreement
(2004: 29) argues that the policy changes in the
with respect to the granting by an exporting Mem-
1980s were deeper than is generally appreciated, and
ber of a compulsory licence.
that they can be characterized as “liberalization”.
24
Commodity prices are measured by a dollar-denomi-
He notes that, given their ad hoc and quiet imple-
nated index and deflated by a dollar-denominated
mentation, they were often described as “liberaliza-
price index, while demand in countries other than
tion by stealth”, while the reforms in the 1990s were
the United States depends on the price of commodi-
systematic and systemic. Panagariya (2004: 15) also
ties relative to output prices in those countries.
mentions the importance of export incentives dur-
25
For further detail see International Rubber Study
ing the rapid export expansion of the late 1980s.
Group and Economic Social Institute (2003); and
These incentives resembled the measures taken ear-
ITTO (2003).
lier in the Republic of Korea to animate a profit–
26
According to Burghardt (2005), for example, specu-
investment and an investment–export nexus; they
lative trading on commodity exchanges increased
included income tax deductions for business prof-
substantially in 2004: the volume of global futures
its from exports, subsidization of interest rates on
and options in agricultural commodities increased
export credit, and facilitation of imports of capital
by nearly 5 per cent, while the growth in the vol-
goods in selected export industries. By contrast, the
ume of trading was close to 12 per cent for energy
standard policy-oriented account of India’s integra-
tion process (e.g. Ahluwalia, 2002) emphasizes the
products and 16.4 per cent for non-precious metals.
adoption of far-reaching reforms in the 1990s and
27
More precisely, worldwide non-ferrous metal ex-
argues that India embarked on the economic reform
ploration budgets had fallen at an average annual
and trade liberalization process in earnest only fol-
rate of 17 per cent between 1997 and 2002, before
lowing its balance-of-payments crisis in 1991.
strongly bouncing back in 2003 and 2004. More-
14
The data refer to trade excluding trade among the
over, the last quarter of 2004 was the seventh con-
member States of the EU. All data are from WTO,
secutive quarter that showed an increase in planned
2005b.
mining investment, with a pipeline of projects
15
Anderson (2003: 12–13) estimates that China’s food,
amounting to $122 billion (Metals Economics Group
feed and fibre self-sufficiency will be only slightly
(2005); and Raw Materials Group, Sweden, quoted
reduced by reforms associated with WTO accession,
in the Mining Journal, London, 4 February 2005:
and that additional net food imports will represent
18–19).
only one per cent of total imports by 2007.
28
Barton Suchomel, WMC Resources, quoted in Min-
16
For a further discussion of these categories, see TDR
ing Journal, London, 22 April 2005: 2.
2002, chap. III.
29
For instance, in response to the rising Chinese de-
17
The quota regulations of the Multi-Fibre Arrange-
mand for soybean imports and higher soybean prices
ment (MFA) have also played an important role, as
in 2002 and 2003, soybean growers in the United
discussed below.
States and major Latin American producing coun-
18
Comprehensive product-specific import data for
tries rapidly increased their soybean production. In
China are available only from 1987, so that the evo-
the 2002/03 season, soybean production increased
lution of China’s imports during its first 15 years of
by 19.5 per cent in Brazil, 18.3 per cent in Argen-
economic catch-up and greater trade integration is
tina and 26.8 per cent in Paraguay (United States
not reflected in the table.
Department of Agriculture, 2005).
19
While the fallout from the Asian crisis certainly
30
Data for 2004 from China’s Customs Statistics, 2004,
played a role in the observed decline of imports in
12, Series No. 184.
the Republic of Korea, it is more likely to have ac-
31
For detailed evidence and discussion, see Mayer,
celerated than provoked the decline.
2004.
Evolution in the Terms of Trade and its Impact on Developing Countries
85
Chapter III
EVOLUTION IN THE TERMS OF TRADE AND
ITS IMPACT ON DEVELOPING COUNTRIES
A. Introduction
Price movements of internationally traded
international trade theory (Benham, 1940). Origi-
goods, as well as changes in the volume and prod-
nally, the discussion of the terms-of-trade problem
uct composition of trade, affect the gains an
of developing countries focused on movements in
individual country can reap from international
the prices of primary commodities relative to those
trade. These gains are traditionally measured by
of manufactures. The works of Prebisch (1950,
the terms of trade (the evolution of a country’s
1952) and Singer (1950) triggered broader debate
export prices relative to its import prices) and the
on this issue. This was supported by empirical
purchasing power of its exports (defined as the
research underlying what came to be known as
export value deflated by import prices). The im-
the Prebisch-Singer thesis of a secular decline in
pact of price movements in global markets for
the terms of trade of internationally traded primary
primary commodities and manufactures on both
commodities vis-à-vis manufactures. Subsequent
these measures is determined, in the short term,
studies also found support for this thesis for a
by the composition of a country’s imports and
number of commodities (see Bleaney, 1993;
exports, and, in the medium term, by its flexibil-
Akiyama and Larson, 1994; World Bank, 1996: 55;
ity in being able to adapt the composition of its
TDR 1993: 98–102; Ocampo and Parra, 2003; and
exports and imports to changing international de-
UNCTAD, 2003a: 13–19).
mand and supply conditions. Clearly, the impact
of a change in the terms of trade on an economy
Today, a large number of developing coun-
increases with the relative importance of external
tries, particularly in Africa, are still highly depend-
trade in its GDP.
ent on exports of primary commodities, and their
terms of trade continue to be closely correlated
The significance of the terms-of-trade con-
with the terms of trade of primary commodities
cept has long been recognized in the context of
vis-à-vis manufactures (UNCTAD, 2003a). But it
86
Trade and Development Report, 2005
is also true that the share of primary products in
particular changes in the direction and product
the merchandise exports of some developing coun-
composition of world trade resulting from rapid
tries, particularly the successful late industrial-
growth in the large Asian economies, have affected
izers, has been diminishing in favour of manufac-
the terms of trade of different groups of develop-
tures. These countries have become suppliers of
ing countries, and the growth of their national
manufactured goods not only to developed coun-
income. The chapter first revisits the terms-of-
tries but also to other devel-
trade concept in the context of
oping countries. Against this
the declining importance of
background, the evolution of
primary commodities in the
the prices of manufactures ex-
Increasing demand from
total exports of an increasing
ported by developing coun-
number of developing coun-
developing countries has
tries relative to those exported
tries. It then analyses recent
been decisive in the recent
by developed countries has re-
developments in terms of trade
price hikes of primary
ceived increasing attention.
resulting from changing inter-
commodities.
Moreover, in the process of
national supply-and-demand
their industrialization the ex-
patterns, where some develop-
porters of manufactures among
ing countries have become
the developing countries have also gained in im-
important drivers of the global economy at a time
portance as importers of primary commodities
when demand in major developed countries has
from other developing countries, to such an ex-
been insufficient to stimulate worldwide growth.
tent that their increasing demand has been a deci-
Section D looks at the effects of terms-of-trade
sive factor in the recent price hikes of a number
changes on real domestic income in countries with
of internationally traded primary commodities.
different export structures and different degrees
This has even led to expectations that the long-
of openness to international trade; section E takes
term downward trend in the terms of trade of com-
up the issue of how income gains or losses are
modity prices could be reversed.
shared between the national economy and foreign
investors. The final section addresses a specific
The objective of this chapter is to show how
issue in this context: the sharing of rents from oil
recent developments in the world economy, in
and mining activities.
Evolution in the Terms of Trade and its Impact on Developing Countries
87
B. The terms-of-trade problem revisited
In the terms-of-trade debate of the early
infrastructure. Simultaneous attempts by an in-
1950s, the observed downward trend in the prices
creasing number of developing countries with
of primary commodities relative to those of manu-
similar natural-resource endowments to boost pri-
factures (and, consequently, the terms of trade of
mary exports to finance such imports added to the
developing countries vis-à-vis developed coun-
downward pressure on commodity prices (TDR
tries) was attributed to the different modes of price
2002, chap. IV).
formation in the markets for primary commodi-
ties and those for manufactures. As a result of these
A strategic consequence of these observed
differences, productivity gains in the production
trends was that developing countries had to aim
of food and raw materials in developing countries
at changing their position in the international di-
translated into lower prices (increasing the real
vision of labour by accelerating their pace of
income of consumers) rather than into higher re-
industrialization. Indeed, over the past five dec-
muneration for local factors of production. This
ades, progress with industrialization in a number
was because surplus labour in the producing coun-
of developing countries, and their increasing par-
tries exerted a downward pressure on wages. By
ticipation in trade in manufactures, has added new
contrast, technical progress in manufacturing in-
dimensions to the problem. Thus, while the issue
dustries in the industrialized countries led to a rise
of prices of primary commodities vis-à-vis those
in wages and profits (Singer, 1950: 311) as a result
of manufactured goods continues to be as relevant
of a higher degree of organization of labour and
as ever for many developing countries whose ex-
the practice of mark-up pricing.
port earnings still depend on a very limited number
of primary commodities, developing countries as
This widening gap between the prices of
a group can no longer be stereotyped as exporters
manufactures and primary commodities was also
of primary commodities and importers of manu-
attributed to the fact that the income elasticity of
factures.
demand for food is less than unity, and that tech-
nical progress in manufacturing tends to reduce
Accordingly, increasing attention has been
the amount of raw materials used per unit of out-
paid to relative movements in the prices of manu-
put (Singer, 1950: 312). This tendency was further
factures exported by developing countries vis-à-
strengthened by the protection of domestic pri-
vis those exported by developed countries. Em-
mary production in the industrialized countries.
pirical studies conducted so far have generally
On the other hand, faster growth in developing
found evidence of a decline in developing coun-
countries depends to a large extent on imports
tries’ terms of trade in manufactures since 1975
of manufactures, mainly capital goods, for the
(TDR 2002: 117–121), due to more intense global
creation or expansion of industrial capacity and
competition for the specific types of manufactures
88
Trade and Development Report, 2005
typically produced by developing countries at
of primary commodities vis-à-vis those of manu-
early stages of their industrialization (i.e. low-
factures: different labour market conditions and
skill, labour-intensive manufactures). The rapid
the existence of abundant and unorganized low-
export growth of these types of manufactures by
skilled labour. This implies that productivity gains
the large Chinese economy and by a number of
are to a large extent reflected in lower prices and
other developing countries has intensified com-
that wages in the developing countries tend to be
petition in the markets for
more flexible than in devel-
these goods, thereby exerting
oped countries. The downward
downward pressure on their
pressure on prices resulting
prices.
Commodity issues continue
from a simultaneous export
to be as relevant as ever
drive by developing countries
For example, according
in standardized labour-inten-
for many developing
to data from the United States
sive products is also a phe-
countries ...
Department of Labor, prices of
nomenon that in the past was
electronic products, including
typical of primary commodity
computers and telecommuni-
markets. Thus price formation
cations equipment, have been falling worldwide
for low-skilled manufactures resembles that of
since the early 1990, as indicated by the decline
primary commodities more than price formation
in both United States export and import prices
for manufactures produced in developed countries.
(fig. 3.1). Within this overall trend, the fall in im-
However, there is one major difference: while the
port prices has been stronger than the fall in export
relative decline in the export prices of low-skilled
prices in the United States since the mid-1990s,
manufactures has generally been associated with
suggesting that goods in this product category that
considerable volume growth, declining export
are exported from developing countries have been
prices for primary commodities are typically as-
subject to a sharper decline than goods exported
sociated with lower volume growth (and vice
from the United States that fall into the same broad
versa), due to the much lower price elasticity of
product category.
demand.
There is also evidence that the export prices
Applied to a country’s external trade, the
of textiles and clothing (apparel) from developing
concept most widely used since the beginning of
countries have followed a declining trend since
the terms-of-trade debate in the 1950s has been
the mid-1990s, though less steep than those of
the “net barter terms of trade”, defined as the ra-
electronic products. Accord-
tio between the unit value in-
ing to UNCTAD secretariat es-
dex of exports and that of im-
timates, prices of apparel ex-
ports (hereinafter referred to
ported from developing coun-
as terms of trade, tout court).
... but developing countries
tries to the world market fell
Obviously, this only captures
as a group can no longer
by more than 7 per cent be-
one of the factors determining
be stereotyped as
tween 1996/97 and 2002/03.
a country’s gains (or losses)
exporters of primary
This trend is also confirmed
from trade, while neglecting
commodities and importers
by data from the United States
changes in the volume of ex-
of manufactures.
Department of Commerce,
ports that may accompany, and
which show a decline in the
in some cases even cause, the
unit value of United States
observed changes in export
apparel imports from developing countries of more
prices. In order to assess a country’s capacity to
than 10 per cent between 1995 and 2004 (see chap-
import essential goods for its development, it is
ter II, table 2.10).
more meaningful to look at the “income terms of
trade”, also known as the purchasing power of
The main reasons for the weak prices of
exports. This is defined as the value index of ex-
manufactures produced in developing countries
ports deflated by the unit value of imports. If the
are by and large the same as those that were iden-
fall in a country’s terms of trade is overcompen-
tified as causing the decline in the terms of trade
sated by a rise in the volume of its exports result-
Evolution in the Terms of Trade and its Impact on Developing Countries
89
Figure 3.1
UNITED STATES IMPORT AND EXPORT PRICE INDICES
FOR SELECTED ELECTRONICS PRODUCTS, 1980–2004
(Index numbers, 1995 = 100)
Computers (SITC 752)
Transistors and semiconductors
(SITC 776)
200
120
Export prices
180
110
160
100
140
Import prices
Export prices
120
90
100
80
80
Import prices
70
60
60
40
20
50
1980
1985
1990
1995
2000
2004
1980
1985
1990
1995
2000
2004
Telecommunications equipment,
Parts of computers and
and parts (SITC 764)
office machines (SITC 759)
110
130
Import prices
120
100
Export prices
110
90
100
90
80
Export prices
Import prices
80
70
70
60
60
1980
1985
1990
1995
2000
2004
1980
1985
1990
1995
2000
2004
Source: UNCTAD secretariat calculations, based on United States Department of Labor database (www.bls.gov/data/).
90
Trade and Development Report, 2005
ing from growing international demand or an in-
constitute the majority of exports in Africa (around
crease in the country’s world market share, the
75 per cent) and in West Asia (78 per cent), the
country will register a rise in the purchasing power
bulk of which are still fuels (around 51 per cent
of its exports, indicating that it is able to increase
and 72 per cent respectively). Moreover, the in-
real imports without adverse-
crease in the share of manu-
ly affecting its trade balance.
factures has been heavily con-
Similarly, if productivity in its
centrated in a relatively small
export industries rises fast
number of countries. With the
enough, a country may obtain
Export prices of textiles
exception of East and South
a larger quantity of imports
and clothing from
Asia, primary commodities
from the same quantity of fac-
developing countries have
still account for the largest
tors embodied in its exports,
been declining since the
share of exports in a majority
even if its terms of trade dete-
mid-1990s, though at a
of developing countries (ta-
riorate.1
slower rate than those of
ble 3.2).
electronic products.
The variability of a coun-
The shift towards manu-
try’s terms of trade is deter-
factures in Latin America main-
mined to a large extent by the
ly reflects the rapid growth of
share of primary commodities in its exports and
manufactured exports from Mexico and, to a lesser
imports. The share of primary commodities (in-
extent, Brazil. In 2003, these two countries gen-
cluding fuels) in total developing-country exports
erated more than 75 per cent of the region’s manu-
has plunged, from around 65 per cent in 1980–
factured exports. In Mexico, 55 per cent of such
1983, to around 30 per cent in 1999–2003 (ta-
exports in 2004 were generated by maquila in-
ble 3.1). This steep fall has been partly due to the
dustries which assemble imported inputs (INEGI,
fall in primary commodity prices, especially fu-
2005). Several smaller Central American and Car-
els, in the 1980s. But the most significant factor
ibbean countries, which formerly specialized in
in the changing export structure has been the rapid
food and beverages, have also become exporters
expansion in the value of manufactured exports.
of manufactures, owing largely to the expansion
By contrast, the product composition of develop-
of their maquila plants. However, most South
ing countries’ imports has not changed signifi-
American countries still export mainly primary
cantly. As a result, the sectoral composition of
products: predominantly food in Argentina, Para-
exports is now more similar to that of imports; in
guay and Uruguay; ores and metals in Chile and
1999–2003, manufactures accounted for 74 per
Peru; and fuels in Bolivia, Colombia, Ecuador and
cent of the total merchandise imports of all devel-
Venezuela.
oping countries taken together and 68 per cent of
their total merchandise exports.
Similarly, in Africa and West Asia only a
small number of countries account for the increase
A shift in the structure
in the share of manufactures in
of exports towards a greater
total exports. Manufactured
share of manufactures occurred
exports have expanded rapidly
in all developing regions. In
Demand for manufactures
in Morocco, Tunisia and South
Latin America, manufactures
is much more elastic with
Africa; they have also gained
rose to become the major ex-
respect to prices and
a relatively high share of the
port category in the late 1990s,
total exports of some sub-
income than demand for
and in East and South Asia,
Saharan countries, such as
primary commodities.
where they had already been
Lesotho, Mauritius, Senegal
the largest category in the
and Swaziland. In West Asia,
early 1980s, their share rose
where the trade structure is
further, to reach 85 per cent in 1999–2003. By
largely dominated by fuel exports, Turkey’s manu-
contrast, despite a considerable increase in the ex-
factured exports account for over 84 per cent of
port share of manufactures, primary products still
the total for the region.
Evolution in the Terms of Trade and its Impact on Developing Countries
91
Table 3.1
EXPORT STRUCTURE OF DEVELOPING COUNTRIES, BY REGION
AND BY BROAD PRODUCT CATEGORY, 1980–2003
(Per cent share in total exports)
Non-fuel primary
Fuels
commoditiesa
Manufacturesb
Otherc
1980– 1989– 1999–
1980– 1989– 1999–
1980– 1989– 1999–
1980– 1989– 1999–
1983
1992
2003
1983
1992
2003
1983
1992
2003
1983
1992
2003
Developing countries
38.8
22.5
18.0
26.0
19.7
12.7
31.4
55.7
68.1
3.9
2.2
1.2
Latin America and
the Caribbean
23.3
22.6
16.2
42.9
40.7
25.7
32.6
35.9
56.6
1.3
0.9
1.5
Africa
40.8
47.9
50.6
32.7
24.9
24.0
12.7
15.7
23.0
13.8
11.5
2.4
West Asia
70.0
73.4
72.2
11.5
8.6
6.1
16.8
17.7
21.0
1.7
0.2
0.6
East and South Asia
18.5
7.2
4.9
24.3
15.1
9.1
54.9
76.5
84.8
2.3
1.2
1.1
Source: UNCTAD secretariat calculations, based on UN COMTRADE.
a SITC Rev. 2: 0 to 4 plus 68, 661 and 667 less 3.
b SITC Rev. 2: 5 to 8 less 68, 661 and 667.
c SITC Rev. 2: 9.
It is also important to note that in the major-
Table 3.2
ity of developing countries where the share of
primary commodities in total exports has fallen,
industrial development, and thus manufactured
DISTRIBUTION OF DEVELOPING COUNTRIES BY
exports, are concentrated in natural-resource-in-
THEIR DOMINANT EXPORT CATEGORY,a 2003
tensive and low-skill, labour-intensive products.
(Number of countries)
Only a few of them have a sizeable share of ex-
ports of higher skill and technology-intensive
Non-fuel
manufactures.
primary
Manu-
Fuels commoditiesb facturesb
Total
The increasing share of manufactures in the
total exports of developing countries implies that
Africa
9
30
9
48
they face different global demand dynamics than
Latin Americac
3
11
6
20
in the past. When commodities were their major
Caribbeand
2
8
6
16
exports, developing countries faced inelastic de-
East and South Asia
1
2
16
19
mand, and therefore relative export prices were
West Asia
10
0
3
13
the main determinant of real export earnings, as
Total
25
52
41
118
export volumes could not increase significantly
given the slow growth of aggregate demand. Since
Source: See table 3.1.
demand for manufactures is much more elastic
a Dominant signifies more than 50 per cent of total
with respect to prices and income, this situation
exports.
has changed, and export volumes respond more
b For definitions see table 3.1.
c Including Cuba, the Dominican Republic and Haiti.
strongly to price changes.
d Including Belize, Guyana and Suriname.
92
Trade and Development Report, 2005
C. Recent trends in the terms of trade
Trends in the terms of trade of the different
In East and South Asia, terms of trade were
developing regions and countries vary, depend-
stable for more than 15 years before declining in
ing on the composition of their exports and
the aftermath of the financial crisis in 1997. Until
imports; and over the past few decades, these
2002 the reduction in the unit value of their ex-
trends have increasingly diverged across differ-
ports (mainly of manufactures) was partly com-
ent groups of developing countries. Since the early
pensated by falling unit values of their imports
1980s, all developing countries taken together
(of both manufactures and primary commodities).
have been experiencing a downward trend in their
But since then import prices of oil, industrial raw
net barter terms of trade (fig. 3.2). The deteriora-
materials and a number of food items have rein-
tion of about 15 per cent was accompanied by a
forced the downward trend in their terms of trade,
rise in the volume of exports from the mid-1980s
which fell by about 15 per cent between 1997 and
onwards, but this was mainly on account of a few
2004. Over the same period, there was a dramatic
economies in East and South Asia. It is only from
increase in the export volumes of countries in these
the early 1990s onwards that Latin America has
subregions, so that the purchasing power of their
seen faster growth of export volumes, which sup-
exports almost doubled in a context of falling
ported the purchasing power of exports. In Africa,
terms of trade. This was mainly due to a rapid
export volumes also expanded in the 1990s, but
growth of their exports to developed countries, as
at a much slower rate.
well as to transition economies and to those de-
veloping countries that have increased their im-
Since the late 1990s these trends have been
port capacity owing to higher primary commodity
increasingly influenced by the growing impor-
export earnings. Moreover, the rapid expansion
tance of China and India in shaping the structure
of their exports has occurred at a time of slow
of international trade. The same factors that im-
growth in the industrialized countries.
proved the terms of trade of some developing
countries, especially the higher prices of oil, and
Africa and Latin America saw a dramatic
mineral and mining products, led to a worsening
deterioration in their terms of trade from the be-
of the terms of trade in others. In some countries,
ginning of the 1980s until the beginning of the
particularly in Latin America, but also in Africa,
1990s. Thereafter, there were considerable fluc-
the positive effect of price movements on the pur-
tuations around a slightly increasing trend, which
chasing power of exports was reinforced by an
has been reinforced in the past three years. In Latin
increase in export volumes. In others, however,
America, the sharp deterioration in the terms of
gains from higher export unit values were offset
trade during the 1980s reflects the consequences
by higher import prices. China and India them-
of the debt crisis. Many countries in the region
selves have seen their terms of trade deteriorate
responded to the crisis by seeking to expand their
since 2002.
exports to compensate for the abrupt ending of
Evolution in the Terms of Trade and its Impact on Developing Countries
93
Figure 3.2
TERMS OF TRADE, EXPORT VOLUMES AND PURCHASING POWER OF EXPORTS
IN DEVELOPING ECONOMIES, BY REGION, 1980–2004
(Index numbers, 1980 = 100)
Developing economies
700
110
600
100
500
400
90
300
80
200
70
100
0
60
1980
1984
1988
1992
1996
2000
2004
Latin America
East and South Asia
700
110
1800
190
600
1700
100
180
500
1600
400
90
1500
170
300
80
1400
160
200
1300
70
100
150
1200
0
60
1100
140
1980
1984
1988
1992
1996
2000
2004
1000
130
900
120
800
Africa
700
700
110
110
600
600
100
100
500
500
90
400
90
400
300
300
80
80
200
200
70
70
100
100
0
60
0
60
1980
1984
1988
1992
1996
2000
2004
1980
1984
1988
1992
1996
2000
2004
Export volume (left scale)
Purchasing power of exports (left scale)
Terms of trade (right scale)
Source: UNCTAD Handbook of Statistics database.
94
Trade and Development Report, 2005
capital inflows, and to generate a trade surplus
of African countries’ export structures, the region
for debt servicing, but this merely led to a fall in
remains more vulnerable than any other region to
export prices. But unlike in East Asia in the after-
a deceleration of global demand. Thus, the recent
math of the financial crisis in the late 1990s, the
positive evolution in Africa’s terms of trade might
fall in the dollar prices of exports was not accom-
well be just another temporary boom rather than
panied by a commensurate increase in the volume
the beginning of a sustained recovery.
of exports, which consisted of a much larger pro-
portion of primary commodities. Moreover, the
A broad picture of how groups of develop-
export push in Latin America coincided with a
ing countries with different trade structures have
slowdown of growth in the major industrialized
been affected by terms-of-trade movements over
countries and a stagnation of global demand. The
the past few years is given in figure 3.3. It shows
decline in Latin America’s
the terms-of-trade movements
terms of trade bottomed out
of 40 developing economies,
only by the beginning of the
classified in five groups ac-
1990s when the purchasing
In East and South Asia,
cording to the major product
power of exports from the re-
the decline in the terms of
category in their exports: oil,
gion also picked up. During
trade has been accompa-
minerals and mining products,
the second half of the 1990s,
nied by a dramatic increase
agricultural products, or manu-
the purchasing power of ex-
factures. For some exporters of
in export volumes.
ports in Latin America rose
manufactures the classifica-
almost at the same rate as that
tion is not straightforward, be-
of East and South Asia, sup-
cause their terms of trade con-
ported by both an acceleration of export volume
tinue to be highly sensitive to changes in the prices
growth and more favourable export and import
of the remaining primary commodities in their
unit values. Since then, many Latin American
export basket, either because the share of the lat-
countries have benefited from a much higher share
ter is still relatively high or because their prices
of manufactures in their exports than in the 1980s
are characterized by a particularly high variabil-
(see TDR 2003, table 5.8.).
ity (or a combination of both). For the purpose of
this analysis such countries have been classified
In Africa, where much less progress was
as “exporters of manufactures and primary com-
made in export diversification, the terms of trade
modities”.
were more unstable during the 1990s than in other
regions, and export volume growth was very mod-
Since 2002, economies with a high share of
est. As a consequence, the purchasing power of
oil, and minerals and mining products in their to-
Africa’s exports recovered to its level of 1980 only
tal merchandise exports have gained the most from
in 1996, where it remained until the end of the
recent developments in international product mar-
decade. Since 2000 Africa’s terms of trade have
kets. According to preliminary estimates, the terms
risen more than those of the other regions as a
of trade of countries with a dominant share of
result of higher demand from the fast growing
fuels in their exports increased by 30 per cent be-
Asian developing countries for certain primary
tween 2002–2004, and those of countries with a
commodities. Between 1999 and 2004, changes
dominant share of mineral and mining exports in-
in the international prices of these commodities
creased by about 15 per cent.
have resulted in an improvement of about 30 per
cent in Africa’s terms of trade, compared to some
The stronger improvement in the terms of
8 per cent for Latin America, and a decline of
trade of oil exporters is due not only to the sharp
11 per cent for East and South Asia. In parallel,
increase in international oil prices, but also to
export volumes in Africa have grown at a pace
the fact that oil exporters have, on average, a less
not seen since the late 1960s. Yet, since the dif-
diversified export structure than exporters of
ference between Africa and Latin America in the
minerals and mining products. Moreover, the com-
recent evolution of the terms of trade is partly
position of the latter product category is less
explained by the higher share of primary com-
homogeneous, and the different products in that
modities and the lower degree of diversification
category display large differences in price trends
Evolution in the Terms of Trade and its Impact on Developing Countries
95
(see chapter II, table 2.8). For these reasons there
tobacco and sugar has caused the terms of trade
is also greater diversity among the countries within
to decline dramatically every year since 2000,
the group of exporters of mineral and mining prod-
whereas in Cuba, another exporter of tobacco and
ucts.
sugar, this effect was largely offset by a sharp rise
in the price of its nickel exports (see chapter II,
Among the countries with a dominant share
table 2.8). In some coffee-exporting countries,
of exports of minerals and mining products, ex-
such as Burundi, the slight improvement in the
porters of uranium (Niger) and copper (Chile, Peru
terms of trade in 2003 and 2004 was insufficient
and Zambia) saw the strongest improvements
to make good the sharp deterioration of previous
in their terms of trade. Gold exporters (such as
years. By contrast, in Côte d’Ivoire, the world’s
Kyrgyzstan) also experienced significant, al-
leading cocoa exporter, the terms of trade rose by
though more gradual, improvements between 2002
more than 20 per cent between 2000 and 2004,
and 2004. For these countries, the positive effect
despite a considerable reversal in 2004. The two
of the surge in the international prices of copper
other countries in the group of agricultural export-
and gold exceeded the combined negative effects
ers that witnessed increases in their terms of trade,
of rising oil prices and adverse movements in the
Argentina and Uruguay, benefited from higher
prices of manufactures (see figure 3.4 for a de-
prices for soybeans, beef and some cereals. In Ar-
composition of the changes in the terms of trade
gentina, this trend was strengthened due to the
of selected countries, including Chile and Peru).
country being a net exporter of oil and mining
But soaring export prices since 2003 have been
products, although the impact of higher prices of
insufficient, in most cases, to fully reverse the
these product categories was dampened by an in-
dramatic losses experienced in the 1980s; for some
crease in import prices of manufactures (fig. 3.4).
countries in this group, such as Chile and Peru,
terms of trade in 2004 were still around 50 per
On the other hand, all the fuel-importing de-
cent lower than in 1980. Jamaica and Mozambique
veloping countries with a dominant share of manu-
saw a slight deterioration in their terms of trade
factures in their merchandise exports have suffered
between 2000 and 2004. Both are exporters of
from a deterioration in their terms of trade in the
bauxite and aluminium, the prices of which rose
past two or three years. The terms-of-trade losses
less than those of other mineral and mining prod-
for East and South Asian exporters of manufac-
ucts, and both were also negatively affected by
tures in 2003 and 2004 ranged between 8 per cent
higher import prices and un-
for Taiwan Province of China,
favourable price developments
and more than 14 per cent for
for the agricultural commodity
India. The losses were largely
components of their exports
Since 2000, Africa’s terms
due to the heavy dependence
(sugar in Jamaica, and sugar,
of trade have risen more
of the countries in this group
tobacco and cotton in Mozam-
than those of the other
on fuel and metal imports, and
bique).
regions as a result of
to the relative decline in the
prices of their manufactured
higher demand for certain
Terms-of-trade develop-
exports. For example, the de-
primary commodities.
ments have varied the most
cline in the unit value of their
among economies where agri-
machinery exports, which in
cultural commodities have
large part consist of electron-
dominated their total merchandise exports. This
ics products, was larger than the decline in the
reflects large differences in the movement of
unit value of their imports of the same product
prices for specific products within this category,
category; while for other manufactures, import
and differences across countries in the share of
unit values grew faster than export unit values.
other primary commodities in total exports, as well
The particularly unfavourable terms-of-trade trend
as differences in the share of oil in their imports.
in Pakistan since 2000 reflects an export struc-
For cotton exporters, such as Benin and Burkina
ture dominated by labour-intensive clothing prod-
Faso, the terms of trade were subject to wide fluc-
ucts and a higher-than-average share of oil in total
tuations around a declining trend during the period
imports. On the other hand, for some exporters of
2000–2004. In Malawi, weakness in the prices of
manufactures, higher prices of their food and bev-
96
Trade and Development Report, 2005
Figure 3.3
TERMS OF TRADE OF SELECTED DEVELOPING ECONOMIES,
BY DOMINANT EXPORT CATEGORY, 2000–2004
(Index numbers, 2000 = 100)
All groupsa
140
Oil exporters
130
Exporters of minerals
120
and mining products
Exporters of
110
agricultural products
100
Exporters of
manufactures
90
Exporters of
manufactures and
80
primary commodities
70
2000
2001
2002
2003
2004
Oil exporters
140
130
Angola
120
Azerbaijan
Gabon
110
Nigeria
Saudi Arabia
100
Trinidad and Tobago
United Arab Emirates
90
Venezuela
80
70
2000
2001
2002
2003
2004
Exporters of minerals and mining products
140
Chile
130
Guinea
120
Jamaica
110
Kyrgyzstan
Mozambique
100
Niger
90
Peru
80
Zambia
70
2000
2001
2002
2003
2004
/...
Evolution in the Terms of Trade and its Impact on Developing Countries
97
Figure 3.3 (concluded)
TERMS OF TRADE OF SELECTED DEVELOPING ECONOMIES,
BY DOMINANT EXPORT CATEGORY, 2000–2004
(Index numbers, 2000 = 100)
Exporters of agricultural products
140
Argentina
130
Benin
120
Burkina Faso
110
Burundi
Côte d’Ivoire
100
Honduras
90
Malawi
80
Uruguay
70
2000
2001
2002
2003
2004
Exporters of manufactures
140
China
130
Haiti
120
India
Morocco
110
Pakistan
Rep. of Korea
100
Sri Lanka
90
Taiwan Prov. of China
80
70
2000
2001
2002
2003
2004
Exporters of manufactures and primary commodities
140
Brazil
130
Colombia
120
Costa Rica
Indonesia
110
Malaysia
Mexico
100
South Africa
90
Viet Nam
80
70
2000
2001
2002
2003
2004
Source: UNCTAD secretariat calculations, based on UN COMTRADE; United States Department of Labor, Bureau of Labor
Statistics, Import/Export Price Indexes database (www.bls.gov/mxp/home.htm); Japan Customs, Trade Statistics
database (www.customs.go.jp); IMF, International Financial Statistics database; and UNCTAD, Commodity Price Bulletin,
various issues.
a Non-weighted average of 70 developing countries, including those presented in this figure.
98
Trade and Development Report, 2005
Figure 3.4
CONTRIBUTION OF DIFFERENT PRODUCT GROUPS TO TERMS-OF-TRADE CHANGES,
SELECTED DEVELOPING ECONOMIES, 2000–2004
(Per cent)
Argentina
Brazil
12
8
10
6
8
4
6
2
4
0
2
-2
0
-4
-2
-6
-4
-8
2000
2001
2002
2003
2004
2000
2001
2002
2003
2004
Chile
Mexico
35
5
30
4
25
3
20
15
2
10
1
5
0
0
-1
-5
-10
-2
-15
-3
2000
2001
2002
2003
2004
2000
2001
2002
2003
2004
Peru
Venezuela
20
45
15
35
10
25
5
15
0
5
0
-5
-5
-10
-15
2000
2001
2002
2003
2004
2000
2001
2002
2003
2004
Agricultural raw materials
Machinery
Food and beverages
Manufactures, excluding machinery
Fuels
Other merchandise transactions (SITC Rev. 2: 9)
Ores and metals
Change in overall terms of trade
/...
Evolution in the Terms of Trade and its Impact on Developing Countries
99
Figure 3.4 (concluded)
CONTRIBUTION OF DIFFERENT PRODUCT GROUPS TO TERMS-OF-TRADE CHANGES,
SELECTED DEVELOPING ECONOMIES, 2000–2004
(Per cent)
2
10
Source: See figure 3.3.
100
Trade and Development Report, 2005
erage exports alleviated the negative effects of
represent 35 per cent of total imports and 47 per
high prices of fuel and some manufactures. This
cent of total exports.
applied, for example, to Sri Lanka (tea) and Mo-
rocco (fish, fruits and vegetables).
These examples of some economies illustrate
the diversity in the impact of recent international
In general, the combined effect of the lower
price movements on the terms of trade of devel-
prices of low-skill, labour-intensive manufactured
oping countries. The variations in the global pat-
exports and higher prices of imports was less pro-
tern of demand and their impact on individual
nounced in the countries classified as “exporters
countries has led to a redistribution of income,
of manufactures and primary commodities”,
not only between developing and developed coun-
which, while having become
tries, but also, to an increas-
important exporters of manu-
ing extent, among different
factures, are still relatively
groups of developing coun-
sensitive to fluctuations in the
tries. This does not necessar-
Increasing supplies of raw
prices of specific primary com-
ily imply absolute losses in
materials, along with efforts
modities. This is the case in
real income for countries that
particular for some countries
in East and South Asia to
have experienced a deteriora-
in Latin America (Brazil, Co-
reduce their dependence
tion in their terms of trade, as
lombia, Costa Rica and
on imports of such goods,
long as global demand and,
Mexico) and East Asia (Indo-
could bring the price
hence, export volumes of all
nesia, Malaysia and Viet
increases to a halt, or even
countries, are expanding. Over
Nam), as well as South Africa.
reverse them.
the past few years, most devel-
In many of them, price move-
oping countries have indeed
ments in the different product
gained from the expansion of
categories neutralized each
global demand. However, for
other in their impact on the terms of trade. In Bra-
some countries, less buoyant demand or unfavour-
zil, for example, recent movements in the prices
able supply conditions of primary commodities
of primary commodities and manufactures have
have affected their export prices; this, combined
not changed the positive long-term trend in its
with rising prices for fuel and food imports, has
terms of trade since the early 1980s. This can be
resulted in a severe deterioration in their terms of
attributed to the diversification of the country’s
trade, which has not been redressed by higher ex-
exports, involving an increase in the share of
port volumes.
manufactures, and to a progressive reduction of
its dependence on oil imports. Since 2003, higher
The expansion of global demand for specific
prices of food exports compensated for the effect
primary commodities and manufactures over the
of increasing oil import prices on Brazil’s terms
past few years has been stimulated mainly by the
of trade (fig. 3.4).
fast growth of demand from China and India, in
addition to that of the United States. Europe and
In Malaysia and Mexico, where fuels still
Japan, on the other hand, have contributed little
account for 10 and 12 per cent, respectively, of
to that expansion. This geographical pattern is not
total merchandise exports, the positive contribu-
without risks, given the imbalances in the world
tion of higher fuel prices largely compensated for
economy and the possibility that adjustments of
the negative impact of trade in manufactures on
these imbalances could lead to a reduction of glo-
their terms of trade in 2003 and 2004 (fig. 3.4).
bal demand (see chapter I, section B). Such a re-
Although manufactures dominate exports in both
duction might occur directly as a result of lower
countries, they are highly import-intensive and the
United States imports, and indirectly as a result
lower cost of imported inputs mitigated the nega-
of lower imports from the fast growing exporters
tive impact of the falling prices of their manufac-
of manufactures among the developing countries,
tured exports. This is especially true for assem-
which themselves depend on exports to the indus-
bly industries, which import and re-export the
trialized countries. In such a scenario, the recent
manufactures belonging to the same product group
improvements in the terms of trade of many coun-
at different stages of processing; in Mexico they
tries could well be reversed, adding yet another
Evolution in the Terms of Trade and its Impact on Developing Countries
101
episode of terms-of-trade volatility to the histori-
imbalances. Furthermore, the fast-growing devel-
cal record.
oping economies of East and South Asia are likely
to reinforce their efforts to reduce their dependence
Another reason for caution in forecasting
on raw material imports in response to the rising
terms-of-trade trends is that supply adjustments
prices of such imports, partly through domestically
in the commodity sector, especially in fuels and
produced substitutes and partly through reduced
mining, could soon arrest the upward price trend.
intensity of metal and energy use (see chapter II,
They could even reverse the trend if increased
section B.2). Their efforts could also contribute
production capacity were to coincide with reces-
to a slowdown, or even to a reversal, of price in-
sionary tendencies in the world economy as a
creases of imported raw materials, particularly if
result of disorderly adjustments to the current
there is a further expansion of supply capacity.
D. Effects of terms-of-trade changes on domestic income
The strength of the impact of terms-of-trade
A deterioration in the terms of trade due to
changes on real national income depends on a
lower export prices associated with, or resulting
number of factors. First, the income effects de-
from, productivity growth in the exporting indus-
pend on whether a change in the terms of trade is
tries, does not mean an absolute loss of real in-
accompanied by, or is even the result of, produc-
come; yet part of the productivity gains, rather
tivity growth that enables domestic exporters to
than accruing to the domestic economy, benefits,
reduce their prices. A second important determi-
instead, the consumers, traders or producers of the
nant is the economy’s open-
importing countries. Similarly,
ness to international trade.
for rapidly growing economies
While terms-of-trade changes
that face a rise in import prices
have a relatively minor impact
resulting, at least in part, from
on income in economies where
Developing countries must
their own growing demand (as
exports and imports are small
not get complacent about
China and other fast-growing
relative to GDP, even moder-
industrialization and
Asian economies), the conse-
ate terms-of-trade changes
diversification.
quent deterioration in the terms
have a sizeable impact on na-
of trade needs not lead to a net
tional income in very open
loss of real income. For most
economies. Finally, secondary
of the fast growing exporters
income effects from changes in the terms of trade
of manufactures that have recently witnessed a de-
depend on the use of income gains (or the form of
terioration in their terms of trade these two ele-
adjustment to income losses), which, in turn, is
ments were combined. By contrast, suppliers
influenced by the distribution of the gains or losses
whose export prices come under pressure but
among the domestic private firms, employees, con-
whose productivity is increasing less than that of
sumers and the State, as well as foreign investors.
their foreign competitors, tend to lose real income
102
Trade and Development Report, 2005
Table 3.3
SENSITIVITY OF DEVELOPING COUNTRIES TO TERMS-OF-TRADE CHANGES, BY BROAD
PRODUCT CATEGORY AND BY REGION,a 1996–2004
Memo item:
Share of the five
Terms-of-trade
leading products
effects on GDIb
Terms-of-trade
Exports–GDP
in total exportse
(Per cent)
variabilityc
ratiod
(Per cent)
Exporters of manufactures
1.1
4.6
30.2
40.7
Oil exporters
4.3
19.3
29.1
71.4
Non-oil primary commodity exporters
1.5
10.0
18.5
64.7
East and South Asia
1.6
6.6
35.7
44.0
West Asia
4.9
19.9
31.5
76.0
Africa
2.2
12.1
23.1
71.4
Latin America
1.3
7.4
20.3
49.8
Source: UNCTAD secretariat calculations, based on UN COMTRADE; United States Department of Labor, Bureau of Labor
Statistics, Import/Export Price Indexes database (www.bls.gov/mxp/home.htm); Japan Customs, Trade Statistics database
(www.customs.go.jp); UN Statistics Division Common Database; UNCTAD Handbook of Statistics database; and UNCTAD,
Commodity Price Bulletin, various issues.
a Non-weighted average for the 12 African, 12 Latin American, 4 West Asian and 11 East and South Asian developing
countries, listed in table 3.4.
b Average annual impact of terms-of-trade changes on GDI as a percentage of GDP, in absolute value, 1996–2004. It is
calculated as the difference between the growth rates of GDI and GDP in real terms.
c Standard deviation of the annual rate of change of the net barter terms of trade.
d In current dollars, average for 1996–2004.
e 2002, at SITC Rev. 2 three-digit level.
from exports, either due to lower export volumes
export concentration are the most pronounced, and
(reducing profits and employment) or lower ex-
where the exports-GDP ratio is relatively high. In
port prices (reducing profits and wages).
this group of countries, the average annual gain
or loss of income from terms-of-trade movements
Table 3.3 shows the exposure of different
amounted to more than 4 per cent of GDP. By
groups of countries to changes in the terms of trade
contrast, in countries that export mainly manufac-
as measured by the absolute difference between
tures much lower terms-of-trade variability com-
the growth rate of real gross domestic income
bined with a similar degree of openness led to an
(GDI) and that of gross domestic product (GDP).
average annual gain or loss of income of 1.1 per
In the system of national accounts this difference
cent of GDP. The more closed economies of coun-
corresponds to the “trading gain or loss resulting
tries that export mainly non-oil primary commodi-
from changes in the terms of trade”.2 The table
ties attenuated the impact of terms-of-trade
also shows the factors contributing to the size of
changes on GDI, which amounted to 1.5 per cent.
that gain or loss: terms-of-trade variability and
openness to international trade. Terms-of-trade
These differences resulting from distinct ex-
variability is to a large extent conditioned by the
port structures, are also reflected in the sensitivity
degree of export diversification.
of the different developing regions to terms-of-
trade changes. The impact has been the strongest
In the period 1996–2004, the effects on domes-
in West Asia, a region that includes many oil ex-
tic income were the strongest in the oil-exporting
porters. In Africa, where terms-of-trade variability
countries, where terms-of-trade variability and
has been considerably higher than in East and
Evolution in the Terms of Trade and its Impact on Developing Countries
103
South Asia and in Latin America, and where most
modity markets could lead to a shift away from
countries also depend on a small number of pri-
investment – both domestic and foreign – in the
mary commodity exports, the terms-of-trade effects
nascent manufacturing sectors of commodity-
on domestic income have tended to be stronger than
exporting countries in favour of extractive indus-
in the two other regions, where manufactures ac-
tries. While higher investment in that area may be
count for a greater share of exports.
beneficial in terms of creating additional supply
capacity and raising productivity, this should not
The differences in the size of the terms-of-
be at the expense of investment in manufactur-
trade movements and their income effects also
ing. Exporters of primary commodities that have
show that the dependence on exports of primary
recently benefited from higher prices and, in some
commodities remains a central problem of devel-
cases, from higher export volumes, have to con-
opment. Thanks to higher price and income elas-
tinue their efforts towards greater diversification
ticity of demand for manufactures, lower prices
within the primary commodity sector, as well as
for exports of such products from developing
upgrading their manufacturing and services sec-
countries will often be accompanied by higher
tors. The recent windfall gains from higher pri-
volume growth. Therefore, it is imperative for
mary commodity earnings provide an opportunity
developing countries not to become complacent
to step up investment in infrastructure and pro-
about industrialization and diversification. There
ductive capacity – both essential for boosting de-
is a risk that the recent recovery of primary com-
velopment.
E. The distribution of gains or losses from terms of trade
Table 3.3 gives figures for the direct income
service the public debt, or in a situation where
gains or losses from terms-of-trade changes. In-
they accrue to workers in the form of higher wages
direct effects, resulting from the use of direct
that are spent for consumption. Similarly, a dete-
income gains or adjustments to direct income
rioration in the terms of trade resulting from higher
losses, are not measurable empirically and thus
import prices or lower export prices can lead, in-
are not considered in that table. Therefore it shows
ter alia, to either a reduction of investment, an
only part of the full impact of terms-of-trade
increase in government indebtedness or higher
changes on real national income. Indeed, from a
unemployment and wage compression if it is not
development perspective, the use of the additional
counterbalanced by productivity and export vol-
income resulting from terms-of-trade changes is of
ume growth. Regarding the distribution of income
crucial importance. For example, if terms-of-trade
effects of terms-of-trade changes, sharing of prof-
gains resulting from higher export prices accrue
its from export-oriented activities among domestic
in the form of higher company profits, and if these
and foreign actors is of particular importance, to
are reinvested, the medium-term impact on growth
the extent that the latter may repatriate higher prof-
will be much greater than in a situation where the
its arising from increases in international prices,
gains accrue to the government through transfers
thereby reducing the positive effect of terms-of-
from State-owned enterprises, which are used to
trade improvements on national income.
104
Trade and Development Report, 2005
A central aspect in the distribution of income
ferences between those rates. For example, in Côte
gains and losses from the terms of trade is cap-
d’Ivoire, Indonesia, Malaysia and Venezuela, the
tured by the distinction between gross domestic
impact of terms-of-trade changes on GDI was con-
income (GDI) and gross national income (GNI).3
siderable, but there were no large differences in
The difference is accounted for by net factor pay-
the changes in GDI and GNI. This was not the
ments abroad; it is often considerable when the
case in other countries, such as Chile and Zam-
income effects of terms-of-trade changes are as-
bia, where net income payments were higher.
sociated with changes in profit remittances by
These two exporters of mining products experi-
TNCs. Since the beginning of the 1990s many de-
enced a significant worsening of their terms of trade
veloping countries have
after 1997, which exacerbated
strengthened their efforts to
the economic slowdown of
attract FDI, and the most suc-
1998–1999. This procyclical
cessful have been some fast
The distribution and use of
impact of terms of trade also
growing exporters of manu-
income gains from terms-
played a role in the upswing
factures and exporters of fuels
of 2003–2004, when it added
of-trade changes is of
and mining products. Espe-
to domestic income. In 2004,
crucial importance.
cially in some of the latter
the gains from terms of trade
countries, a large proportion of
were huge: more than 8 per-
export activities are controlled
centage points of GDP in Chile
by TNCs, and changes in their domestic income
and 7 percentage points in Zambia. However, a
as a result of higher terms of trade may be partly
considerable proportion of these gains was cap-
absorbed by an increase in profit remittances. The
tured by TNCs, leading to an increase in net fac-
inverse is of course, theoretically, also true. How-
tor payments abroad. As a result, GNI grew more
ever, the reaction pattern is unlikely to be
than GDP, but much less than GDI.
symmetrical; given the labour market situation in
most developing countries, higher export prices
In China and El Salvador, countries with very
(or falling prices for imported inputs) will more
different economic structures, but whose exports
likely translate into higher profit remittances
are dominated by manufactures, the terms of trade
rather than higher wages, while lower export
have been much less volatile than in countries
prices will more likely translate into lower wages
whose exports are dominated by primary com-
rather than lower profit remittances.4
modities. However, their terms of trade have been
declining since 1998, a trend that explains the
What appears as profit remittances in the
lower growth rate of income (both domestic and
current account of the balance of payments is of-
national) compared to GDP, especially in 1999 and
ten partially reinvested in the same host country,
in 2003–2004. While this has not prevented China
recorded in the capital account as an inflow of
from maintaining a rapid growth rate, it has con-
FDI. But this does not mean that there is a direct
tributed to weak growth in El Salvador in the past
link between profit remittances and new FDI; like
few years (fig. 3.5).
domestic investment, FDI is primarily determined
by expected rather than current profits. Conse-
These examples illustrate the varying trends
quently, the reinvestment of TNC profits in the
among developing countries since the mid-1990s.
host country where they originate as a result of
Table 3.4 presents an estimate, for a larger number
terms-of-trade gains, especially from increasing
of countries, of recent gains and losses in income
prices for oil and mineral and mining products,
arising from terms-of-trade changes and real net
cannot be assumed to be systematic and therefore
income payments. Despite the diversity of cases,
is not considered in the analysis presented in this
it is possible to discern some general features. In
and the following section.
2002, the terms of trade generally had little effect
on domestic income in developing countries.
Figure 3.5 presents estimates for growth rates
Among the 39 countries for which reliable data
of GDP, GDI and GNI for selected developing
are available, gains or losses from terms-of-trade
countries; it also shows the evolution of their terms
changes amounted to 1 per cent of GDP or more
of trade, which explains to a large extent the dif-
in nine countries and 5 per cent or more of GDP
Evolution in the Terms of Trade and its Impact on Developing Countries
105
Figure 3.5
CHANGES IN GROSS DOMESTIC PRODUCT, GROSS DOMESTIC INCOME, GROSS NATIONAL
INCOME AND TERMS-OF-TRADE INDICES, SELECTED DEVELOPING COUNTRIES, 1996–2004
(Per cent and index numbers, 2000 =100)
Indonesia
20
140
Malaysia
15
140
15
130
10
130
10
120
120
5
5
110
110
0
100
0
100
-5
90
-5
90
Per cent-10
80
Per cent
80
-10
-15
70
70
-20
60
-15
60
Index numbers, 2000 = 100
Index numbers, 2000 = 100
-25
50
-20
50
1996
1998
2000
2002
2004
1996
1998
2000
2002
2004
Côte d'Ivoire
12
Venezuela
140
30
140
10
130
130
8
120
20
120
6
110
110
4
100
100
2
10
90
90
0
Per cent
Per cent
80
-2
80
0
-4
70
70
-6
60
60
Index numbers, 2000 = 100
Index numbers, 2000 = 100
-8
50
-10
50
1996
1998
2000
2002
2004
1996
1998
2000
2002
2004
Chile
16
140
Zambia
15
140
14
130
130
12
120
10
120
10
110
110
8
5
100
100
6
90
90
4
0
Per cent
Per cent
80
2
80
0
70
-5
70
-2
60
60
Index numbers, 2000 = 100
Index numbers, 2000 = 100
-4
50
-10
50
1996
1998
2000
2002
2004
1996
1998
2000
2002
2004
China
El Salvador
12
140
8
140
130
130
11
120
6
120
10
110
110
9
100
100
4
90
90
8
Per cent
Per cent
80
80
7
2
70
70
6
60
60
Index numbers, 2000 = 100
Index numbers, 2000 = 100
5
50
0
50
1996
1998
2000
2002
2004
1996
1998
2000
2002
2004
Gross domestic product
Gross domestic income
Gross national income
Terms of trade (right scale)
Source: UNCTAD secretariat calculations, based on UN Statistics Division Common Database; IMF, Balance-of-Payments
Statistics database; and UNCTAD estimates of unit value and volume of exports and imports.
106
Trade and Development Report, 2005
Table 3.4
IMPACT OF CHANGES IN TERMS OF TRADE AND NET INCOME PAYMENTS ON
NATIONAL INCOME, SELECTED ECONOMIES, 2002–2004
(Per cent of GDP)
Gains or
losses from
Effects of
Gains or losses
Effects of net
terms of
net income
from terms of tradea
income paymentsb
tradea
paymentsb
2002
2003
2004
2002
2003
2004
Average 2002–2004
Exporters of manufacturesc
-0.5
-0.6
-1.1
0.4
-0.1
-0.0
-0.7
0.1
Bangladesh
-0.4
-1.0
-0.8
0.1
-0.1
-0.2
-0.7
-0.1
China
0.0
-1.1
-2.1
0.5
0.6
0.1
-1.1
0.4
India
-0.3
-1.0
-0.7
-0.1
-0.7
0.1
-0.7
-0.2
Indonesiad
2.5
1.1
-0.5
0.2
0.4
-1.5
1.0
-0.3
Malaysia
0.0
1.1
-2.3
0.8
1.2
-0.4
-0.4
0.5
Pakistan
-0.8
-1.1
-1.2
-0.2
-0.3
-0.5
-1.0
-0.3
Philippines
-6.0
-1.8
-2.3
1.4
0.8
1.0
-3.4
1.1
Republic of Korea
-0.4
-1.6
-3.7
0.4
0.0
0.0
-1.9
0.2
Sri Lanka
0.9
-1.5
-1.6
0.2
0.4
-0.1
-0.7
0.1
Taiwan Province of China
-0.5
-1.5
-3.3
0.3
1.0
0.1
-1.7
0.5
Thailand
-0.7
0.5
1.0
0.2
-0.4
-0.3
0.3
-0.2
Turkey
-0.3
0.5
0.6
0.6
-0.6
-0.1
0.3
-0.0
Morocco
-0.4
-0.2
-0.4
0.2
-0.2
0.2
-0.3
0.1
South Africad
0.1
2.7
2.4
1.0
-0.6
-0.6
1.7
-0.1
Tunisia
0.0
-0.7
0.0
-0.1
-0.6
-0.8
-0.2
-0.5
Brazil
-0.2
0.2
0.6
0.4
-0.3
-0.5
0.2
-0.1
Costa Rica
0.5
-0.5
-1.7
1.9
-2.0
1.9
-0.6
0.6
El Salvador
-0.2
-0.9
-0.6
-0.4
-0.7
-0.5
-0.6
-0.5
Mexico
0.1
-0.1
0.1
0.4
0.2
-0.2
0.0
0.1
Oil exportersc
-0.3
3.2
6.1
-1.1
-1.0
-0.1
3.2
-0.7
Iran, Islamic Republic of
-2.1
2.2
4.6
0.2
-0.1
0.4
1.6
0.2
Kuwait
-0.5
7.9
11.3
-3.9
-1.4
6.2
6.3
0.3
Saudi Arabia
0.0
5.5
10.0
0.2
-0.6
0.6
5.2
0.1
Algeria
-1.1
6.8
6.6
-1.0
-0.5
-0.5
4.1
-0.6
Nigeria
0.8
6.8
10.7
-5.4
-4.0
-4.9
6.1
-4.8
Sudan
-0.4
1.9
2.8
-0.2
-1.7
-1.2
1.4
-1.0
Colombiad
-0.2
0.5
2.2
-0.2
-0.7
-1.0
0.8
-0.7
Ecuador
0.8
0.8
0.8
0.7
-0.7
-0.0
0.8
-0.0
Venezuela
0.3
2.7
7.8
-0.7
0.1
-1.2
3.6
-0.6
Non-oil commodity exportersc
1.4
0.6
1.5
0.0
-1.1
-1.5
1.2
-0.9
Burundi
1.0
-0.2
-0.6
0.4
-1.1
-1.0
0.1
-0.6
Côte d’Ivoire
10.3
-1.4
-3.8
0.0
-1.2
-0.5
1.7
-0.5
Ethiopia
0.2
0.2
0.2
0.2
-0.1
-0.3
0.2
-0.1
Ghana
5.0
1.8
-0.6
-1.1
0.4
-0.7
2.1
-0.5
Uganda
-0.2
0.2
-0.3
0.2
-0.2
-0.5
-0.1
-0.2
Zambia
-1.0
1.0
7.1
0.4
0.3
-3.8
2.3
-1.0
Argentina
0.0
1.3
1.8
-0.2
-0.2
-0.7
1.1
-0.4
Bolivia
-0.0
1.0
1.6
0.2
-1.2
-1.3
0.9
-0.7
Chile
-0.5
0.8
8.4
-0.5
-2.9
-5.4
2.9
-2.9
Peru
1.0
1.1
2.2
-0.6
-1.2
-2.5
1.4
-1.4
Uruguay
0.1
0.5
0.4
0.9
-5.1
-0.3
0.3
-1.5
Source: UNCTAD secretariat calculations, based on UN Statistics Division Common Database; IMF, Balance-of-Payments
Statistics database; national sources; and UNCTAD estimates of unit value and volume of exports and imports.
a Difference between the growth rates of GDI and GDP in real terms.
b Difference between the growth rates of GNI and GDI in real terms.
c Non-weighted averages.
d Not included in the product group average because the other product groups have an untypically strong influence on
the terms of trade.
Evolution in the Terms of Trade and its Impact on Developing Countries
107
in three countries: Côte d’Ivoire (10.3 per cent),
part of the gain was offset by higher net income
Ghana (5.0 per cent) and the Philippines (-6.0 per
payments abroad ($8.1 billion in 2004, compared
cent). In 2003 and 2004, the situation changed
to $4.6 billion in 2003), mostly by exporting TNCs.
perceptibly. In both years, gains or losses from
Other exporters of mining products (e.g. Peru) and
terms of trade exceeded 1 per cent of GDP in
hydrocarbons (e.g. Colombia and Bolivia) also ex-
24 countries, with 15 countries registering gains
perienced significant gains from terms of trade and
and 9 losses. On average, ex-
suffered a negative effect from
porters of manufactures regis-
higher net income payments
tered relative losses of GDI
abroad. In Argentina, improv-
from terms of trade of 0.7 per
Foreign investors may
ing terms of trade contributed
cent of GDP in 2002–2004.
repatriate the higher profits
to a recovery from the 2001–
Oil exporters, on average, saw
arising from increases in
2002 crisis, not least because
relatively large domestic in-
international prices,
a larger-than-average share of
come gains in that period
thereby reducing the posi-
this gain remained inside the
(3.3 per cent), while improve-
tive effect of terms-of-trade
country.
ments in the terms of trade of
improvements on national
non-oil primary commodity
The oil-exporting coun-
income.
exporters led to relative gains
tries of West Asia, and, to a
in GDI, averaging 1.2 per cent
lesser extent, those of Africa
in 2002–2004. These gains
(Algeria, Nigeria and Sudan)
and losses were partly offset by changes in net
registered relatively large domestic income gains.
income payments abroad. Over the three years,
However, in the case of the West Asian oil ex-
from 2002 to 2004, roughly 10 per cent of the rela-
porters, the positive terms-of-trade effects on rela-
tive income losses of exporters of manufactures
tive income growth were reinforced by increases
were offset by lower net income payments abroad,
in income payments received from abroad, reflect-
while the oil exporters saw 25 per cent of their
ing the rising government revenues from foreign
relative income gains vanish through higher net
investments. By contrast, the domestic income
income payments abroad. The outcome has been
gains in Nigeria and Sudan were in large part off-
dramatic for the exporters of primary commodi-
set by higher net outflows of profit remittances.
ties other than oil: on average, 75 per cent of their
The African exporters of minerals and mining
relative income gains from terms-of-trade im-
products, South Africa and Zambia, had large rela-
provements were absorbed by higher net income
tive gains in domestic income. The effects of net
payments abroad.
income payments were nega-
tive in 2004 for almost all the
In 2003 and 2004, the
African countries examined,
deterioration of the terms of
and particularly so for Nigeria
trade of most economies of
Profit remittances are
and Zambia, as profit remit-
East and South Asia meant a
often reinvested in the
tances from oil and mining
loss of income frequently ex-
same host country, but
companies, respectively, in-
ceeding 1 per cent of GDP.
there is no systematic link
creased.
Among Latin American coun-
between such remittances
tries, the terms of trade had a
and new FDI.
Overall, the recent im-
negative impact only on some
provements in the terms of trade
exporters of manufactures that
of many developing countries,
are also oil importers. In Costa
as a result mainly of higher
Rica in 2004, a reduction in the profit remittances
international prices for a broad range of primary
of TNCs compensated for the loss of income, re-
commodities – especially fuels, and ores and met-
flected in the positive effect from net income pay-
als – have translated into real income gains. In
ments. Chile and Venezuela obtained the greatest
principle, these gains can have positive develop-
gains from terms of trade in the region, by as much
ment effects by strengthening the ability of these
as 8.4 and 7.8 percentage points of GDP, respec-
countries to finance new investments in infrastruc-
tively, in 2004 alone. However, in Chile, a large
ture and productive capacity, with attendant im-
108
Trade and Development Report, 2005
provements on employment, productivity and out-
groups use the higher income on investment or
put growth. However, this depends on how the
consumption. The observations in this section sug-
higher earnings from exports, resulting from ris-
gest that in a number of countries that have ben-
ing export prices (or falling prices for imported
efited in recent years from domestic income gains
inputs), are used. They may translate into higher
through improvements in their terms of trade, the
wages, higher government revenue from taxes,
potential of these gains to enhance the financing of
royalties or profits of public enterprises, higher
development has not been fully realized because
net profits of local firms, or higher net profits of
they were associated with increasing outflows of
foreign investors. The developmental effect fur-
profit remittances, an issue that is examined fur-
ther depends on the extent to which the different
ther in section F.
F. The distribution of export income and
rent from extractive industries
In order to accelerate their economic and
can occur, since production costs differ consider-
social transformation, and advance towards
ably depending on the localization, accessibility
achieving the Millennium Development Goals
and richness of the deposits. On the other hand,
(MDGs), developing countries need to use the in-
the share of the government in the rent from ex-
come generated by export-oriented activities in a
port-oriented activities in these sectors is a po-
way that is conducive to faster capital accumula-
tentially important source of revenue for financ-
tion and stronger productivity growth. That in-
ing development. Careful management of the rent
come may accrue to private agents in the form of
from extractive industries is of special importance
profits, interest or wages, or to
in the context of sustainable
the government through prof-
development, because these
its transferred by State-owned
rents are generated from the
enterprises (SOEs), or through
exploitation of non-renewable
The rent from extractive
royalties or taxes paid by com-
resources, which will eventu-
industries is a potentially
panies in the export sectors. It
ally be depleted.
important source of
may be used to reduce poverty
revenue for financing
and boost private consump-
In this context, the State’s
development.
tion, or to increase private
retention of a part of the rents
capital formation or public in-
generated in these sectors has
vestment. When TNCs in-
traditionally received special
volved in export activities repatriate their profits,
attention in developing countries. Until the mid-
the potential development-enhancing effects are
1980s, the State controlled extractive activities in
reduced (assuming that new FDI is independent
most developing countries. Subsequently, priva-
of current profits). In the capital-intensive min-
tization of SOEs in the mining sector, along with
ing, oil and gas sectors, TNCs typically control a
tax incentives for foreign investors has led to a
particularly large share of export activities. These
considerable reduction of government revenues
are also the sectors where large differential rents
from this sector (box 3.1).
Evolution in the Terms of Trade and its Impact on Developing Countries
109
Fiscal revenues from external trade in gen-
lated the debate on the distribution and use of the
eral and extractive industries in particular still
windfall. Revenue systems and the structure of
provide a significant share of total revenue in a
ownership of these sectors differ considerably
number of developing countries (table 3.5), al-
across countries, and reliable, detailed informa-
though the amount and mechanisms for collecting
tion on the income they generate in developing
the revenues differ widely from one country to
countries, or the government revenue realized
another. Government revenue accrues from trans-
from them, is not systematically available.5 How-
fers of State-owned exporting companies or as a
ever, it is possible to identify some general trends
share of export income through royalties and in-
and orders of magnitude based on rough estimates
come taxes paid by private
of the distribution of rents in
operators. Despite the tendency
the oil and mining sectors.
towards a general reduction of
import and export duties, they
Privatization and tax
As a first approximation,
have remained an important
incentives for foreign
government revenue from
source of public revenue for
investors have led to a
natural resources may be com-
many countries, especially
considerable reduction of
pared with the value of the
LDCs.
natural resources produced or
government revenues from
exported (table 3.6). In some
the mining sector.
Although taxes on inter-
major oil-exporting countries
national trade mainly take the
for which data are available,
form of import duties, fiscal
such as Algeria, Ecuador, the
revenues from that source depend indirectly on
Islamic Republic of Iran, Kuwait and Nigeria,
the value of exports, since the latter largely deter-
transfers to the public budget exceeded 60 per cent
mines the level of imports. Thus, recent increases
of total fuel export earnings in the reference year;
in the export earnings of many developing coun-
and they amounted to between 16 per cent of GDP
tries have contributed, directly and indirectly, to
in the Islamic Republic of Iran and 43 per cent of
an increase in their fiscal revenues. Moreover,
GDP in Kuwait, depending on the degree of di-
some countries such as Argentina, Côte d’Ivoire
versification of the economy. In these countries,
and Ghana have applied taxes on exports – which
with mature hydrocarbon industries, most govern-
are easier to collect – as a substitute for taxes on
ment income is generated directly through SOEs
the profits of exporters, especially in agriculture.
or joint ventures.6
In Côte d’Ivoire, taxes on exports of coffee and
cocoa provided 18 per cent of the public revenue
In several sub-Saharan African countries,
in 2002. In Argentina, export taxes, at rates of
such transfers account for a much smaller share
5 per cent for manufactures and 20 per cent for
of oil export earnings, especially in Chad, where
primary commodities, were introduced to absorb
they amount to only 6.7 per cent. In these coun-
part of the windfall profits resulting from the large
tries, oil extraction industries are more recent and
currency devaluation of 2002 and from the higher
mainly operated by TNCs. The lower fiscal in-
international prices of agricultural and energy
come in these countries is explained partly by high
products.
start-up costs and high initial depreciation allow-
ances that reduce the taxable income, but also by
Government revenue from export-oriented
fiscal incentives accorded to the foreign-owned
activities is frequently reduced by fiscal incen-
companies. For example, in Chad, a country that
tives accorded to foreign investors. Although such
has been presented as an example of sound man-
incentives may have been successful in attracting
agement of oil revenues, TNCs only paid royalties
additional FDI, they have increasingly come un-
of about $2 per barrel in 2004.7
der criticism, especially in a number of Latin
American countries. In response, some countries
The counterpart of the relatively low share
have recently revised their fiscal and ownership
of the public sector in total oil earnings in sub-
regulations relating to the oil and mining sectors.
Saharan Africa is the higher share obtained by
The rise in the prices of most mineral and mining
TNCs, which explains the sizeable income pay-
products in the past few years has further stimu-
ments abroad in the balance of payments. Angola,
110
Trade and Development Report, 2005
Box 3.1
STATE INCOME FROM EXTRACTIVE INDUSTRIES: A HISTORICAL PERSPECTIVE
In many countries, economic activities in the energy and mining sectors have long been directly
controlled by the State. For example, in Argentina a public oil company was founded in 1922, and
in Bolivia and Mexico private companies in these sectors were nationalized in 1937 and 1938
respectively. In other countries, where these activities were entirely or partly in the hands of do-
mestic or foreign private operators, part of the income resulting from oil and mineral exports went
to the State in the form of royalty payments or taxes on profits and export earnings. The size of
those payments was often a source of conflict between host countries and foreign firms and their
home countries. Well-established States, such as Chile, were able to collect significant revenues
from exports of raw materials,1 but this was the exception rather than the rule. Less organized
independent States, colonies and protectorates would typically receive only a small share of export
revenues, if any. Moreover, disclosure of costs and profits was not always obligatory. In the case of
oil, for example, extraction costs, and thus the profits of the dominant firms (the “Seven Sisters”),
were kept secret until the early 1950s.2
In the process of decolonization, the situation changed in many countries, particularly in respect of
the oil sector. In the 1940s, the Venezuelan Government first imposed taxes on oil companies and
later it required a 50/50 distribution of net oil earnings. Similar regimes were introduced by Ku-
wait, Iran (now the Islamic Republic of Iran) and Saudi Arabia in 1950. With the creation of the
Organization of the Petroleum Exporting Countries (OPEC), its member States worked towards a
harmonization of their oil regimes, and in 1970 they agreed to establish a minimum tax rate of 55
per cent. In parallel, State-owned oil firms were created during the 1960s in Algeria, Iraq, Kuwait,
Venezuela and Saudi Arabia, and in the early 1970s, these and other OPEC countries went further
by nationalizing or acquiring a majority share in their oil industries.
Beginning in the early 1950s there was also a nationalization wave in other sectors, as an increas-
ing number of developing countries tried to increase their revenues and reaffirm their sovereignty.
This included mining activities in Bolivia (1952), Zaire (now the Democratic Republic of the
Congo) (between 1967 and 1974), Zambia (starting in 1970) and Chile (1971). As a result, the
SOEs from Chile, Zaire and Zambia were the three major world copper producers in 1980.3
But soon many SOEs in developing countries, especially in the mining sector, faced serious prob-
lems that eventually undermined their ability to generate fiscal revenues from their export activities.
Chad, Congo and Equatorial Guinea had a large
of the different domestic agents and foreign in-
surplus in their trade balance in 2003 and 2004,
vestors with the total rent generated in that sector.
the value of merchandise exports being roughly
This requires information on costs, production and
double that of imports. However, all these coun-
prices, which is not, however, systematically avail-
tries posted current-account deficits owing to
able. Nonetheless, in the annex to this chapter,
profit remittances and other service payments,
such estimates are undertaken for some countries
mainly linked to the oil sector.
in Latin America during the period 1999–2004.
A more precise estimate of the rent from ex-
The country studies suggest that there are
tractive industries that is retained in an economy
large differences in the distribution of the rents
can be obtained from a comparison of the income
from extractive activities across countries and sec-
Evolution in the Terms of Trade and its Impact on Developing Countries
111
Box 3.1 (concluded)
Prices of most metals fell in the second part of the 1970s and much of the 1980s. Falling prices and
economic problems due to the debt crisis of the 1980s aggravated the fiscal situation in many
developing countries, as a result of which the SOEs had to transfer an increasing share of their
revenues to central governments. This deprived them of the means of financing the investments
needed for maintaining and expanding their production capacities. On the other hand, TNCs un-
dertook a radical restructuring process that involved several mergers and acquisitions. They also
developed new technologies that enabled them to profitably exploit lower-grade deposits despite
lower prices.
As access to new technologies and capital had become crucial at a time when many SOEs were
facing financial problems and losing their relevance as a source of public revenue towards the end
of the 1980s, the doors were again opened to TNCs. They returned to developing countries or
reinforced their presence through acquisitions of privatized companies, joint ventures and conces-
sions in the extractive industries. In the oil sector, where OPEC members produced at very low
costs, the position of public firms had remained viable and national ownership of most companies
was maintained. But in the mining sector, most public companies were privatized. Ghana reformed
its mining sector between 1985 and 1989, reducing State ownership and encouraging FDI through
a reduction of corporate income tax from 55 to 35 per cent and royalties from 6 to 3 per cent. This
early example was followed by other African countries, including Guinea, Madagascar, Mali and
the United Republic of Tanzania.4 In Latin America, a wave of opening up to FDI in the mining
sector was pioneered by Chile, and followed by other countries including Argentina and Peru. A
similar opening also occurred in the Latin American hydrocarbons industry (see also the annex to
this chapter). In some cases, good management and sufficient resources enabled State firms to
survive (e.g. the copper company in Chile).
1
Taxes on saltpeter exports accounted for roughly half of Chile’s fiscal income for almost 40 years in the
late 19th and early 20th centuries (Bethell, 1986).
2
Only in 1952, with the publication of The International Oil Cartel (a report by the Federal Trade Com-
mission of the United States) was the modus operandi of the major international oil companies unveiled.
For an analysis on the energy market from a historical perspective, see Chevalier, 2004.
3
For a historical analysis of the copper sector, see UNCTAD, 1994b, and Moussa, 1999.
4
For a recent account of FDI in Africa, see UNCTAD, 2005c, in particular section D.
tors as a result of differences in the role of SOEs
oil industry has been the main vehicle for capturing
and fiscal regimes. For example, in the case of
all or a large part of the rent from oil extraction.
the oil industry in Mexico, the entire rent went to
This is most apparent in Mexico, where PEMEX
the Government; in Ecuador and Venezuela, the
operates the State monopoly, but in Ecuador and
Government received close to two thirds of the
Venezuela, where SOEs and private contractors
total rent throughout the period 1999–2004, and
coexist, the SOEs have also provided the bulk of
in Venezuela a sizeable share of the rent also ac-
fiscal receipts generated from the rent of the oil
crued to domestic consumers. In Argentina, the
sector.
government share in the oil rent fell from around
45 per cent in 2001 to an estimated 36 per cent in
In the case studies on the mining sector in
2004. In these countries, State ownership of the
Chile and Peru, the distribution of the rent was
112
Trade and Development Report, 2005
Table 3.5
less favourable for the State than in the case stud-
ies on the oil industry of other countries. For
example, in Chile between 1999 and 2002 less than
GOVERNMENT REVENUEa FROM
20 per cent of the total rent originating from cop-
INTERNATIONAL TRADE AND
per extraction accrued to the State; in 2003 this
EXTRACTIVE INDUSTRIES,
SELECTED DEVELOPING
share rose to about 30 per cent and in 2004 to more
COUNTRIES
than 50 per cent. The State-owned copper com-
pany, CODELCO, provided around 80 per cent of
(Per cent of total current
government revenue)
the public sector revenue from copper between
1999 and 2004, although its share in total copper
production was less then 40 per cent (see annex
Revenue
Import
from
Period
to this chapter). In Peru, the proportion of the
and export extractive
con-
public sector’s share in the total rent from gold
duties
industriesb sidered
and copper extraction averaged 15 per cent dur-
ing that period. Similarly, in Argentina, the State
Algeria
7.3
68.7
2003
has been able to obtain only a relatively small pro-
Angola
5.9
75.1
2003
portion of the growing total rent of its copper and
Argentina
16.9
7.1
2004
gold sectors.8 The relatively small government
Bahrain
4.4
74.2
2003
revenue generated by the mining sector in these
Boliviac
3.5
26.2
2003
countries appears to be largely the result of the
Botswana
11.0
52.7
2002
policy of offering fiscal benefits to mainly foreign-
Chile
5.7
8.2
2003
owned private companies operating in that sector.
Chad
17.3
33.8
2004
Congo
7.2
69.8
2003
A general conclusion arising from these ex-
Côte d’Ivoire
38.6
1.4
2002
amples is that the ability of the State to capture a
Dem. Rep. of the Congo 28.5
20.7
2002
significant share of the rent has been relatively
Ecuador
9.2
29.8
2002
weak in the developing countries that privatized
Egypt
13.0
16.4d
2003/04
their national companies. In particular, government
Equatorial Guinea
0.9
91.9
2004
revenue from private oil and mining companies
Ghana
22.7
3.5
2002
in the form of income taxes have been low com-
Guinea
19.8
14.0
2003
pared to the oil and mining rent.
Indonesia
3.1
25.9
2002
Iran, Islamic Republic of
8.8
53.8
2004
The increasing participation of TNCs in oil
Kuwait
1.3
71.6
2002
and mining activities since the mid-1980s has gen-
Malaysia
5.9
22.7
2004
erally expanded production, but it has also reduced
the share of the rent retained by the host coun-
Mexicoc
1.7
33.1
2004
tries. This is because the role of SOEs has been
Namibia
24.9
18.4
2002/03
considerably reduced and fiscal charges for pri-
Nigeria
8.3
76.5
2003
vate foreign companies greatly lowered. Rising
Peru
7.3
2.4
2003
global demand for oil and mining products in the
Sudan
20.7
44.8
2002
wake of fast output growth in East and South Asia,
United Arab Emirates
2.8
69.2
2003
and the associated sharp price increases since
Venezuela
3.0
49.7
2003
2003, have further attracted foreign investors in
Viet Nam
18.5
30.3
2002
these activities. At the same time, governments
Yemen
6.4
47.6
2003
of countries with large oil and mineral deposits
have begun to review their regimes governing the
Source: IMF, Government Financial Statistics Yearbook, and
Country Reports; and UNCTAD secretariat calcula-
distribution of rents in these sectors, and some
tions, based on national sources.
reforms have already been initiated. This is the
a Central government unless otherwise indicated.
case in some Latin American countries that had
b Government revenue from royalties, income taxes
of exporting firms, and profits of State-owned enter-
been pioneers in privatizing their oil and mining
prises transferred to the government budget.
activities or opening up their natural-resource sec-
c Non-financial public sector.
d Including revenues from the Suez Canal Authority.
tors to private investment.
Evolution in the Terms of Trade and its Impact on Developing Countries
113
Table 3.6
GOVERNMENT REVENUE FROM FUEL INDUSTRY IN SELECTED DEVELOPING COUNTRIES
Value
Share in
Share in fuel
Share in
($ million)
fuel exports
production
total GDP
Year
Algeria
17 442
72.7
72.5
26.2
2003
Angola
3 892
44.8
58.3
28.2
2003
Chad
128
6.7
7.5
3.0
2004 *
Congo
725
34.4
42.0
20.7
2003 **
Ecuador
1 363
67.0
51.5
5.6
2002
Equatorial Guinea
1 513
32.8
38.0
33.7
2004 *
Gabon
1 136
33.3
36.3
15.7
2004 *
Iran, Islamic Republic of
22 521
83.3
73.8
16.1
2003 *
Kuwait
14 752
98.5
91.2
43.1
2001
Nigeria
16 298
61.3
64.0
27.9
2003 **
Sudan
905
59.9
n.a.
6.7
2002
United Arab Emirates
15 567
52.6
42.8
19.5
2003 **
Yemen
1 725
46.8
47.4
15.5
2003
Source: IMF, Country Reports; and UNCDB.
*
Estimates.
** Preliminary estimates.
Several other countries have adapted their
troversy about the distribution of the oil and gas
taxation rules to the changes in international pri-
income between the State and foreign companies
mary commodity markets, especially in countries
led to a severe political crisis.12
where taxes paid by private companies had been
particularly low. For example, in 2004 the Gov-
In order to ensure that the considerable rents
ernment of Kazakhstan introduced a progressive
accruing in the extractive industries are used in a
“rent tax” on oil exports with
way that maximizes the gains
a maximum tax rate of 33 per
for development and social
cent when the oil price rises
welfare, governments need to
to $40 or more per barrel.9 A
Progress towards the MDGs
design an appropriate fiscal
similar progressive tax was
can be enhanced only if the
framework for these indus-
also introduced in the Russian
income gains from favour-
tries, that strikes a balance
Federation.10 In Argentina, du-
able terms of trade are used
between promoting long-term
ties on oil exports were raised
strategically for physical and
investment and realizing pub-
with a view to increasing the
lic revenue. On the one hand,
human capital formation.
public sector’s share in the
a “race to the bottom” in the
windfall profit from higher oil
provision of fiscal incentives
prices.11 In a number of other
should be avoided. On the
Latin American countries the conditions for pri-
other, efforts to obtain adequate fiscal revenue
vate investors’ participation in the oil and mining
should not deprive the operators, private or pub-
industries have also been modified recently (see
lic, of the financial resources they need to increase
annex to this chapter), while in Bolivia, where the
their productivity and supply capacity, or their in-
hydrocarbons sector was privatized in 1996, a con-
ternational competitiveness.
114
Trade and Development Report, 2005
Recent upward trends in world market prices
the formulation of some generally agreed principles
of fuels, and mineral and mining products as a
relating to the fiscal treatment of foreign inves-
result of growing demand from East and South
tors. Obviously, a higher share for the Government
Asia have themselves attracted higher FDI and
in the rent generated by extractive industries, or a
new entrants to these sectors, including TNCs from
higher share obtained by domestic consumers or
China. This situation provides an opportunity to
investors, does not automatically enhance devel-
review the existing fiscal and ownership regimes.
opment and progress towards the MDGs; this will
Such a review, and possible strategic policy ad-
occur only if higher national income due to gains
justments, could be more effective if oil and
from the terms of trade is used strategically for
mineral exporting countries would cooperate in
physical and human capital formation.
Notes
1
A fall in the terms of trade “does not mean that pri-
and imports, and P is a price index expressed in a
mary producers are worse off than they were be-
selected numeraire. For the analysis in this TDR the
fore. Everything depends on the degree of increased
numeraire is P (which is one of the most frequently
m
productivity reached and the extent to which it is
used), and the reference year for the price indices
transferred to industrial manufacturers. If the index
is the previous year. The formula thus becomes
falls to 80, for instance, primary producers will be
T = X/P – X/P (i.e. the difference between the pur-
able to obtain 20 per cent less manufactured goods
m
x
chasing power of exports and the volume of exports).
than they did before, for the same amount of pri-
3
See United Nations et al., 1993: 405.
mary goods. However, if to obtain the same amount
4
If, as is frequently the case, lower export prices are
they need work only half as long as before, one
accompanied by real currency depreciation, the real
hour’s labour would now allow them to purchase
effect of income payments will probably be greater
60 per cent more manufactured goods, instead of
in terms of current GDP, measured in local currency,
100 per cent more, as would have been the case had
even if the income payments fall in current dollars.
they received the full benefits of their own techni-
5
Different initiatives have been proposed for increas-
cal progress” (ECLA, 1951: 47).
ing the availability of information on revenues stem-
2
The System of National Accounts defines the in-
ming from various extractive industries. In particu-
come effect of terms-of-trade changes as follows:
lar, in 2002 the British Prime Minister and the De-
“GDP in constant prices, plus the trading gain or
partment for International Development (DFID) of
loss resulting from changes in the terms of trade,
the United Kingdom launched the Extractive Indus-
equals real gross domestic income” (United Nations
tries Transparency Initiative, which was endorsed
et al., 1993: 405). Trading gains or losses (T) are
by the World Bank in 2003. The IMF also seeks to
measured by the formula:
improve the quality of such information within the
Article IV consultations with developing countries.
X – M
X
M
T = ––––––– – — – —
6
The situation is quite similar in the United Arab
P
P
P
Emirates, but a significant proportion of the trans-
x
m
fers to the Government are not included in the re-
where X and M are exports and imports at current
spective figure in table 4.6, because “some revenue
prices; P and P are the price indices for exports
is retained by the national oil company for financ-
x
m
Evolution in the Terms of Trade and its Impact on Developing Countries
115
ing of investments, or is transferred directly to Abu
the reference oil price – the West Texas Intermedi-
Dhabi’s government’s foreign assets, rather than
ate (WTI) price – is below $32, to 45 per cent when
accruing to the budget” (IMF, 2004d: 26).
it exceeds $45.
7
“Royalties, set at 12.5 percent of the wellhead price,
12
Since 1996, the royalty rate for the exploitation of
were paid in 2004 using the agreed 2003 wellhead
old fields was 50 per cent, while the rate for new
price of US$ 16.9 per barrel because of a disagree-
exploitations was reduced that year to 18 per cent.
ment between the authorities and the oil companies
This new regime attracted significant amounts of
on export prices and transportation costs. Negotia-
FDI in the gas sector, in particular for the construc-
tions on these issues are ongoing” (IMF, 2005b: 11).
tion of a pipeline to Brazil between 1997 and 1999.
8
Following the economic policy reforms, the min-
In anticipation of rising export demand, TNCs also
ing industry in Argentina has benefited from spe-
invested in exploration that resulted in the discov-
cial fiscal treatment such as accelerated deprecia-
ery of huge new gas reserves, exceeding what the
tion allowances and exemption from the 20-per-cent
Brazilian market could absorb. In 2001, an interna-
export duty that was introduced in 2002 for all other
tional consortium prepared a $6-billion project for
primary exports. Moreover, although the peso has
the export of liquefied gas to North America, which
lost two thirds of its value since the end of 2001,
included the construction of a pipeline to the Pa-
payments of royalties and taxes by mining compa-
cific Ocean (Campodónico, 2004). This project met
nies continue to be determined on the basis of an
with strong public opposition, as both the price for
exchange rate of 1 peso to the dollar. As a conse-
the gas agreed with the North American importers
quence, the dollar value of government revenue from
and the royalties were considered too low. Popular
royalties and tax payments by the copper and gold
concerns that, as on previous occasions, the income
mining sectors may have fallen between 2001 and
from the exploitation of the natural resources would
2004, although, as a result of higher production and
not be used for national development, triggered
prices, the rent from those sectors is likely to have
massive protests, which led to the President’s res-
increased considerably since 2001.
ignation in October 2003. In a subsequent referen-
9
As a result of new tax legislation the Government’s
dum, a large majority approved the abrogation of
share in oil income will be raised to a range of 65–
the 1996 hydrocarbons law, the restoration of a pub-
85 per cent. The former guarantee for investors of a
lic oil and gas company and the imposition of taxes
fixed tax rate throughout the duration of a contract
or royalties on private companies of up to 50 per
was abolished, while an excess profit tax and a mini-
cent of the value produced. As a consequence, a new
mal Government share of oil to be produced under
law promulgated in May 2005 has introduced a tax
new production-sharing agreements were introduced
of 32 per cent, in addition to the 18 per cent roy-
(see EIA, 2004: 3).
alty; it also requires mandatory conversion of old
10
Below $15 a barrel there is no export duty; between
contracts to make them compatible with the new
$15 and $20, the rate of duty is 35 per cent of mar-
rules. However, political tensions persist: on the one
ket price minus $15; in the $20–$25 range, the ex-
hand, TNCs complain about a “confiscatory change
porter must pay 45 per cent of market price minus
in the rules”, and, on the other, “civilian commit-
$20, plus $1.75 a barrel; over $25 a barrel, export
tees” in the gas-producing provinces have been
duties are 65 per cent of market price minus $25,
claiming regional autonomy for gas policies. There
plus $4 a barrel.
have also been massive demonstrations calling for
11
In May 2002, a tax of 20 per cent was introduced
the nationalization of the hydrocarbons industry.
for all primary commodity exports. The rate appli-
Continuing protests led to the resignation of the
cable for oil exports was raised in May 2004 to
President in June 2005, and the control of hydro-
25 per cent, and since August 2004, a progressive
carbons and the distribution of the income they gen-
scale is being applied, ranging from 25 per cent when
erate remain a burning political issue.
Distribution of Oil and Mining Rent: Some Evidence from Latin America, 1999–2004
117
Annex to chapter III
DISTRIBUTION OF OIL AND MINING RENT:
SOME EVIDENCE FROM LATIN AMERICA,
1999–2004
1. The oil industry in Argentina, Ecuador,
Mexico and Venezuela
Methodology
consumers) is estimated as the difference between
total and public rent. Undistributed profits of SOEs
are included in the business sector rent. Subsidies
The oil rent is estimated as the difference
for domestic oil consumption are considered as
between the values of production at the relevant
the portion of the rent that accrues to consumers.
international price and the cost of production. It
considers only the “upstream” rent, thus excluding
profits at the refinery and the commercialization
Argentina
stages (“downstream” income). Following the cri-
teria used by the United States Energy Information
Administration, cost of production includes the
In 2004, Argentina produced an average of
costs of exploration, extraction and production,
690,000 barrels per day (bpd), 14 per cent less
plus administrative costs and depreciation.
than in 1999. Higher oil prices more than com-
pensated for this decline. Devaluation of the
The part of the rent accruing to the Govern-
currency in 2002 reduced production costs to an
ment consists of proceeds from income tax and
estimated $6.1 a barrel. As a result of all these fac-
other relevant taxes plus royalties paid by private
tors, oil rent increased significantly, reaching
and State-owned firms, plus the latter’s profits
$7.1 billion in 2004 (table 3.A1).
transferred to the Government. Indirect taxes on
hydrocarbons, such as value-added tax and spe-
The State-owned oil company, YPF, was pri-
cific consumption taxes, are not considered to be
vatized in the 1990s, and in 2004 a new public
a part of the oil rent. The share of the rent ob-
firm in the energy sector, ENARSA, was created
tained by the private sector (business sector and
but its activities are not yet significant. The Gov-
118
Trade and Development Report, 2005
Table 3.A1
ARGENTINA: ESTIMATE OF OIL RENT, 1999–2004
Price
Cost of
Production
(f.o.b.)
production
Rent
Total rent
(Million barrels)
($ per barrel)
($ million)
1999
293
16.0
7.9
8.1
2 373
2000
282
26.6
7.9
18.7
5 273
