How Developing Countries Trade

The Institutional Constraints

Sheila Page

• Publisher: Routledge
• Year: 1994
• eBook ISBN: 9781134816378
• Topic: Commerce
• Subtopic: Commerce Général

Over the last fifteen years there have been dramatic increases in both private and public intervention in international trade. Traditional barriers to market-based trade such as commodity cartels and tariffs have been augmented by new developments such as the rise of regional trade blocs and the growth of intra-firm trade. This book argues that the

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THE RISK OF DISTORTED DEVELOPMENT

Trade, industrialisation and other countries’ policies

DOES POLICY MATTER?

Analyses of the progress of developing countries and their trade in the 1980s frequently rested on an odd dichotomy of views. Each country’s own trade policy, and in particular ‘trade liberalisation’, took central importance, while the policies of its trading partners were treated as, at worst, secondary problems. This approach was part of a more general shift towards treating developing countries as responsible for their own success or failure. In the 1950s and 1960s, it was argued that they depended on the nature of the advanced industrial economies, perhaps on active policies on their part, but certainly on their economic performance. In the 1970s, while the policy interpretations started to change, aggregate international models, both formal and implicit, preserved this dependency. Frequently, their growth was directly constrained by imports, which in turn depended entirely on exogenously determined exports and capital inflows. A more historical approach suggested that there might be times when there were insuperable natural or social or other obstacles to their development. This last interpretation can be reconciled with the 1980s emphasis on how countries themselves act if the way in which they respond to external conditions, whether by policy or by economic changes, is brought into the central focus, and if external conditions are analysed in more detail.

The question of the role of the policy (or policies) towards trade in developing countries themselves has been extensively investigated, and this is not the place to review the literature or conclusions. Some of the elements of the debate, however, offer lessons for a study of the effects of other countries’ trade policies. Early assertions that good export performance could be taken as a sufficient indication that the policy was one of export promotion are paralleled by the first reactions to complaints about protection in the industrial countries which are developing countries’ markets: that their imports were increasing, therefore the policy could not be protectionist. Serious analysis of both questions has moved beyond this (although examples can still be found), and since the early 1980s studies have repeatedly shown that exports by developing countries facing new non-tariff barriers have grown more slowly than before, or than exports to similar markets, or than similar goods to the same market. (These were summarised in Page, 1987.) There remain, however, serious methodological problems in measuring the degree of protection from the supplier’s point of view as well as the universal problem in economics of defining the alternative: how would we expect the exports of countries, which are (or want to be) rapidly growing and which are changing their industrial structure, improving their inputs and thus altering their advantages relative to other traders, to behave in the absence of policy? To this must be added estimates of the effects of all other policies and economic conditions and changes taking place in them at the international level. Finally, there is interaction directly between the trade policies of a country and those of its trading partners, and between different perceptions of these. If developing countries’ performance does improve or falter relative to whatever normal path or alternative international system is assumed, is this because of (in spite of) their own policies or those of their trading partners? Too frequently the answer seems to be: it depends on which is being analysed.

Two conclusions would seem to emerge from the studies of developing country trade policy, which have relevance to looking at the effect of others’ actions: first, that the policies can matter to trade, but second that the way in which they affect trade, and through trade the rest of the economy, depends strongly on how exporters and potential exporters respond to them, not simply on the legal details of the policies. A third conclusion from trade liberalisation studies is also relevant, however: that the ways in which policies work through beyond exports to the rest of the economy, and how changes within the economy interact with the policies and affect exports, depend on a variety of conditions in each country. Any general results about the nature of growth, the importance of competition, and the roles of intervention or market signals therefore need to be placed in the particular context of each country.

The first of these conclusions, that policies matter, helps to justify the present study, although the second will prove as significant here as in the other studies, and the third will again be relevant. Changes can be identified in the general level of protection and the relative levels facing different types of country (or exporters of different products). In particular, it is possible to show a change from reducing to increasing protection in the industrial countries, traditionally the principal market of most developing countries, and more recently the beginning of a process of reducing protection in some developing countries which are potential and in some cases actual markets. There are identifiable differences in the distribution of protection as it affects different countries, arising from the nature and extent of preference arrangements, or from variations among different industrial country markets, as well as differences for different products or for different stages of production. All these could affect the total value or the composition of a developing country’s exports, and the changes and differences provide potential ways of analysing the nature and the size of the effects. The effects of the policies and of the changes in policies in the last 10–15 years are sufficiently large to have influenced long-term decisions about investment and development strategy which can be identified, if not quantified, at country, and even international, level.

Analysing the impact of these trade policy-induced effects beyond trade on the rest of a developing economy can follow at least two routes. The level, rates of change, and changes in composition of trade can have the same effects, both macro-and microeconomic, as changes induced by home country government policies or by market effects. These are direct economic responses to policies which change market sizes or relative prices. But the fact that the external influences are the result of policy decisions, and that these are taken outside national control, may itself affect those reactions which lead to long-term decisions about sales and production. These responses will be influenced by whether the results of policy interventions appear more or less permanent, or more or less easily reversible by intervention through negotiation or other non-economic forms of action. Such decisions may perhaps even change the type of producer company which is seen as successful, to those able to anticipate, influence, and respond to policy rather than those which take a narrower production or industrial approach.

Many conditions outside the market or industry will be important for external trade policy effects. These include the nature of the productive structure and alternatives, the political and social situation and history, and relations between the economic and political decision-makers, as well as the traditional factors in policy analysis like the country’s own development strategy, size, and the immediacy of non-economic problems.

The purpose of this study is to examine how the external policies facing a developing country can affect its industrial structure and thus its development by their total effect and their nature, and therefore how far such conditions need to be taken into account in a country’s own development strategy. But it will need to look beyond this to suggest the range of possible responses. This means looking at the scale and nature of each of the possible policy interventions, and then examining how they have acted in combination. The emphasis is on the last 10–15 years when there appear to have been major changes in their nature.

This first chapter will survey the types of intervention which seem important (and general and identifiable) enough to be worth examining, and will indicate the types of effects which can be expected from changes in trade policy. The following five chapters will then examine each in turn, to measure its importance, and changes in it, and suggest how this has affected different countries or types of trade, and Chapter 7 discusses their effects taken together. The country chapters in the second half of the book examine the results in the context of different conditions.

HOW POLICIES ACT ON TRADE

The effects which can be expected are on the size, type, and direction of trade flows. Stemming from these would be more general and fundamental changes in the observed pattern of sectoral development and in the type of development policy which is available to decision-makers in industry or trade, or to the government. Not only countries’ trade, but also their choice of development path, between industry and raw material development, and between a broad or a more concentrated pattern of development, can be affected. This in turn could have effects on other economic objectives, including the distribution of income among the population and between major sectors or different regions, but these go beyond the scope of this study. If the policy decisions of the importing countries have a significant effect on the pattern of exports, this may also affect a country’s approach to economic development. It may encourage an emphasis on finding and exploiting policy-based opportunities or alternatively lead to more emphasis on avoiding policy obstacles, while concentrating on more nationally determined criteria for choice (whether these are market-based or determined by a national economic strategy). The reverse may also be true: an interventionist approach to development at the national level may affect attitudes to trading partners’ policies. The final chapter will look particularly at these interactions.

In analysing the reasons for long-term changes, a major problem is the difficulty of moving from recording apparent correlations between policy changes and responses to reasonable confidence about causation, particularly in developing countries which would be expected to be changing their trading and industrial structure. Some changes may be induced by changed expectations about ‘normal’ trading policy in trading partners, as well as actual changes. If the development strategy itself changes to fit the changed external situation, the nature of the problem becomes even more complex. There is also a more practical problem of measurement. After fifteen years of a shift to greater protection, any structural adaptations in an economy should be large enough to measure, but the more completely and successfully a country has adjusted, the more difficult it will be to find surface indicators. It may be continuing to grow, and to increase its exports, and to develop its industrial structure, and there may be no obvious excess capacity or immediate ability to respond to a reduction in a barrier.

The examination in detail of seven countries, therefore, explores the history of individual industries or firms or country policies, and how the decision-makers interpret what has happened. Such evidence must, however, be treated with as much caution about direction of causation as the more quantitative correlations. There is the inevitable problem that the producers and policy-makers who are available to give opinions are largely those who have succeeded in the actual conditions observed, and these are not necessarily those who would have been there in other circumstances. On questions like the effectiveness of preferences or of barriers to trade it is tempting to believe that at least a prima facie assumption of their effectiveness can be made because presumably well-informed companies or countries lobby for them. But even this common-sense approach may not be valid. What may be beneficial for an individual company at a particular point in time may not be so at an aggregate level or in the long run. Companies, and countries, have objectives other than maximising returns or growth, in particular security of markets or of supply. In the case of international ‘lobbying’ by governments rather than companies, there is a further possibility of divergent objectives between the government and industries or between the ‘national interest’ and the sum of individual interests.¹

The case-study countries were chosen to give a network of pair (at least) comparisons between countries which have similar products, similar locations or size, similar levels of industrialisation or general development, or similar access arrangements to market countries, combined with differences on at least some of these points with others in the group. The combination of comparisons and interview evidence provides a test of the aggregate conclusions from the first half of the book.

The principal objective of the study is to understand how strongly and in what ways countries are influenced by their trading partners’ (or potential partners’) economic policies, and to offer evidence of what this has meant for the current development and development policies in developing countries. The principal emphasis, therefore, is on recent experience and evidence. But the important changes in the direction of industrial country policy occurred in the second half of the 1970s, and it was in the late 1970s or early 1980s that their effects on developing country trade were first identified. Restricting an examination of the evidence to too recent a period risks starting from a base which already incorporates the effects to be studied. The period to be examined must therefore vary between types of influence and types of country.

This frequently means going back to 1974. This is the year which marks a clear turning point in trade policy, as well as in the growth of trade, its composition and the importance of different trading groups (Table 1.1). It was the end of the last commodity price boom, and it could also be held to mark the end of the development optimism and enthusiasm of the 1960s. Barriers to trade had fallen during the 1950s and 1960s. The war-induced controls were eliminated, and average tariffs also fell with a series of worldwide rounds of negotiations under GATT and regional agreements on further preferences. For developing countries, the commodity exports which they were then exporting in exchange for manufactures imports revived first, in the 1950s. Although tariffs were higher on more processed products and ‘tariff escalation’ from one stage of production to the next was identified, this was a problem only for the most advanced, and was not increasing during this period. The economies of most industrial countries, most of the time, were expanding rapidly. This reduced general pressures for protection. Although some of the old special access arrangements for the emerging independent ex-colonies were reduced or eliminated, by the end of the period the industrial countries as a group had been persuaded to introduce the Generalised System of Preferences. As with trade barriers, it is difficult to demonstrate convincingly whether preference schemes have long-term effects on industrialisation, or the structure of the recipients’ economies. The evidence on tariffs and preference areas, on what has been available, what appears to have been used, and what the reactions to the preferences are, is given in Chapter 2.

Table 1.1 Growth of exports (annual average percentages)

Trade in manufactures was rising among the industrial countries, with increasing importance for specialisation and intra-industry trade, and thus a growing share of trade in total output. It was only towards the end of this period, in the early 1970s, that manufactures started to become a significant export (and target for export policy) even for the advanced developing countries (Table 1.2). Development throughout the 1960s (and earlier in most countries) had always meant industrialisation, but the primary focus had been on replacing imports in national markets, certainly as the first step, and there was little thought beyond that. The debates were between those who wanted to give special policy assistance to this, and those who thought promoting production, and implicitly exports of primary commodities, was a more reliable way to permit industrialisation by initially accumulating the savings necessary for development. Promoting production of manufactures for export rather than import substitution was not perceived as a serious option, because the principal objection even to replacing imported manufactures was the low quality and high cost of the substitute. The question of obstacles to exports was therefore basically confined to the special cases of those commodities which competed with production in developed countries (sugar, cereals, fertilisers, some metals), or which had special terms of access to traditional ex-colonial buyers. The first manufactured exports to see such barriers rise, starting in the mid-1960s, were textiles and clothing.

Table 1.2 Share of manufactured exports in total exports (percentages)

In the 1970s the decline in the growth in demand for commodities and in their relative prices was a severe shock after the boom of 1970–3. It was accelerated by the increase in the cost of energy, both directly and through the recession which high oil prices induced in the industrial countries. This lowered the attraction of the traditional commodity path of development. At the same time, the progress of those countries which were able to increase their exports of simple manufactures, and the effect on the exporting aspirations of other countries from observing their success (and the apparent sequence from Japan’s previous success to that of other Asian Newly Industrialising Countries) led to a much greater emphasis in development policy on promoting exports of manufactures, even in the most traditional import-substituting countries. Mexico introduced its export processing zones, the maquiladoras, as early as 1966.

What then would the trade trends of the early 1970s have implied in the absence of the policy responses which promoted exports in some developing countries and restricted imports by the industrial countries from the developing countries? The question is perhaps meaningless, because it treats policy as exogenous. The increase in export promotion itself followed the effect of the recession on the prospects for primary commodities. The restriction by developed countries of imports from developing countries followed both the recession and the early export successes of the NICs. It is difficult to believe that the policies were unrelated to these events. If the trends induced the policy changes, it is difficult to construct a credible alternative scenario, with the trends but without the policies, except by imposing the rationality (from an economist’s point of view) of an economist’s response to the trend as an alternative to the political or industrial interest group rationality which in fact prevailed.

Up to 1973, what had been commonly assumed would happen next was that increasing specialisation would continue, because of continuing reduction in trade barriers (implicitly this meant among the industrial countries because they were at that time the only significant industrial producers or exporters), permitting the exploitation of economies of scale, and therefore an increasing share of trade in output. As worries about the persistence of technological advantages under conditions of economies of scale had not yet passed from ‘ill-informed’ advocates of the protection of infant industries in developing countries into ‘advanced strategic economic theory’, this was accepted as beneficial to all except declining industry pressure groups in the industrial countries. Bringing in developing countries, with much lower labour costs and access to all the other required production inputs apart from trained and therefore high productivity labour, would have brought these trends under question even without two further factors. One was the recession and the consequent normal increase in protectionism, against all outside suppliers. Given the network of special arrangements some industrial countries had with others (notably the European Community and European Free Trade Association; formally on cars, less formally by habit, the US and Canada), this brought an abnormal relative growth in protection against the easier targets, the developing countries. The second was the great success, especially in the second half of the 1970s, of developing countries (although in practice it was only a small number of them) in increasing their share of markets: from 7 per cent share in world exports of manufactures in 1970 and 7.4 per cent in 1975 to 10 per cent by 1980, 13 per cent by 1985, an...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• TABLES
• ACKNOWLEDGEMENTS
• 1 THE RISK OF DISTORTED DEVELOPMENT
• 2 TARIFFS AND PREFERENCES
• 3 NON-TARIFF BARRIERS
• 4 COUNTERTRADE
• 5 OTHER OFFICIAL CONTROLS AFFECTING DEVELOPING COUNTRY TRADE
• 6 FOREIGN INVESTMENT
• 7 THE WORLD TRADING SYSTEM VIEWED FROM DEVELOPING COUNTRIES
• 8 MALAYSIA
• 9 THAILAND
• 10 COLOMBIA
• 11 ZIMBABWE
• 12 MAURITIUS
• 13 JAMAICA
• 14 BANGLADESH
• 15 DEVELOPMENT UNDER A CONSTRAINED TRADING SYSTEM
• GENERAL BIBLIOGRAPHY
• COUNTRY BIBLIOGRAPHY