Trade Infrastructure and Economic Development

David Olusanya Ajakaiye, T. Ademola Oyejide

• Publisher: Routledge
• Year: 2012
• Print ISBN: 9780415669139
• eBook ISBN: 9781136595752
• Topic: Business
• Subtopic: Business General
• Index: Business

There is growing consensus in the literature that trade and trade policy matter for a pro-poor growth and development strategy. Therefore, policies that are consistent with this strategy feature increasingly in many African countries where poverty is endemic and rapid and where sustainable economic growth is viewed as the major vehicle for poverty reduction. Key elements of these polices include measures that promote the expansion and diversification of production and trade in Africa. This book is aimed at articulating appropriate structural and policy measures for eliminating the constraints that African countries face and thus ensuring that they can derive maximum benefits from all available market access opportunities.

There is evidence that most African countries face external market access barriers in their major export destinations which are generally less constraining than those confronting countries in other developing country regions. Yet, they have generally not been able to take full advantage of the special (preferential) market access opportunities available to them. This suggests that improved external market access, whether reciprocal or preferential, would not, by itself, be sufficient for strengthening African export performance. In this collection, export supply response capacity takes external (beyond-the-border) factors as given and concentrates primarily on the internal (behind-the-border) factors that influence production and distribution costs and, thus, competitiveness.

The central working hypothesis of this book is that the inability of domestic producers and exporters in Africa to respond quickly, effectively and efficiently to external market access opportunities is caused by various limitations of their internal supply capacity and that this, in turn, is largely responsible for the lacklustre export performance of many African countries. This comprehensive study should be of interest to students and researchers of international trade and development economics as well as African studies.

1 Relaxing export constraints

The role of governments

Marc Bacchetta

1 Introduction

Over the past two decades, developing countries have progressively increased their share of global trade from just under one-quarter to about one-third. Increased participation in world trade has been facilitated by the diversification of exports. The share of manufactures in total merchandise exports of developing countries increased from 35.1 per cent in 1985 to 65.8 per cent in 2004 while the share of developing countries in world exports of manufactures increased from 14.5 per cent in 1985 to 30.3 per cent in 2005. Developing countries have also diversified their export markets. The share of developing country markets in total developing country exports increased from 27.8 per cent in 1990 to 39.4 per cent in 2004.

These positive figures hide important regional differences. In fact, Asia and particularly China account for most of the change. While developing Asia's share of total world exports increased from 11.7 per cent in 1985 to 21.5 per cent in 2005, Africa's share decreased from 4.3 per cent to 2.9 per cent of total exports over the same period. Similarly, while the share of manufactures in Chinese exports increased from 42.2 per cent in 1985 to 71.4 per cent in 1990 and 90.6 per cent in 2004, their share in African exports increased from 19.9 per cent in 1990 to 28.6 per cent in 2002 only to fall back to 21.2 per cent in 2005 due to the rise in the value of oil exports.

Africa's poor export performance and its failure to integrate in world trade are associated with poor economic performance and lagging development. Much has been written about the linkage between exports and growth. While there seems to be almost a consensus that export performance matters significantly to development in small low-income countries, the nature of the relationship between export performance and growth is not completely clear (see Helleiner, 2002). Empirical evidence suggests that exporting firms are more productive than non-exporters but the debate over the reasons behind this observation is far from being closed. While exporting could contribute to improved productivity, the higher productivity of exporters could reflect the self-selection of the more productive firms as exporters.

Whether one sees the economic development of Africa as export led or investment led does not make much of a difference in the end. In small, poor countries, investment in production for export markets is likely to be of greatest potential (see Helleiner, 2002). Söderbom and Teal (2003) found that exports were associated with income growth in nine sub-Saharan countries. The challenge is thus to identify the constraints to improved export performance and to determine how they could be released. There are two types of constraints: demand side and supply side constraints. Barriers restricting access by African exporters to foreign markets may well be playing a role in the evolution of Africa's export performance. During the last two decades, however, African countries have faced relatively less constraining external market access barriers than other developing-country regions. There are thus reasons to believe that Africa's poor export performance may be due in no small part to binding export supply response capacity constraints which prevent fuller utilization of available market access opportunities. Some of these constraints are associated with underlying economic conditions while others are associated with market failures or policy obstacles. Some impede the expansion of existing exports to existing markets (growth at the intensive margin) while others prevent geographical or product diversification (growth at the extensive margin).

This chapter reviews the existing literature on the role of governments in releasing constraints to export supply. It discusses the economic rationale for government interventions to support export development and, in the light of this rationale, examines the interventions needed to address the key factors responsible for restraining export supply response across products and countries in Africa. Section 2 summarizes the debate among economists on industrial development policy and export promotion, including recent results of particular relevance to the discussion of export promotion and diversification policies. It explains that the case in favour of interventions hinges upon the existence of some market failure. Economists tend to agree that permissive and functional policies can promote development but their views diverge on the need for selective policies. The controversy regarding selective policies is for the most part rooted in issues related to implementation. Section 3 provides an overview of recent contributions which explore the factors affecting the export performance of manufacturing enterprises in African countries, using enterprise-level data from the mid 1990s. Their results point out the importance of trade policies, transportation infrastructure, energy, telecommunications and security. They also point out the difficulties of smaller often informal firms and the advantages of export processing zones. The role of governments in releasing those constraints is addressed in Section 4. The discussion addresses the question whether or not there is a need for targeted interventions before reviewing the lessons from past experience, including with the implementation of various types of policies.

2 Industrial policy, exports and development strategies

2.1 The role of industrial policy in development strategies

The approach to government-assisted industrial development and preferences for specific policy instruments has evolved over time as a result of changes in development thinking and the external environment. Ideas regarding the linkages between trade, development and the role of government have changed a good deal in the post-war period, influenced in part by country experiences (see Bruton, 1998; Winters, 2000).

In the 1950s and early 1960s, development was equated with industrialization and import substitution was seen as the route to industrialization. The view that a more or less free market would not solve the development problem was widely accepted. Large-scale comprehensive planning was considered to be the appropriate policy instrument although the necessary data were largely missing and neither planning nor growth were very well understood. The role of capital formation as the main source of growth was emphasized. As most capital goods had to be imported, overvalued exchange rates were seen as a means to encourage investment. But this practice induced balance-of-payments pressures, which were countered through a variety of trade restrictions. While protection was typically afforded mainly to consumer goods, in some large countries domestic production of capital goods was encouraged by keeping out imports and by direct subsidies (see Bruton, 1998).

The experience of the 1950s and early 1960s, sometimes referred to as the easy stage of import substitution, created considerable hope among economists and country leaders. Compared with the pre-war period, investment and growth rates increased as did the share of manufacturing in the gross domestic product (GDP). Life expectancy at birth and literacy rates rose and infrastructure developed. During the 1960s, however, distortions became increasingly evident. Agriculture and exports were penalized. Unemployment prevailed and, surprisingly, capital was underutilized. Two large collections of case studies published around 1970 carefully documented these distortions (see Little et al., 1970; Balassa and associates, 1971). At the same time, estimates of total factor productivity growth became available showing very limited improvements, if any, in developing countries. It also became apparent that poverty was not declining at a significant pace.

By 1970, economists had started having doubts about import substitution as a development strategy. These doubts were not only fed by the facts. Developments in economic theory also contributed. While second-best theory had provided intellectual support to import substitution, the general theory of distortions, which refined it, reinforced the case for trade liberalization. Second-best theory suggested that trade liberalization could not be guaranteed to be advantageous in an otherwise distorted world. The general theory of distortions further developed the argument and showed that trade policy is usually neither first nor second best but rather nth best. Another attack on the import substitution strategy came from Baldwin (1969). In his paper, Baldwin showed convincingly that duties levied on infant industry do not only distort consumption, but may also fail to correct the market failures they are intended to address and may even result in a decrease in social welfare. If, for example, the acquisition of the socially optimal level of knowledge requires some direct outlays, imposing tariffs is no guarantee that these socially optimal outlays will be made. He also explained that what is required to handle the special problems of infant industries is a much more direct and selective policy measure than general import duties.

Doubts regarding the import substitution strategy were further fed by the exceptional export and growth performances of the Republic of Korea and Chinese Taipei in the 1960s. These two countries had made substantial policy changes in the late 1950s and early 1960s that encouraged firms to export. In both cases, exchange rates were unified, currencies devalued and export incentives put in place. These policies were designed to ensure that producers were no longer rewarded primarily for selling in the domestic market – returns to exporting were made at least as attractive through the removal of the anti-export bias inherent in import substitution policies. Initially, these strategies were seen as export promotion with limited government intervention. However, this view was soon disputed. It is now largely acknowledged that governments intensively promoted specific sectors in the Republic of Korea and Chinese Taipei, and in Japan. Whether export promotion and trade policy interventions played a crucial role in the “East Asian miracle” is an open question.¹ What is fairly clear, however, is that the circumstances leading to success in the Republic of Korea and Chinese Taipei were not typical. The policy instruments used were typically the same as those used elsewhere, including import quotas and licenses, export subsidies, public ownership and tax holidays. But the manner of implementing and monitoring trade policies was different. A political leadership fully committed to strong economic performance was firmly in place and relationships between government and business were highly unusual. The extent to which government priorities and resources were organized around export performance in the Republic of Korea was striking (Rodrik, 1993; Bruton, 1998; Noland and Pack, 2003).

The lessons learned from the import substitution experience, and some learned from the export promotion experiences in the Republic of Korea and Chinese Taipei, contributed to the emergence in the 1980s of a new strategy relying on outward orientation with minimal government involvement.² The emphasis on exports as an engine of growth was drawn from the Asian experiences, while the strong scepticism vis-à-vis government interventions was largely inspired by the import substitution experiences. Anne Krueger's work on rent seeking and difficulties associated with the implementation of sophisticated policies supported the view that government failures were more likely than market failures and that an effective market mechanism would naturally emerge if policy-induced distortions were eliminated. During the 1980s, the World Bank and the International Monetary Fund became strong advocates for an outward orientation strategy.

In this strategy, the suspicion of targeted trade policy interventions was rooted in a general scepticism regarding the capability of governments to deliver appropriate policies. While most supporters of outward orientation would agree that some market failures provide a case for temporary intervention, they would stress difficulties with detecting and quantifying the externality, identifying the appropriate intervention and preventing the capture of policies, as reasons not to intervene. This scepticism was itself largely based on anecdotal evidence and stylized facts.

During the 1990s, the outward orientation strategy came increasingly under fire. Disappointing results in Latin America and Africa, unsatisfactory performance in the transitional economies and the financial crisis in Asia raised doubts about the capacity of this strategy to promote development. Empirical work on the growth benefits of openness looked promising initially, but this work has been challenged recently on methodological grounds (see Hallak and Levinsohn, 2004). Interest in the linkages between trade reforms, inequality and poverty has also revived, and results have confirmed there can be no simple general conclusion about the relationship between trade liberalization and poverty (see Winters et al., 2004). The debate on the interpretation and the lessons to be drawn from the East Asian experience has intensified (see Noland and Pack, 2003). The presumption that governments typically lack the capacity to implement trade policies has also been questioned (see Rodrik, 1995).

With this background of growing doubts, new strategies have been slow to emerge. A number of trends, however, can be identified. First, multilateral, regional and bilateral trade agreements are imposing increasing discipline on traditional trade-policy instruments. Tariffs are progressively being reduced, quotas are largely prohibited and subsidies are disciplined. Governments are making more use of new trade policy tools, in particular export promotion and foreign direct investment (FDI) attraction (see Melo, 2001). Second, attention has progressively shifted from import policies to export policies. The focus of the World Bank, for example, has moved from the incentive framework associated with the tariff regime to removing policy and other obstacles that prevent producers from taking advantage of new market opportunities. This has been reflected in the Integrated Framework Diagnostic Trade Integration Studies. Third, the importance of institutions and learning has been recognized; this has repercussions for the design of industrial development policies. Finally, economists are more nuanced and cautious with policy advice than they were before. Most importantly, the one-size-fits-all approach has been abandoned. A better understanding of the growth and poverty effects of specific trade and industrial policy interventions is warranted (see Hallak and Levinsohn, 2004).³

Considerable divergence remains in views on the role of governments in industrial development strategies. Although the need in some instances for proactive government interventions and industrial policies has been recognized, the World Bank continues to mistrust direct government selection of promising sectors and to favour the use of indirect mechanisms to promote technological upgrading, by attracting FDI and developing local technological capabilities (see de Ferranti et al., 2002). At the same time, a new strand of literature is exploring novel approaches to industrial policy that takes into account the traditional arguments against interventions. One approach emphasizes information externalities entailed in discovering the cost structure of an economy, and coordination externalities in the presence of scale economies, and sees industrial policy as a discovery process where firms and the government learn about underlying costs and opportunities and engage in strategic coordination (see Hausmann and Rodrik, 2003; Rodrik, 2004). Another approach emphasizes the role of recent shifts in the institutional mechanism of international trade such as the emergence of production and buyer-led networks, and sees negotiations with multinational corporations as the main focus of industrial policy (see Pack and Saggi, 2006).

2.2 The debate on industrial promotion

Targeted support

For economists the case for government interventions rests on the existence of market failures. With perfect competition, small firms and well-functioning markets, prices give producers the appropriate signals for efficient resource allocation. Government support causes resources to be used in an industry beyond what is optimal. This is all the more so if part of t...

Table of contents

• Front cover
• Trade Infrastructure and Economic Development
• Routledge studies in development economics
• Title Page
• Copyright
• Contents
• List of Figures and tables
• Contributors
• Foreword
• Introduction and overview
• 1 Relaxing export constraints: The role of governments
• 2 Assessing export supply constraints: Methodology, data and measurement
• 3 The business of exporting: Transaction costs facing suppliers in Sub- Saharan Africa
• 4 The role of infrastructure in determining export competitiveness: Framework paper
• 5 The structure of supply chains and their implications for export supply
• 6 Implications of standards and technical regulations on export competitiveness
• 7 African trade, investment and exchange rate regimes and incentives for exporting
• 8 Trade facilitation: What is it and how does it help?
• 9 Aid for trade competitiveness: New opportunities for Africa
• 10 Evolving wave of competition in the international market: Challenges for Africa through the rise of China and India
• Index