FW: Sub-Saharan Africa AND INTERNATIONAL TRADE: COMMODITY DEPENDENCE, TRADE POLICIES

DEPENDENCE, TRADE POLICIES

 

Outline

1. Facts regarding trade in SSA

2. Commodity dependence, price decline and price volatility

3. Theoretical issues regarding the export of commodities

4. The impact of China?

5. The debates on the relationship between trade openness and growth

6. Other effects of trade reforms: effects on poverty, inequality, investment and the fiscal balance

7. The constraints on trade in SSA

8. The impacts of Developed countries policies: protection, subsidies, market access to developed countries

9. The concepts of commodity chains and global value chains

 

 

 

 

1. Facts regarding trade in SSA

 

·                     Historical perspective: historically, trade is a key dimension of growth

Secular trends: Western countries based their growth on trade: see Maddison 2001 The World Economy: A Millennial Perspective.

The crucial impact of colonial structures: exports of primary commodities, vs imports from the colonising countries; the necessity to produce cash crops and other products for colonial taxation.

 

·                     In the 1990s, a rapid expansion in world trade, which exceeded the growth of world output:see UNCTAD Trade and Development Report/TDR 2003

Not the first period since the war when world trade grew faster than world GDP. Similar episodes between 1961 and 1974, followed by a decade of erratic and slower growth in world trade and GDP.

Post-war period= upward trend in the ratio world trade/world output. Steeper trend after the late 1980s: role of EU.

 

 

·                     The current situation of word trade:

See WTO, presentation of the International Trade Statistics 2008: Weakening demand in developed countries, realignments in exchange rates and fluctuations in the prices for commodities, such as oil and gas, introduced uncertainties into the global markets in 2007. As a result, growth in world merchandise trade slipped to 6% in real terms, down from 8.5% in 2006.

The slowdown is due to a deceleration of import demand, mainly in the United States, but also in Europe and Japan. Trade remained strong in most developing countries. Regions such as Africa, the Middle East, the Commonwealth of Independent States (CIS), developing Asia and South and Central America showed sustained growth in their economies in 2007. While higher commodity prices helped to improve the financial situation of certain countries, higher energy and food prices also increased inflationary pressures worldwide. Higher commodity prices induced a 19% rise in the total value of agricultural exports, a higher increase than for trade in manufactured goods, fuels and mining products. In value terms, for the first time in five years, commercial services trade rose faster than trade in goods at 18% compared with 15%. This was mainly due to the expanding international supply of many financial, computer, and miscellaneous business, professional and technical services and the increase in the price of transportation

 

See for data the annual reports of the WTO, UNCTAD. See the WTO World Trade Reports, e.g., WTR 2005: SSA trade grew strongly in 2004, buoyed by firmer commodity prices for oil and metals. Price movements and exchange rates significantly influence trade flows measured in current dollar terms. Prices of primary commodities increased faster than prices for manufactured goods. Fuel prices were a key factor. SSA = net exporter of fuel.

 

See UNCTAD TDR 2005, TDR 2006 on global imbalances: growing importance of South-South trade. Rise in oil prices: strong effects on the terms of trade

The changes in international trade, with respect to both product composition and direction of trade, affects 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. On the import side, it is especially the dependence 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= the higher prices of oil and minerals and mining products, led to a worsening of the terms of trade in others.

In SSA, positive effect of price movements on the purchasing power of exports reinforced by an increase in export volumes.

Since 2002, economies with a high share of oil and minerals and mining products in their total merchandise exports gain the most from recent developments in international product markets.

The terms of trade of countries with a dominant share of oil exports increased by almost 30 % between 2002 and 2004, and those of countries with a dominant share of minerals and mining products in their exports increased by about 15 %.

Terms-of-trade have varied the most among economies where agricultural commodities have dominated total merchandise exports: because of large differences in the movement of prices for specific products, differences in the shares of other primary commodities in their exports and the share of oil in their merchandise imports.

 

See UNCTAD LDC Report 2006: The 4 oil-exporting LDCs — Angola, Equatorial Guinea, Sudan and Yemen — accounted for 52.7 % and 55.6 % of the 2003 and 2004 increases in the share of LDCs in world merchandise exports. Despite the spectacular export performance of oil- exporting LDCs, non-oil-exporting LDCs also performed well in 2003 and 2004. The improved export performance in 2003 and 2004 was supported by higher international commodity prices in many commodities relevant to their exports.

 

For UNCTAD (World Economic Situation and Prospects 2007): 2006 characterised by volatile primary commodity prices: average oil prices were up by 20 % for the year compared with the average for 2005. Prices of base metals and minerals have increased markedly. However, the prices of commodities became more volatile during 2006.

WTO Annual Report 2006: World trade, as measured by merchandise exports, grew by 6% in real terms during 2005 (at constant prices, i.e. volumes adjusted to take account of price changes), after an exceptional 9% expansion recorded in 2004. Africa and the Middle East recorded their highest shares in world merchandise exports in two decades, due to developments in the oil market over the last two years.

The share of fuels and other mining products in world merchandise trade rose to 16%, the highest level since 1985. On the other hand, the share of agricultural products in world merchandise exports decreased to a historic record low of less than 9%. Within the manufacturing sector, the largest export value increases were observed for iron and steel products and for chemicals. Although global demand recovered somewhat for computers and other electronic products, the trade value of these categories expanded no faster than that of manufactured goods in general. (..)Electronic products have not regained the dynamic role they played in the expansion of trade in manufactures throughout the 1990s. In the 1990s, the export value of electronic goods rose on average by 12% or twice as fast as all other manufactured goods.

 

 

·                     Factors contributing to trade expansion?

See Baxter and Kouparitsas, 2006, What Determines Bilateral Trade Flows? Robust determinants of international trade? Robust variables = factor endowments; fixed exchange rates; the level of development; and current account restrictions.

 

For UNCTAD (TDR 2002), among the factors of trade expansion in particular products: 1) income growth and demand. Growth of world trade in manufactures is faster than trade in primary products. As incomes rise, a smaller share of household budgets is spent on food, which implies that the share of food in world consumption and trade declines. For agricultural and industrial raw materials, demand grows less rapidly than income.

2) Policies governing market access; 3) international production networks.

The 3 product groups with the fastest and most stable growth rates over the past 2 decades=parts and components for electrical and electronic goods, labour-intensive products, e.g. clothing, and finished goods with high R&D content.

=the ones affected by the globalisation of production processes through international production sharing, facilitated by lower transport and communication costs and reduced trade and regulatory barriers, and concentrated in labour-intensive activities: role of large TNCs.

The developmental effects of export of products differ according to their potential for demand and productivity growth: this potential is limited for primary commodities.

Considerable differences among manufactures in terms of skill and technology intensity and productivity potentials.

 

 

·                     The decline of SSA share in world trade and its determinants

Trade liberalisation in the 1990s has increased importance of international trade in SSA.

Trade (merchandise exports plus imports) in SSA as a share of GDP increased from 38 to 43% between 1988–1989 and 1999–2000.

Despite the increased trade orientation of SSA, the share of SSA in world trade has declined because its exports have grown much more slowly than world exports=SSA marginalisation in world trade: see Razin et al. 2002 Trade Openness and Investment Instability.

From the mid-1950s to 1990, SSA share of global exports fell from 3.1 to under 1.2%, a decline that implies associated export earning losses of about $65 billion annually: see Amjadi and Yeats 1995 Have Transport Costs Contributed to the Relative Decline of SSA Exports.

 

See UNCTAD Handbook of Statistics, 2007, selected statistics for Africa, the share of SSA exports in world exports was 3.8% in 1980, 2.0% in 1990, 1.5% in 2000, with a slight improvement in 2004 (1.6%).

The share of SSA imports in world imports was 3.2% in 1980, 1.6% in 1990, 1.2% in 2000, with similarly a slight improvement in 2004 (1.4%).

 

From Subramanian and Matthijs. 2007. Can SSA Leap into Global Network Trade?

 

From the IMF (2007), Regional Economic Outlook: Sub-Saharan Africa. April

 

For UNCTAD, SSA marginalisation in world trade reflects its inability to sustain growth.

SSA failures have been developmental failures, not export failures. SSA declining shares of world trade reflect SSA slow GDP growth, and other countries' increasingly outward orientation, not a decline in trade or export shares of GDP.

 

 

·                     Structure of SSA exports

See the IMF Regional Economic Outlook SSA-April 2007

 

Source: Department of Economic and Social Affairs: Africa Report, UN, 2008

 

 

 

 

See the WB WDI 2004, 2006, 2007. In 2005, food = 15% of merchandise exports; agricultural raw materials=5%; fuels= 36%; ores and metals=10%; manufactures=33%.

In 2004: food=16%; agricultural raw materials=5%; fuels= 38%; ores and metals=10%; manufactures=31%. In 2002: food=17%; agricultural raw materials=6%, fuels=29%, ores and metals=8%, manufactures=35%. In 2001: food=16% of exports, agricultural raw materials= 6%, fuels=31, ores and metals=8%, manufactures=33%.

 

 

·                     After a worrying period, improvements in SSA in the 2000s

 

See IMF Regional Economic Outlook: Sub-Saharan Africa, October 2008

 

 

 

 

 

 

 

 

 

 

 

See IMF SSA Regional Economic Outlook 2008, April

 

 

See the IMF SSA Regional Economic Outlook 2007, October

 

See the IMF (2007), Regional Economic Outlook: SSA. April

 

 

See Department of Economic and Social Affairs Division: Africa Report, UN, New York 2008

 

 

 

2. commodity dependence, price decline and price volatility

 

·                     The issue of the behaviour of commodities and commodity prices

See IMF WEO October 2008, chapter 3

 

 

 

 

 

From Streifel, Shane (2006) Impact of China and India on global commodity markets: focus on metals and minerals and petroleum, World Bank, Washington D.C., the World Bank and Singapore, Institute of Policy Studies.

 

 

 

 

 

·                     Commodity dependence: facts

From World Economic Outlook IMF, September 2006

 

 

 

See the IMF WEO (World Economic Outlook), Sept. 2006, chapter 5. Over the past 4 years, fuel and nonfuel commodity prices have risen significantly.(..)Nonfuel commodities have a higher share in world trade (about 14 % during 2000–04) than fuel commodities (7 %). As in the case of oil, many developing countries are highly dependent on nonfuel commodities as a source of export earnings—36 countries have a ratio of nonfuel commodity exports to GDP of over 10 %, and in 92 countries the ratio is over 5 %. Indeed, in many low-income countries, a large share of export receipts are generated by just a few commodities. Moreover, prices of some nonfuel commodities have increased more than oil prices—for example, the IMF metals index has risen by 180 % in real terms since 2002, while oil prices increased by 157 %. Given the significant exposure of many countries to fluctuations in nonfuel commodity prices, the future dynamics of commodity markets have important policy implications. Some observers have suggested that the rise of China and other large emerging markets may have led to a fundamental change in long-term price trends, and that the world has now entered a period of sustained high prices, particularly of metals (see Barclays Capital, 2006a). (..)Others believe that speculative forces have largely decoupled metals prices from market fundamentals (Societe Generale, 2006), and that prices will inevitably fall back and continue to decline gradually in real terms, as during most of the past century.

= roles of rising commodity demand from large emerging market countries (China) and of financial investors in pushing up prices. Will the current high price levels be temporary or lasting?

IMF WEO chapter 5: Long-Term Trends in Commodity Prices and Volatility. Despite recent increases, the prices of most nonfuel commodities remain below their historical peaks in real terms. Over the past five decades, commodity prices have fallen relative to consumer prices at the rate of about 1.6 % a year. This downward trend is usually attributed to large productivity gains in the agricultural and metals sectors relative to other parts of the economy. Compared with the prices of manufactures, however, commodity prices stopped falling in the 1990s as the growing globalization of the manufacturing sector slowed producer price inflation.

This long-term trend has been apparent for most of the past century and was highlighted by Prebisch (1950) and others in the 1950s. See Cashin and McDermott (2002); Deaton and Laroque (2003); Grilli and Yang (1988); and Borensztein and others (1994) for a detailed discussion. (..)Due to data deficiencies and inherent volatility in commodity prices, the academic literature does not uniformly share the view that real commodity prices are falling—see Cuddington (1992) for an alternative account.

 

Uncertainties: see the WB Global Economic Prospects/GEP 2007

See 15th December 2006 The Economist Intelligence Unit. The African economy is set for a fourth consecutive year of above-average growth, according to the World Bank's 2007 Global Economic Prospects. In 2006, oil exporters led the way with average growth of 6.9%, while (small) oil importers managed average expansion of 4.9%.

The World Bank attributes Africa's "robust" economic expansion to favourable international conditions, improved economic policies in Africa itself, accelerated regional exports (to China especially), and higher commodity prices, most notably for oil and metals. Unfortunately, manufactured exports were hit by "intense competition from China and India", and although both the US and the EU re-introduced quotas on Chinese clothing and textile exports to their markets, Sub-Saharan Africa's clothing and textile exports to the US fell 17.3% while those to the EU were down 16.9%.

(..)While increased Chinese demand for cotton and reduced price subsidies in the US and EU should benefit cotton producers in West Africa, African manufacturers of clothing and textiles will most likely continue to lose market share to China and India.

Because Africa is so reliant on commodity exports, it is the region most vulnerable to any decline in energy and mineral prices. The African countries that are most vulnerable to a commodity price shakeout are oil and mineral exporters.

 

 

See IMF WEO Sept 2006: Table 5.1. Dependence on Exports of Selected Non-fuel Commodities(2000–04; in percent)

	Country	Share in total exports
Aluminium	Suriname	47
	Tajikistan	46
	Guinea	36
	Mozambique	26
Cocoa	Côte d'Ivoire	34
Coffee	Burundi	43
Copper	Zambia	41
	Chile	31
	Mongolia	20
Cotton	Burkina Faso	42
	Benin	28
Fish	Iceland	30
	Seychelles	30

Source: IMF WEO September 2006: Table 5.1. World Bank, World Integrated Trade Solution database.

 

 

·                     The dependence on primary commodities may have detrimental effects: the concept of poverty trap

See WB Global Economic Prospects 2004: for the WB, relatively good news: in the 1980s, developing countries derived 70% of merchandise export revenue from sales of primary commodities - agriculture and energy – situation now completely reversed= 80% of revenue coming from exports of manufactures.

Even SSA exports no longer primarily resource-based: the share of manufactures in SSA exports has risen from 25% during the late 1970s to 56% in 2003 - almost all of the increase realised during the last decade.

 

BUT (see WTO World Trade Report 2003): only 6 out of 53 SSA countries achieved a sustained expansion of their exports over 1999-2002= problem of declining and volatile commodity prices= declines during the last decade, reduced export revenues. Commodity price shocks create poverty in already poor countries.

The explanation for the long-run behaviour of prices is traditionally focused on differences in demand elasticities for manufactures and commodities

+market power enjoyed by developed countries in manufactured goods.

Alternative explanations: technical progress and secular improvements in agricultural productivity.

In the short to medium term, other factors: trade policies (agricultural subsidies and tariff escalation) in developed countries, structure of the international market for commodities, global macroeconomic conditions.

The share of trade (merchandise exports plus imports) in the GDP of SSA = from 38 to 43% between 1988-89 and 1999-2000, but decline of the SSA share in world trade (source: UNCTAD 2001 Economic development of SSA: performance, prospects and policy issues).

Composition of exports: primary commodities since the colonial period: 95.3% of SSA exports were primary commodities in 1980 (oil and non-oil); 81.3% in 1997.

SSA has not diversified the structure of exports after 2 decades of structural adjustments.

 

E.g., in 1990, oil represented 97% of Nigerian exports, and in 2002, 100%, 98% in 2004, 98% in 2005 (WB WDI 2004, 2006, 2007).

In 1990, agricultural raw materials represented 62% of the total exports of Mali, and 94% in 1999 (WDI 2001); 42% in 2003 (WDI 2005).

In Benin, agricultural raw materials represented 56% in 1990, and 71% in 2001 and 59% in 2003, 49% in 2004; 61% in 2005 (WB WDI 2003, 2005, 2006, 2007).

In Cameroon, 14% in 1990, 21% in 2001, 20% in 2003, 24% in 2004; 13% in 2005: but fuel= 47% of exports in 2004; 50% in 2005 (WB WDI 2003, 2005, 2006, 2007).

In Gabon, oil revenue accounted in 2001 for 60% of the national budget (WTO, Trade Policy Review Gabon 2001).

 

See UNCTAD TDR 2005, higher growth rates in SSA, but very uneven. Growth performance in SSA fuelled by higher prices of primary commodity exports (petroleum), and strong global demand.

 

For the FAO: 43 developing countries depend on only one agricultural product for more than 20% of their total exports +54 developing countries: maximum 3 agricultural products;

For 15 developing countries, more than 50% of exports depend on less than 3 agricultural products. In 6 countries a single export crop earns more than 50% of export earnings.

 

These countries are constrained not only by the dependence on primary commodities, but by low productivity, low value added, and high competition in their main sector of activity.

 

This is recognised by the WB: see Ng and Yeats 2002 What Can Africa Expect From Its Traditional Exports?: importance of diversifying SSA exports. No major shifts in the composition of exports can occur in the short to medium-term: anti-export biases in SSA domestic policies, insufficient promotion of more competitive (low cost) prices for traditional exports. Necessity to implement policies promoting production efficiencies and lower costs: otherwise, SSA will experience major competitive export losses.

 

Slow export growth, because of the decrease of the real price of products, diminution of market share, and concentration of exports in a few products for which global demand is declining= the poverty trap: lower international prices of commodities, lower domestic agricultural income, lower agricultural wages, lower public revenues, deterioration of the terms of trade and of the balance of payments.

 

 

·                     Global trade is boosted by manufactures, not by agricultural commodities: typical UNCTAD view: advantage for East Asia, not SSA.

In the 1990s: the fastest growing category of products, electronic and electrical goods=1/6 of world exports. The 3 fastest growing product groups (transistors and semiconductors; computers; and parts of computers and office machines) increased their share in world exports almost 4 times, 2.6% in 1980 to 9.7% in 1998. The share in world exports of the 7 groups of electronic and electrical products tripled to reach 16% in 1998. These fastest-growing manufactures are technology-intensive and belong to sectors with high productivity growth. The share in world exports of dynamic primary commodities is small.

But: shifting away from commodity exports to manufacture is not the panacea: developing countries have achieved a rising ratio of manufactured exports/GDP, but without a rising ratio of manufacturing value added/GDP. Since the early 1980s, developed countries have a lower share in world manufacturing exports, but a higher share in manufacturing value added: see UNCTAD TDR 2002.

Significant differences with respect to the income elasticities of demand for different products. This leads to disparities in their growth rates in world trade.

àA recurrent assessment: prospects for SSA are uncertain.

 

 

·                     Key debates: the characteristics of the prices of primary commodities; the issues of price decline and volatility

The price of commodities follow cycles: issue of income elasticity of the demand for specific commodities.

See the IMF WEO September 2006. The boom in nonfuel commodity prices: Can it last? Historical evidence: e.g., income elasticity for metals is high; demand for metals typically grows in parallel with average per capita incomes until the latter reach about $15,000-$20,000 (adjusted for purchasing power). This is higher than current per capita incomes in China and India.

 

UNCTAD position: downward trend in relative prices vis-à-vis manufactured goods

+ the terms of trade of commodities exhibit higher volatility, much more than the terms of trade for exports in other regions such as East Asia (twice as much) or industrial countries: 4 times as much: see UNCTAD 2001 Economic Development in Africa: Performance.

 

See A raw deal for commodities Apr 15th 1999 The Economist print edition

 

Decline of commodity prices relative to manufactures prices: challenges for SSA depending on primary commodities for a substantial share of export revenues. The decline will continue in the longer term: productivity increases in commodities continue to outpace those in manufactures.

Upturn in the terms of trade/ToT during the commodity price booms of the 1970s, but the trend from the early 1980s has been downward. The levels of ToT at the end of the 1990s were 24 and 21% below those attained in the early 1970s for North Africa and SSA respectively.

However, short-lived surges in commodity prices and ToT, e.g. one after 1993, making a significant contribution to economic recovery in SSA, but lasted only 3 years; the ToT of SSA in 1998 was 15% below the peak reached in 1996.

 

See UNCTAD TDR 2004: demand from China (+ exchange rates factors, e.g., weak dollar). After a long period of decline, commodity prices in current dollar terms have been on the rise since 2002, for all commodity groups, the largest increases being in vegetable oilseeds and oils, agricultural raw materials and minerals, ores and metals groups. Price increases of food and tropical beverages very modest + price increases for coffee and cotton. Despite the recent commodity price increases, viewed over a longer term perspective, and in real terms, prices still remain at very low levels and considerably below their levels of the 1970s and early 1980s.

 

 

For UNCTAD, the secular decline in SSA terms of trade is an important reason for SSA marginalisation in world trade.

A significant part of the decline in the share of SSA in world exports is explained by declines in the prices of SSA exports relative to those of the rest of the world. If the ToT of SSA had stayed at the level of 1980, its share in world exports today would have been almost twice as high. If non-oil exporters in Africa had not suffered from ToT losses, the current level of per capita income would have been higher by as much as 50%: see UNCTAD 2002, Economic performance.

Prices of specific agricultural commodities have declined much more than the average decline because of large supply increases, large increases in productivity, weak demand caused by falling population growth rates and income elasticities, and policies supporting production in industrialised countries.

E.g., large supply increases from Vietnam and Brazil and slow growth in demand despite low prices, robusta coffee prices have fallen to nominal lows not seen since the 1960s. In 2002, cotton prices fell to nominal levels, which were last seen in 1986 and the mid-1970s. (see GEP 2003)

Real commodity prices declined from 1980 to 2001: World Bank's index of agricultural prices: down 53%, crude oil prices down 46%, metals and mineral prices down 35%.

 

 

·                     For a general assessment by UNCTAD of the problems linked to commodity dependence

See UNCTAD. 2008. Trade and Development Report 2008: Commodity Prices, Capital Flows and the Financing of Investment

Primary commodity markets: new patterns and linkages. In 2008, the prices of all commodity groups were much higher than their peaks of the mid-1990s, except for tropical beverages. This upward trend has been mainly the result of rapidly increasing demand from several fast growing developing economies. Price movements have also been influenced by the closer links between energy markets and agricultural commodity markets, particularly those for food crops, and by the closer links between primary commodity markets in general and financial markets. Thus the level and stability of commodity prices has become an important policy issue, not only from the traditional development perspective, but also from the perspective of the functioning of a highly integrated global economy.

Higher oil prices influence the final prices of other commodities, particularly food crops and vegetable oils, because they have led to increased competition for arable land to grow crops for biofuel production, as an alternative to oil. This trend has been reinforced by policy measures in the EU and the United States to accelerate the substitution of traditional fuels by biofuels. Together with extremely low inventory levels and the turbulence in financial markets, this has probably been one of the factors encouraging speculative demand for such commodities. The depreciation of the dollar is an additional factor contributing to the higher commodity prices in dollar terms. For instance, between May 2007 and May 2008 the index of non-fuel commodity prices in dollars increased by 41.9 per cent, but only by 32.7 per cent in SDRs and by 23.3 per cent in euros.

 

Primary commodities: unresolved problems of commodity dependence and price instability. Uncertainty about key prices generally has a negative impact on the investment and production planning of both sellers and buyers, and renders macroeconomic, fiscal and financial management more difficult. This is why, from the perspective of those developing countries whose export earnings and national income are highly dependent on commodity markets, both the long-term trend of primary commodity prices and their volatility have always been a concern. Price volatility is one of the reasons why commodity-dependent economies have lower long-term average growth rates than economies with diversified production structures. For every country, reducing dependence on a few primary commodities through diversification and industrial development is the best strategy in the long run to reduce vulnerability to commodity price shocks and unfavourable price trends. But diversification is a complex and time-consuming process that is not possible without capital formation and skills acquisition. It also depends on stable earnings from primary commodity exports. From the perspective of consumer countries and the world economy as a whole, fluctuating commodity prices render policies aimed at macroeconomic stability more difficult. Given the problems created by unstable commodity prices, the global economic system would gain greater coherence if new efforts were made at the multilateral level to control price fluctuations on international commodity markets, while allowing smooth adjustments of relative prices that reflect market fundamentals and structural changes.

However, it is unlikely that international price stabilization mechanisms agreed multilaterally between producers and consumers, such as the various commodity agreements of the past, will again become a political option in the near future. It would therefore be useful to tackle the factors that cause large commodity price fluctuations in the first place and correct any undesired market outcomes. Stricter regulatory measures that help contain speculation on commodity markets could be one important step, since commodity market speculation typically exacerbates price trends originating from changes in fundamentals.

International compensatory finance schemes employed in the past to mitigate the impact of volatility on developing countries have proved insufficient. Such schemes would need to make more rapid disbursements and be equipped with more financial resources for balance-of-payments or income support. They should not only be able to cover shortfalls in export earnings but also higher import costs resulting from sharp increases in prices of essential commodity imports, particularly food and energy. These schemes might also include the provision of grants to be passed through to the most seriously affected producers or households in the poorest countries. In principle, it should be sufficient that the country has no control over the cause of the underlying price shock to be eligible for such assistance, and conditionality, if any, should be linked directly to the use of the financial resources provided under the scheme.

At the national level, institutional arrangements that serve as a buffer between prices on international commodity markets and earnings of domestic producers may facilitate the latter's investment decisions and the financing of measures to improve productivity. Experience with systems of income support in many developed countries could provide useful lessons, but the costs of these systems normally exceed the budgetary possibilities of developing countries. A possible solution would be for these countries to consider an institutional arrangement whereby they would retain part of the windfall gains from high commodity prices in national funds for release to domestic producers when international market conditions are unfavourable. If initiated in a phase of relatively high prices, such an arrangement would assure a smooth income stream for their producers without unduly straining budgetary resources.

The gains of developing countries from commodity exports and their impact on financing investment in support of diversification and industrialization also depend on how they are distributed. There are strong indications that in several countries a large share of the considerable gains from the higher prices of hydrocarbon and mining products have gone into profit remittances of the foreign enterprises involved in their exploitation. This means they are lost for capital accumulation in the country where they originate, unless they are reinvested by the foreign companies. But the latter may often not be in the interest of the exporting country either because, rather than contributing to diversification and industrial upgrading, such reinvestment in the same activities tends to perpetuate commodity dependence.

 

 

 

 

 

·                     The negative impacts of price volatility in SSA, in a context of SSA vulnerability to external shocks

Over the long-run, the volatility of the terms of trade is detrimental to growth

 

Macroeconomic volatility per se has a negative impact on growth

See Loayza, Rancière, Servén, and Ventura. 2007. Macroeconomic Volatility and Welfare in Developing Countries: macroeconomic volatility: both a source and a reflection of underdevelopment. High aggregate instability results from a combination of large external shocks, volatile macroeconomic policies, microeconomic rigidities, and weak institutions.

Volatility entails a direct welfare cost for risk-averse individuals, as well as an indirect one through its adverse effect on income growth and development.

 

 

 

 

An example of volatility

Market.view In one corner... Nov 25th 2007 From Economist.com What we can learn from a divided commodities market. The two-tier nature of the commodity market is becoming ever more apparent. In the bullish corner are oil and gold, which in the course of the last week have flirted with $100 a barrel and re-crossed the $800 an ounce mark respectively. In the bearish corner are the industrial metals, which are falling sharply in price.

 

 

For those interested by economic history, it has been shown over 1870-1939 by Blattman, Hwang and Williamson (2004), The Impact of the Terms of Trade on Economic Development in the Periphery, 1870-1939: SSA exports=real price deterioration. Small economies dependent upon primary exports are vulnerable to external shocks, such as changes in the ToT.

 

ToT shocks are very costly for SSA countries, as highlighted by UNCTAD.

Export revenues are a major determinant of these countries' balance of payments position, external indebtedness, fiscal situation, levels of savings and investment, and hence their aggregate supply and demand

+ government revenues in SSA countries depend heavily on taxes levied on exports and importsà fiscal earnings highly vulnerable to changes in the value of export earnings (see UNCTAD 2003 on SSA commodity dependence)

For a group of 19 SSA countries, trade taxes as a percentage of GDP declined from an average of almost 6% in 1975 to about 5.5% in 1995 (3% of GDP for other developing-country regions, and less than 0.5% in (OECD).

Economic Commission for Africa data=over 1991–2001, import duties comprised 34% and 22% of government revenues respectively in least developed and non-least developed countries of SSA compared to an average of 15% for developing countries: see UNCTAD 2003, commodity dependence.

 

Other studies show that shocks are costly to growth: see Kose and Riezman 2001, Trade Shocks and Macroeconomic Fluctuations in Africa: modeling trade shocks, i.e. fluctuations in the prices of exported primary commodities= in SSA (non-oil) they account for about half of fluctuations in aggregate output over 1970-90+ they cause prolonged recessions as they cause a significant decrease in aggregate investment.

Same result on 1980-1995 on 14 SSA countries= specialisation in primary commodities exports reduce growth, as growth is negatively affected by terms of trade instability: growth and investment improve when the terms of trade improve (see Bleaney and Greenaway 2001 The Impact of Terms of Trade and Real Exchange Rate Volatility on Investment and Growth in SSA.

SSA structural rigidity and limited access to credit= heavy costs from temporary adverse shocks. SSA experienced enormous adverse trade shocks in the 1980s, larger than in the 1930s.

 

 

·                     An issue: the asymmetry of shocks:

Commodity price cycles: price slumps last longer than booms: see Cashin et al. 2002 Booms and Slumps in World Commodity Prices

In SSA: on the period 1960-96: half terms of trade shocks were short lived, and 1/3, long-lived trade shocks, typically in oil producing countries: see Cashin and Patillo 2000 Terms of Trade Shocks in Africa – Are They Short-Lived or Long-Lived?

 

 

·                     Controversies on the origin of volatility

In particular: are they co-movement of commodity prices?:

See Cashin et al. 1999, IMF, on a measure of co-movement of economic time series (concordance) =it measures the proportion of time that the prices of two commodities are concurrently in the same boom period or same slump period.

Findings= no evidence of co-movement in commodity prices.

 

But other views: in particular, specificity of oil: see Baffes 2007. Oil Spills over to other Commodities. On the effect of crude oil prices on the prices of 35 internationally traded primary commodities for 1960-2005

Findings: the pass-through of crude oil price changes to the overall non-energy commodity index is 0.16: the fertilizer index had the highest pass-through (0.33), followed by agriculture (0.17), and metals (0.11).

The prices of precious metals also exhibited a strong response to the crude oil price. In terms of individual commodities, the estimates of the food group exhibited remarkable similarity while those of raw materials and metals gave a mixed picture.

Hence if crude oil prices remain high for some time, as most analysts expect, then the recent commodity price boom is likely to last much longer than earlier booms, at least for food commodities. The other commodities, however, are likely to follow diverging paths.

 

 

 

·                     The problem is not only the volatility and decline of the ToT, but the issue of export concentration

See Jansen 2004 Income Volatility in Small and Developing Economies: Export Concentration Matters: LDCs and especially SSA are affected by high level of exports concentration (e.g., Mauritania exports 13 products, or Angola 13 products, Congo 30 products, vs. e.g., 221 for Ireland or 214 for Portugal):

 

·                     A more micro issue, the impact of volatility on households

On the case of Ghana, see Rapsomanikis and  Sarris. 2006. The Impact of Domestic and International Commodity Price Volatility on Agricultural Income Instability: Ghana: market and nonmarket uncertainties affect the variability of agricultural income of households and especially households that are specialised in a few commodities. But almost all of income variability is due to more to domestic factors than international prices.

 

For those interested, see on the export costs at the household level in Uganda, Guido G. Porto, Irene Brambilla and Jorge F. Balat. 2008. Realizing the Gains from Trade: Export Crops, Marketing Costs, and Poverty, Washington D. C., the World Bank, Policy Research Working Paper 4488: on export costs in the process of poverty reduction in rural Africa. Marketing costs that emerge when the commercialisation of export crops requires intermediaries can lead to lower participation into export cropping.

Finding: i) farmers living in villages with fewer outlets for sales of agricultural exports are likely to be poorer than farmers residing in market endowed villages; ii) market availability leads to increased household participation in export cropping (coffee, tea, cotton, fruits); iii) households engaged in export cropping are less likely to be poor than subsistence-based households. =>availability of markets for agricultural export crops helps realise the gains from trade. Key role of market access and reduction of marketing costs.

 

 

·                     The failure of institutional arrangements aiming at reducing price volatility or price decline

- Domestic schemes, e.g., marketing boards or stabilisation funds.

- International schemes = Commodities Agreements (coffee, cocoa, etc.). Some have been unable to adapt to changes in the market, +problems of free riding.

 

The failure of these arrangements has been an argument for the IFIs for thir dismantling and replacement by market mechanisms (part of adjustment programmes).

For the IFIs, answers regarding the issue of volatility: market solutions: but mostly unsatisfactory, many problems.

For a WB view of the management of commodities booms and busts: see Varangis, Akiyama and Mitchell 1995 Managing Commodities Booms - and Busts,

 

IFIs proposals = e.g., insurance mechanisms for producers, supposed to provide a minimum price for a part of production and solve the problem of price uncertainty (see Sarris 2002 on commodity insurance in the case of cocoa producers in Ghana)

 

Or 'commodity currencies' = real exchange rates of commodity exporting countries move together with real prices of commodity exports: see Cashin, Cespedes, Sahay 2002 Keynes, Cocoa and Copper: In Search of Commodity Currencies.

Also proposals of pegging the export price.

 

The IMF mechanisms for compensatory financing, i.e. the Compensatory and Contingency Financing Facility (CCFF) (1963) and the Buffer Stock Financing Facility (BSFF). CCFF= a contingency element (ECM), not used between 1992 and 2000 + a compensatory element (CFF). The BSFF=a facility not been used between 1986 and 2000. CCFF not used since 2000. BWIs=advocate market solutions=e.g., risk management, hedging, derivatives, futures.

+EU mechanisms: e.g. the Stabex for the ACP countries (1975-2000); + the EU preferential access schemes (e.g. the Lomé Convention, then the Cotonou Agreement, now the EPAs…)

 

On the limitations of these schemes, see Page and Hewitt 2001 World Commodity Prices: Still a Problem for Developing Countries?

àAll temporary and limited responses to structural problems.

See Akiyama and Larson 1994,

See Maizels 1997 on commodity markets, on institutional support measures.

 

 

3. theoretical issues regarding the export of commodities

 

·                     The well-known Prebisch-Singer hypothesis: the key papers are Prebisch (1950), Singer (1950), Singer (1987).

= the secular decline in world real prices of commodities

= deterioration in the terms of trade for developing countries/industrialised countries

= deterioration in the commodities/manufactures terms of trade; unequal exchange relations of developing countries with the industrial countries.

See Prebisch 1959 Commercial Policy in the Underdeveloped Countries: necessity of industrialisation, as increasing productivity and technical progress are major factor of growth.

See Sarkar and Singer (1991), Manufactured Exports of Developing Countries and their Terms of Trade since 1965, on the terms of trade since 1965: the unit values of exports of the developing countries declined by about 1% a year in relation to those of the developed countries, but expansion in the volume of manufactures exported by developing countries, thus average annual increase of 10 % in their income terms of trade

+ ambiguous results over the 1965-85 on the trends of the terms of trade.

Exports from developing countries are primary products; imports are manufactured goods. Markets for manufactured goods are imperfectly competitive, vs markets for primary products.

à a gap between their respective prices and costs of production. Hypothesis confirmed, with intervals periods of improvements of the terms of trade of primary producers: see Bloch and Sapsford 2000 Whither the Terms of Trade? An Elaboration of the Prebisch-Singer Hypothesis.

 

Subsequently, recommendations of active state intervention for promoting exports of manufactures. Close positive relationship between commodity prices movements and growth. Additional income during booms helps, loss in income during slumps hurt.

 

The pricing of commodities: a complex issue: see the model in Deaton and Laroque 2003 A Model of Commodity Prices after Sir Arthur Lewis: commodity supply is assumed infinitely elastic in the long run, the rate of growth of supply responds to the excess of the current price over the long-run supply price, and demand is linked to the level of world income and to the price of the commodity.

 

The Prebisch-Singer thesis is debated in many studies. In particular, the decline is not always found:

E.g., minor effect of ToT shocks in Hadass and Williamson (2003)

E.g., see Grilli and Yang (1988), Primary Commodity Prices, Manufactured Goods Prices and the Terms of Trade of Developing Countries= no trend, and the observed pattern of commodity prices may be explained by periodic structural breaks.

+problems of spurious regressions.

 

Stationarity of the trend and linear negative trend of the ToT found in other studies: see Ardeni and Wright 1992 The Prebisch-Singer Hypothesis: a Reappraisal Independent of Stationarity Hypothesis.

 

·                     The Prebisch-Singer thesis is a major element of pessimism, as an explanation that commodity-dependent countries face slow growth

= low income elasticities of demand for commodities = difficulties for commodity-dependent countries to export and, hence, economies to grow. Countries adopted import substitution policies.

Studies find declining commodity prices in relation to manufactured products prices

And commodity price volatility that cause volatile export revenues and negative effects on investment and on government deficits, risk-averse investors being hesitant to invest in the context of uncertainty.

Volatile commodity export revenues cause government revenues to fluctuate widely, which in turn increases government deficits and, hence, external debts.

 

 

·                     See the studies by Alfred Maizels

E.g. Maizels 2000 on the manufactures ToT of developing countries vis-à-vis the US: significant terms of trade deterioration for developing countries over the first half of the 1980s; no significant change since then+ important role of technological innovation: SSA not in a good position as an innovator, vs., e.g., Malaysia.

See Maizels, 1984. A Conceptual Framework for Analysis of Primary Commodity Markets;

See Maizels 1987. Commodities in Crisis: An Overview of the Main Issues: on the 'commodity problem', and intrinsic instability of commodity markets

= theoretical reasons for believing that over the long term the trend in the commodity terms of trade is likely to deteriorate. Cf Prebisch (1950; 1951) and Singer (1950)

= low price-and-income-elasticities of demand for commodities as compared with manufactures;

+ the technological superiority of developed countries which, together with the economic power of their transnational corporations, allows these countries to capture excess profits in trade with underdeveloped areas;

+ and the asymmetrical impact of labor union power in developed countries and labor surplus in developing countries on the division of the benefits of increased productivity.

 

Solutions? See Maizels 1994. The Continuing Commodity Crisis of Developing Countries. Since the early 1980s the dominant feature of the international commodity markets has been a sharp downtrend in prices, though short-term instability has also remained excessively high for many commodities.

International policy should therefore be focused on supply management to raise depressed levels of commodity prices.

For Maizels, the problem of short-term commodity price instability is best tackled by a series of international buffer stocks, rather than by hedging on the financial markets, a technique which has serious limitations for exporters in developing countries.

And also diversification.

I.e., supply management is a proposal that disagrees with the IFI recommendations, which consider that markets provide the best solutions.

 

 

·                     The secular decline in commodity prices is recognised by the IMF.

For a term of trade shock, the distinction between a temporary and permanent shock is essential.

IMF researchers recognise that the secular decline in commodity prices require policies concentrated on export diversification and stabilisation funds.

See Sapsford and Singer 1998 The IMF, the World Bank and Commodity Prices: this recognition by the IMF and the WB is welcomed; but the questions remain regarding on the policies the IFIs find appropriate.

 

 

·                     A key debate: comparative advantages and factor endowments: does SSA have a comparative advantage in primary commodities exports?

See Wood and Mayer 1998 Africa's Export Structure in a Comparative Perspective.

Slow growth: more due to poor investment appraisal and poor quality of governance: see Deaton 1999 Commodity Prices and Growth in Africa.

Commodity prices variability: poor macroeconomic performances attributable to difficulty of predicting commodity price fluctuation, or flawed political and fiscal arrangements? Poor economic growth has negative influence on political exits: see Deaton and Miller 1996 International Commodities Prices, Macroeconomic Performances and Policies in SSA.

Ricardo: principle of comparative advantage: trade pattern based on the relative efficiency in production, not the absolute: when 2 countries enter into voluntary trade through markets, there are potential gains from trade even when one country is absolutely more productive in every line of production.

Protection: temporary suspension of the principle of comparative advantage. Main argument for protection= infant industry argument, when there are market imperfections in factor and product markets due to economies of scale, externalities (e.g. training), goods having the attributes of public goods, e.g. knowledge.

Heckscher-Ohlin model: the trade pattern is determined by differences in national factor endowments and the way technologies allow factors to be combined in the production of different products: factor proportion models. Trade equalise factor returns internationally. In free trade, countries export the product making relatively intensive use of its relatively abundant factor (labour or capital).

Gains from trade, trade openness as a factor of growth, increase of demand for the good where a country has a comparative advantage - comparative advantage in labour-intensive products.

 

 

·                     Controversies on the issue of comparative advantages

Controversy regarding the options: exports of primary commodities vs industrialisation and exports of manufactured products (see Sachs and Warner 1995 Economic Reform and the Process of Global Integration,).

SSA endowments of relatively abundant natural resources and relatively scarce human skills =little hope of developing manufacturing for export, except in unskilled-labour-intensive primary processing activities.

On the roots of comparative advantage when mobile capital and immobile resources and labour of different skills, see Wood and Mayer 1998, Africa's Export Structure in a Comparative Perspective,

Investment in human capital needs time=needs decades before SSA relative factor endowments could significantly alter.

SSA static comparative advantage therefore lies with primary production, agricultural, e.g. mineral and petroleum production and related unskilled-labour-intensive activities.

Exceptions: Mauritius and South Africa.

 

 

·                     A theory highlighting the negative effects of exporting commodities: the 'Dutch disease'.

Sudden inflow of large foreign exchange into an economy may have negative effects, e.g. the development of a natural resources sector, e.g., the discovery of large reserves

For thoese interested, the key studies: Corden W. M. and Neary J. P. 1982. Booming Sector and De-Industrialisation in a Small Open Economy, Economic Journal Vol. 92 No. 368: 825–848; Gelb, Allan H. ed. 1998. Windfall Gains: Blessing or Curse? New York: Oxford UP.

Dutch disease results from commodity booms and busts and high commodity price volatility.

Negative impact of a significant appreciation of the currency when a commodity boom results in large unanticipated foreign exchange inflows. This appreciation adversely impacts non-booming export and import-substitution sectors.

When the boom ends, the country is worse-off than before the boom, because it ends up with much weaker tradable industries that did not boom while the once-booming industry has gone bust.

This was a contribution of Hans Singer to the Prebisch-Singer thesis: even if the terms of trade of primary products improved à reduction of the incentive for industrialisation, incentive to produce more primary products ='industrialisation crowding out'.

 

See Clemens Breisinger and James Thurlow. 2008. Asian-driven Resource Booms in Africa: Rethinking the Impacts on Development. Today's resource boom in Africa, driven by Asian economic growth, offers new opportunities for resource-rich African countries. Contrary to the experience of previous booms, however, most mining profits now accrue to foreign companies, leaving little room for governments to use revenues for pro-poor investments or to mitigate adverse distributional impacts.

 

Case of Zambia: despite privatisation, Dutch disease remains a valid concern and may hamper economic diversification, worsen income distribution, and undermine poverty reduction. Mining royalties must be increased and used to finance growth-inducing investments: otherwise, risk of resource trap.

 

 

·                     A different theoretical perspective, but leading to similar pessimism: the natural resource 'curse' (see the lecture on growth)

See Sachs and Warner 1995: they found an inverse association between natural resource intensity and growth, the key division for endogenous growth effects is traded manufacturing versus natural resources.

 

 

·                     The case of oil-exporting countries: volatility of oil prices, hence risks for the fiscal balance.

The oil-producing countries in SSA = Angola, Cameroon, Chad, the Republic of Congo, Côte d'Ivoire, Equatorial Guinea, Gabon, and Nigeria,

 

For an IMF view, see Olters 2007. Old Curses, New Approaches? Fiscal Benchmarks for Oil-Producing Countries in SSA. Buoyant oil prices have allowed oil-producing countries in SSA to increase oil exports and fiscal revenues, i.e. resources for social needs.

To preclude another boom-bust cycle, a fiscal benchmark must be anchored in sustainability grounds (Leigh-Olters 2006). The difference between current primary deficits and those that could be maintained after oil reserves are exhausted represent an indication of the degree to which fiscal positions will have to be adjusted—either gradually, while the overall balances remain in surplus, or abruptly, once oil revenues begin to dwindle.

 

 

 

·                     Another theoretical explanation of the negative effects of the export of commodities: the 'adding-up problem', or the 'fallacy of composition'

=What may be true for one country is false for many countries =decline in prices if several countries export simultaneously the same commodities, e.g. if there is a multiplicity of players (or new players, e. g. coffee in Vietnam). Slow growth of demand despite low prices.

Countries having difficulties in promoting primary sector exports= move to labour-intensive manufacturing as demand for these products is more stable than the demand for primary products.

+moving into labour-intensive manufactures because these products are more market-dynamic than primary commodities=they offer better prospects for expansion of volume of exports without risks of sharply falling prices and/ or earnings because of low price elasticities of demand.

But world trade in several primary commodities has been growing faster than that in many manufactures, mainly labour-intensive.

 

Which threshold beyond which an expansion of exports leads to a drop in prices?? = problem of the fallacy of composition

=a small developing country can substantially expand its exports without flooding the market and seriously reducing the prices, but this is not true for developing countries as a whole, or even for large countries, e.g. China and India.

A rapid increase in exports of labour-intensive products=a risk that the terms of trade will decline to such an extent that the benefits of any increased volume of exports may be more than offset by losses due to lower export prices

This gives rise to 'immiserizing growth': concept coined by Bhagwati 1958. For Bhagwati, under certain circumstances economic expansion may be harmful: it increases output, which might lead to a deterioration of the ToT that offsets the beneficial effects of expansion and reduces the real income of the growing country (see also TDR 2002).

Low price elasticity of demand for commodities and low income elasticity of demand. When the demand is not increasing, the revenue from a commodity with low price elasticity of demand falls when supply is increased. The additional supply causes price to fall proportionately more than the increase in supply. It is not possible for all the commodity-dependent countries to achieve high export growth because when the world export volume of commodities with low price and income elasticities is increased, the aggregate export revenues of these countries decline.

However: there are successes, e.g. horticulture, mining (Ghana). Research=essential for the success of palm oil in Malaysia; better infrastructure in transport and communication: see Yabuki and Akiyama 1996 Is Commodity-Dependence Pessimism Justified?.

Commodity prices are volatile +over the long term, declining trend. Developing countries' commodity prices= 40% lower in 1995 than in 1980=reduced export earnings for many countries highly dependent on commodity exports.

 

The adding-up problem=when a country significantly increases production of a commodity with a low price elasticity of demand relative to world production. The price of the commodity drops.

For countries that expand production, the price decline can be large enough that the percentage increase in export revenues is much less than the percentage increase in production. When the problem is serious, export revenues can even decline.

The adding-up problem creates real welfare losses for producers when marginal production increases lead to declining net revenues.

The adding-up problem is not unique to commodity markets, but occurs mostly in commodity markets= more severe when demand and supply price elasticities are low and when production is concentrated in a few countries.

Primary commodities must be processed and transported before they are consumed. Frequently the cost of the underlying commodity= a small share of the final product's price.

Demand for commodities varies little with a change in price (=low price elasticity of demand). The price elasticity of demand=the heart of the adding-up problem. But income, tastes, and demographics also affect demand.

 

 

·                     The problem of fallacy of composition or adding-up does not affect only commodities, but also possibly manufactures.

Not on SSA countries: See Razmi and Blecker. 2008. Developing Country Exports of Manufactures: Moving up the Ladder to Escape the Fallacy of Composition: on 'fallacy of composition' by analysing the demand for exports of the 18 developing countries that are most specialised in manufactures in the markets of the 10 largest industrial countries.

Most developing countries compete with other developing country exporters rather than with industrialised country producers. A smaller number of countries that export more high-technology products compete with industrialised country producers and also have higher expenditure elasticities for their exports. The fallacy of composition applies to the larger group of countries exporting mostly low-technology products.

 

 

·                     For a discussion of the argument of the fallacy of composition in the context of China's growth, see Mayer and Fajarnes. 2005. Tripling Africa's Primary Commodity Exports: What? How? Where?, Income growth in SSA would be associated with roughly a tripling of Africa's primary exports.

Increased SSA supply on world commodity markets would tend to make prices lower, but not by much, given the smallness of its market shares. Rising global demand from sustained rapid growth in natural-resource-poor Asian countries, particularly China, would compensate such a potential fall in prices and provide opportunities for SSA primary exports. In SSA, extractive industries would benefit directly from China's rising imports, while exporters of agricultural products would benefit indirectly from rising world market prices associated with Asia's growing primary imports.

From Mayer and Fajarnes 2005

But Mayer and Fajarnes insist that development is associated with an expansion of SSA output and exports of both primary products and manufactures. Raising agricultural productivity is a crucial determining factor of industrialisation.

The basic problem in agrarian economies, including SSA, is how to manage the relations between agriculture and the rest of the economy in a way that promotes agricultural growth and thus enables a structural transformation in which the relative importance of the agricultural sector declines as other sectors, and particularly manufacturing, move onto a dynamic growth path.

 

·                     In the mid-1990s, even the World Bank recognised that free trade is not optimal for countries that export commodities like cocoa or coffee. This problem of adding-up is recognised by economists within the WB:

See Gilbert and Varangis. 2003 Globalization and International Commodity Trade with Specific Reference to the West African Cocoa Producers: all producers now face world rather than domestic prices. Producer prices have tended to rise as a share of fob prices as intermediation costs and tax has declined. But inelastic demand: the downward shift of the aggregate supply curve results in lower world prices. Farmers therefore get a higher share of a lower price.

E.g. cocoa market: liberalisation benefits in cocoa largely on developed country consumers at the expense of the governments of the exporting countries.

 

 

·                     For a dissenting view vis-à-vis the IFIs– from the G-24 and UNCTAD, see Ul Haque, 2004. Commodities under Neoliberalism: The Case of Cocoa:

= on cocoa as an illustration of the problems faced by primary commodity producers. Market liberalisation is not responsible for improvements in productive efficiency. No convincing evidence that the producer's share in the export price increased.

Market liberalisation diverted attention from the main concerns = market volatility, low prices, and the declining producers' share in the value chain. + institutional vacuum created by the abolition of state marketing authorities in cocoa producing countries.

 

 

·                     The South competing against the South in the pursuit of export-led growth

=another dimension of the fallacy of composition mechanisms and price decline

Problem of diverging interests among developing countries, problems of collective action and prisoner's dilemma.

See Razmi and Blecker 2004 The Limits to Export-Led Growth: there are demand-side constraints on export-led growth; world demand plays a major role in determining developing countries of manufactures.

=on a panel of 10 industrialised and 18 developing countries: countries that report significant price effects compete with other developing countries exporters, not with manufacturers in developed countries; greater degree of substitutability between the products exported by developing countries.

 

Example: trade liberalisation in groundnut markets=South-South dimension= under free trade SSA exporters should gain because they are net sellers of groundnut products.

But policies in India and China have heavily depressed the world prices of groundnut productsà cost for smaller developing countries, mostly in SSA= recognised by the WB: see Diop, Beghin and Sewadeh 2004 on groundnut policies, WB.

 

 

4. The impact of China?

 

·                     Increasing complexity in the debate on the relationships between the export of commodities and growth:

I.e. the recent demand from China for SSA commodities, e.g., oil, cotton, metals…

 

 

Source: International Crisis Group (2008), China's Thirst for Oil, Brussels, International Crisis Group, Asia Report 153

 

 

 

 

 

On China and Africa: see Feb 3rd 2007, the Economist)

 

 

China's share of sub-Saharan Africa's trade with the world has risen steeply to 10% in 2005 (see chart), and that volume is expected to double by 2010.

 

 

See the IMF SSA Regional Economic Outlook/REO, April 2007: Asia now receives about 25% of SSA's exports. China and India together account for about 10% of both SSA exports and imports—25% more than the share of these two countries in world trade (Broadman, 2007). The emergence of China as an important trade partner for SSA is most pronounced for fuels and raw materials. From small amounts in 1990 China's share increased to one-fourth of raw materials and one-sixth of fuels in 2005.

Limited evidence of product diversification in the export pattern. In fact, the share of fuels has risen to over half of total SSA exports.

 

Outcomes are uncertain, too recent. Many arguments view this as a positive process: price increases, increase in exports, growth….

But many arguments have a pessimistic view: e.g., re-specialisation in commodity export, reducing incentives for diversification, hence making it more difficult, increase in dependence….

 

 

·                     See the IDS (Sussex) programme on 'Asian Drivers', China and SSA, led by Raphael Kaplinsky and others: IDS website.

See Kaplinsky 2006. Revisiting The Revisited Terms of Trade: Will China Make A Difference?: Singer and Prebisch explained the declining terms of trade of developing countries via country- and product-specific factors. Over the past decade, simultaneous price differentiation within commodities (with the prices of some commodities increasing) and within manufacturing (with the price of many manufactures falling).

These price changes may reverse the decline in the terms of trade of commodity producers. The entry of China into the global market has played an important role in this, augmenting the demand for many ''hard commodities.''

China's role as an exporter of manufactures, coupled with concentration in global buying may undermine the prices of many manufactures.

 

 

 

See Kaplinsky and Morris. 2008. Do the Asian Drivers Undermine Export-Oriented Industrialisation in SSA? An increase in outward orientation, and in export-oriented manufacturing in particular is often viewed as suitable developmental path for SSA: demonstration effect of China and the earlier generation of Asian NICs + theory.

But the entry of China into the global economy as an exporter of manufactures: severe problems for export-oriented growth in SSA.

Cf SSA's recent experience in the clothing and textile sectors, often considered to be the first step in export-oriented manufacturing growth.

Without sustained trade preferences over Asian producers, SSA's clothing and textile industry will be largely excluded from global markets and face significant threats in its domestic market.

 

 

See Kaplinsky, McCormick and Morris. 2007. The Impact of China on SSA: links between China and SSA = 3 vectors of interaction – trade, foreign investment and aid. Chinese involvement in Africa is driven predominantly by the quest for material inputs (oil and other primary commodities) required for its infrastructural investments and booming manufacturing sector. Early years: close coordination between Chinese involvement in these 3 related vectors.

Chinese involvement in SSA has important policy implications for growth, distribution and policy = a spur for some of SSA's key commodity exporting economies, but its impact on manufacturing (both that destined for domestic and export markets) has been adverse.

Even some of the benefits of the commodity price boom are ambiguous, since these are often associated with rising exchange rates, corruption and violent conflict.

Commodity-based production also has adverse distributional impacts when compared to manufacturing.

 

 

 

In particular, problems for the textile sector

The share of SSA exporters in the US clothing and textiles imports grew between 2001 and 2004, reflecting the combination of quota-access and preferential AGOA trading arrangements.

But the removal of MFA quotas set back this advance. SSA exporters experienced a significant fall in their share of the US market after quota removal. By contrast, the share of China in each of these major product markets grew significantly.

 

 

·                     Figures and impact are perhaps more modest in reality? But clearly growing: see Besada, Wang and Whalley. 2008. China's Growing Economic Activity in Africa:

Trade between the whole of Africa and China (imports and exports summed) grew from $10.6 billion to $73.3 billion between 2000 and 2007, and between SSA and China from $7 billion to $59 billion over the same period.

 

 

China is now Africa's third largest trading partner behind the EU and the US.

The Chinese FDI stock in Africa has grown from $49 million in 1990 to $2.6 billion in 2006. While the annual growth rates of trade and investment flows are high (around 30% per year sine the late 1990's), the levels are still considerably smaller than claims on the influence of China on SSA might suggest.

China in 2006 accounted for only $520 million of inward FDI compared to a total from all sources of $36 billion, around 1.4% of total FDI inflows to Africa; and only 8.6% of African exports and 9.6% of African imports.

African interdependence with China thus remains proportionally smaller than that for most other geographical areas, but is growing rapidly.

 

 

·                     For an IMF view, see Wang 2007. What Drives China's Growing Role in Africa?: Nuanced views.

Quantified assessment of China's influence as market, donor, financer and investor, and contractor and builder.

Government policies, markets for each other's exports, SSA demand for infrastructure, and China's differential approach to financing have together moved commercial activities—trade and investment—to the center of China-SSA economic relations.

= process supported both by China's public sector (and state financial institutions) and the private sector.

 

 

From Wang 2007

 

See the companion paper: Wang, Jian-Ye and Abdoulaye Bio-Tchané. 2008. Africa's Burgeoning Ties with China Finance and Development, vol. 45, n°1, March, pp. 44-47.

Trade is growing: Two-way trade flows between Africa and China have been growing rapidly. Between 2001 and 2006, Africa's exports to and imports from China rose on average by more than 40% and 35%, respectively, significantly higher than the growth rate of world trade (14%) or commodities prices (18%). In dollar terms, for both imports and exports, the increase in that period was from about $10 billion to more than $55 billion (see Chart 1). China is now Africa's third largest trading partner after the United States and the European Union. Its share in Africa's annual export growth has almost doubled since 2000 (see Chart 2).

 

 

The composition of goods traded between Africa and China is similar to that between Africa and its other major trading partners (see Chart 3). In 2006, oil and gas accounted for over 60% of Africa's exports to China, followed by nonpetroleum minerals and metals at 13%. Africa's imports from China comprised mainly manufactured products and machinery and transport equipment, which together accounted for about three-fourths of total imports. The similar composition of goods traded between Africa and its main trading partners suggests that the recent surge in Africa-China trade largely reflects the comparative advantages of each partner, given their stage of economic development, rather than any unilateral interest by China in exploiting natural resources.

 

 

 

 

·                     For WB views

See the WB study: Broadman, Isik, Plaza, Ye and Yoshino. 2007. Africa's Silk Road; China and India's New Economic Frontier. The acceleration of South-South trade and investment is one of the most significant features of recent developments in the global economy. For decades, world trade has been dominated by commerce both among developed countries— the North—and between the North and the developing countries of the South. Since 2000 there has been a massive increase in trade and investment flows between Africa and Asia. Today, Asia receives about 27% of Africa's exports, in contrast to only about 14 percent in 2000. This volume of trade is now almost on par with Africa's exports to the United States and the European Union (EU)—Africa's traditional trading partners; in fact, the EU's share of African exports has halved over the period 2000–2005. Asia's exports to Africa also are growing very rapidly—about 18 percent per annum—which is higher than to any other region

 

 

See Zafar 2007. The Growing Relationship between China and SSA: Macroeconomic, Trade, Investment, and Aid Links: China's search for natural resources to satisfy the demands of industrialisation: trade between China and Africa in 2006 totalled more than $50 billion, with Chinese companies importing oil from Angola and Sudan, timber from Central Africa, and copper from Zambia. Demand from China has contributed to an upward swing in prices, particularly for oil and metals from Africa, and has given a boost to real GDP in SSA. Chinese aid and investment in infrastructure are bringing needed capital to the continent.

But strong Chinese demand for oil increases the import bill for many oil-importing SSA countries, and its exports of low-cost textiles, while benefiting African consumers, is threatening to displace local production. China poses a challenge to good governance and macroeconomic management in Africa because of the potential Dutch disease implications of commodity booms.

China and India will dominate 80 percent of the global textile market following the phase out of quotas (end of the MultiFiber Agreement, 1 January 2005). The competition from growing Chinese imports in Africa, due to lower production costs and better technology, hurt the textile sectors in a number of African economies: Botswana, Kenya, Lesotho, Madagascar, Mauritius, South Africa, and Swaziland.

=> China is an opportunity for SSA to reduce its marginalisation from the global economy, but a challenge as well.

 

From Zafar 2007

 

 

 

Zafar 2007: the dispersion of China's trade with Africa shows that resource endowments trump geographic proximity as an explanatory variable for trade flows.

 

 

 

 

 

·                     A positive impact of China on SSA growth? But mixed impact on SSA political development…

See Meyersson, Padró i Miquel and Qian (2008), The Rise of China and the Natural Resource Curse in Africa: causal impact of China's rising demand for natural resources (NR): exporting NR overall has no effect on economic growth but has potentially negative effects on political institutions.

 

 

 

 

 

 

 

 

5. the debates on the relationship between Trade openness and growth

 

·                     The relationship between trade openness, i.e. liberalisation of exports and imports, and market access, and economic growth is a controversial issue.

In particular, in the context of countries that mostly export commodities, what can be the benefits of trade liberalisation?

Tariff liberalisation= pressures on factor markets from more advanced foreign firms undermine the competitive position of native enterprises.

The final impact on native firms' employment, comparative advantage and factor returns depend on the size and dispersion of the technology differences, the ability of native firms to imitate more advanced technologies and the final tariff structure.

 

·                     LDCs and especially SSA countries implemented trade liberalisation more than other developing countries (see UNCTAD LDC Report 2004)

+deeper trade liberalisation in SSA LDCs than in the Asian ones, and in the commodity exporting LDCs than in the manufactures- and/or services-exporting LDCs.

 

 

·                     There are various channels in the relationship between trade openness and growth

See Wacziarg 2001 Measuring the Dynamic Gains of Trade: = the channels between trade policy and growth may be classified under 1) government policy (macroeconomic policies, macroeconomic stability, size of government); 2) domestic allocation and distribution (price distortions, factor accumulation, investment, capital goods imports); 3) technology transmission (incorporation of foreign technology in local production, foreign direct investment). Other possible channels: human capital, income inequality, corruption.

 

Review updated, see Wacziarg, Romain and Karen Horn Welch. 2008. Trade Liberalization and Growth: New Evidence. A new data set of on openness indicators and trade liberalisation dates.

Over the 1950–98 period, countries that liberalised their trade regimes experienced average annual growth rates that were about 1.5 percentage points higher than before liberalisation. Postliberalisation investment rates rose 1.5–2.0 percentage points, confirming past findings that liberalisation fosters growth in part through its effect on physical capital accumulation. Liberalisation raised the average trade to GDP ratio by roughly 5 percentage points, suggesting that trade policy liberalisation did indeed raise the actual level of openness of liberalizers. However, these average effects mask large differences across countries

 

 

See Broda, Greenfield and Weinstein 2006, From Groundnuts to Globalization: A Structural Estimate of Trade and Growth: trade enhances growth through the creation and import of new varieties.

2 channels: 1) trade raises productivity levels because producers gain access to new imported varieties. 2) increases in the number of varieties drives down the cost of innovation and results in ever more variety creation.

Example of Gabon's imports of Gambian groundnuts: they estimate the impact of new import on 4000 markets per country, then move from groundnuts to globalization by building a TFP index that aggregates these micro gains to obtain an estimate of trade on productivity growth for each country. In the typical country in the world, new imported varieties account for 15% of its productivity growth + effects larger in developing countries.

 

 

·                     A positive link between growth and trade openness?

For many economists= trade openness causes growth, through different channels.

Well-known study by Sachs and Warner (1995).See Panagariya 2004 Miracles and Debacles: in Defence of Trade Openness (Asian examples).

E.g., trade generates faster growth and poverty reduction: see Frankel and Romer 1999 Does Trade Cause Growth?

Trade liberalisation causes a temporary, and sometimes long-lived, increase in growth. Its major component= increase in productivity. Other policies are complementary /trade liberalisation= investment, institutional policies

See the review of the literature on trade liberalisation and growth in Winters 2004 Trade Liberalisation and Economic Performance.

 

 

·                     For the World Bank, the effects of trade liberalisation in SSA are positive

For those interested, see Anderson, Martin and van der Mensbrugghe 2005. Would Multilateral Trade Reform Benefit SSA: SSA could gain from multilateral trade reform in the presence of trade preferences. The WB LINKAGE model: free global merchandise trade would boost real incomes in SSA proportionately more than in other developing countries or in high-income countries, despite a terms of trade loss in parts of SSA.

For the World Bank, SSA has liberalised with the first generation trade reforms in the 1990s, but despite efforts in rationalising tariff structures, lowering rates and eliminating quantitative restrictions, trade policies maintain a bias in favour of import competing activities over exports: see Hinkle et al. 2003 How Far Did Africa's First Generation Trade Reforms Go?.

 

A vast literature, often linked to IMF and WB research, finds a positive impact of trade liberalization on growth.

Famous examples are the papers by David Dollar and Aart Kraay: see Dollar and Kraay 2001.

The post-1980 globalisers (including China, India): large increases in trade, and declines in tariffs over the past 20 years. Their growth rates have accelerated from the 1970s to the 1980s to the 1990s, even as growth in the rich countries and the rest of the developing world has declined.

For Dollar/Kraay: The 'post-1980 globalisers' are catching up to the rich countries while the rest of the developing world is falling farther behind. Regressions exploit the within-country variation in trade and growth: strong positive effect of trade on growth after controlling for changes in other policies and addressing endogeneity.

Effects of trade on the poor: little systematic evidence of a relationship between changes in trade volumes (or any other globalisation measure) and changes in income share of the poorest. Increase in growth rates that accompanies expanded trade leads to proportionate increases in incomes.

 

See Ng and Yeats. 1997 Open Economies Work Better! Did Africa's Protectionist Policies Cause its Marginalization in World Trade: Insufficient liberalisation →slower growth.

SSA declining importance in global trade is primarily due to its inability to remain competitive in international markets. If SSA merely retained its 1962-64 shares for major products its exports would now be 75% ($11 billion) higher. External protection against SSA has not played an important role. OECD trade preferences made market access conditions for Africa more favourable than that for many other exporters.

SSA trade barriers are higher than those of most other developing countries.Countries which pursue liberal trade policies achieve superior growth rates. Importance of domestic policy reforms if SSA is to reverse its diminishing role in world trade.

For those interested, see Francis Ng and Alexander Yeats, Kenya: Export Prospects and Problems, Africa Region Working Paper Series No. 90, 2005: Kenya's share of world trade now less than one-half its average level in the early-1980s. SSA countries, including Kenya, experienced serious supply constraints that limited their ability to capitalise on opportunities of international production sharing in foreign markets.

Causes=inappropriate governance policies, unfavourable commercial environment + with two exceptions (cut flowers and apparel exports) Kenya experienced an erosion of its US and EU import market shares. Priority=diversifications of Kenya's exports away from traditional products.

 

 

For another WB view, see Subramanian and Matthijs. 2007. Can SSA Leap into Global Network Trade?. SSA may benefit from global network trade. Over the last 15 years Asia has become SSA fastest growing export market. Asian countries are much more open to trade than Europe or America.

Numerous caveats in Asia's growing interest in SSA: the "resource curse" of exports that are heavily concentrated on oil, minerals and raw materials, and competition from Asia's cheap manufactured exports. But potential for South-South cooperation in trade and investment.

Perspective of international value chains: 5 factors for participation in global trade: price, speed-to-market, labour productivity, flexibility and product quality. +country's policies and institutions.

Example of the issue of price, and competitive advantage of China:

 

 

 

·                     Possible differences between the IMF and the World Bank on issues of trade openness

The IMF= focus on fiscal deficits and redressing imbalances: therefore more cautious on lowering tariffs, etc.

For the IMF: SSA under-exploits its trading opportunities. SSA: process of disintegration: see Subramanian and Tamarisa 2001. Africa's Trade Revisited.

 

 

·                     For a case study of the impact of trade policy, South Africa, see Edwards and Lawrence. 2006. South African Trade Policy Matters: Trade Performance and Trade Policy: South Africa developed a comparative advantage in capital-intensive primary and manufactured commodities partly because of its natural resource endowments but also because the pattern of protection was detrimental to exports of non-commodity manufactured goods.

When global commodity markets were weak, with declining gold exports, this constrained aggregate growth. Trade liberalisation in the 1990s increased imports and, by reducing both input costs and the relative profitability of domestic sales, boosted exports: trade liberalisation could enhance export diversification.

 

 

·                     Trade openness may increase output volatility

See Levchenko and Di Giovanni. 2008. Trade Openness and Volatility: output volatility is related to trade openness using an industry-level panel dataset of manufacturing production and trade.

Findings: sectors more open to international trade are more volatile; trade is accompanied by increased specialisation; sectors that are more open are less correlated with the rest of the economy. Each of the three effects has an appreciable impact on aggregate volatility => the relationship between trade openness and overall volatility is positive and economically significant.

 

 

·                      Many studies show scepticism on the positive relationship trade openness-growth

The positive relationship between trade openness and growth=a matter of debate, not clearly corroborated by empirical facts.

Historically, some countries experienced period of growth while implementing protection policies.

History shows that there was no relationship between trade openness and growth over the last 2 centuries: for those interested, see Clemens and Williamson. 2001: a Tariff-Growth Paradox? In Latin America before WWI: high tariffs, and high growth; high tariffs do not mean necessarily 'protection': they may be the expression of weak governments with non loyal bureaucracies and land abundance (=few people to tax)àtherefore can rely only on tariffs for raising revenues and hence growth.

 

 

·                     Scepticism on this positive correlation growth-trade openness even within the IMF

=this correlation may be a recent phenomenon: see Vamvakidis 2002 How Robust is the Growth-Openness Connection? Historical Evidence: from 1870 to the present, no support for a positive growth-openness connection before 1970 and the correlation is negative for 1920-1940.

 

·                     Complementary policies are necessary, including for studies conducted within the IFIs

See Chang, Kaltani and Loayza, 2005, Openness Can be Good for Growth: The Role of Policy Complementarities: effect of trade openness on growth depends on complementary reforms that help a country take advantage of international competition. Based on a Harris-Todaro model where output gains after trade liberalisation depend on the degree of labour market flexibility: trade liberalisation unambiguously increases per capita income only when labour markets are sufficiently flexible.

The growth effects of openness are positive if certain complementary reforms are undertaken.

 

 

·                     The Dollar/Kraay results and WB conclusions on the positive relationship globalization/poverty reduction have been often criticised:

='openness is not enough', the problems of commodities producing countries are distinct from the question of openness vs closedness: see Birdsall, Hamoudi 2002 Commodity Dependence, Trade and Growth: When 'Openness is not Enough'.Trade openness may be inefficient when exports are commodities: the "commodity curse" may have little to do with trade policy.

 

 

 

·                     Trade reforms: growth enhancement but of stagnation in many countries, as shown by the effect of liberalisation on growth of GDP on a group of countries which have liberalized in the post-1985 period: see Greenaway and Wright 1997 Trade Liberalization and Growth in Developing Countries: Some New Evidence,

See Harrison and Hanson 1999 Who Gains From Trade Reform? Some Remaining Puzzles.

 

See Yanikkaya 2003 Trade Openness and Economic Growth: A Cross-Country Empirical Investigation: trade liberalisation does not have a straightforward relationship with growth: for a cross section of countries over the last 3 decades and two groups of trade openness measures=contrary to the conventional view on the growth effects of trade barriers, trade barriers are positively and significantly associated with growth, especially for developing countries.

 

See Teal 2002. Export Growth and Trade Policy in Ghana in the 20th Century= in Ghana, trade policy did not succeed in increasing export volumes, in moving towards sustainable growth.

 

 

·                     Dani Rodrik's critique of the links trade openness-growth

See Rodriguez and Rodrik 1999, on trade policy and economic growth: A Skeptic's Guide: they reviewed 4 well-known studies finding a positive relationship between trade openness and growth. Do countries with lower barriers to international trade grow faster, once other relevant country characteristics are controlled for?

Against the large empirical literature providing an affirmative answer, methodological problemsàresults open to diverse interpretations. The indicators of openness' used by researchers are poor measures of trade barriers or are highly correlated with other sources of bad economic performance.

For Rodriguez/Rodrik, the methods showing the link between trade policy and growth have serious shortcomings. Studies by Dollar (1992), Ben-David (1993), Sachs and Warner (1995), and Edwards (1998) show little evidence that open trade policies - lower tariff and non-tariff barriers to trade - are significantly associated with economic growth.

 

The neoclassical idea that trade reform is good for growth is not helpful in times of macroeconomic instability, and for the understanding of policy reversals and the conditions of sustainability and credibility of trade reform. Trade reforms are not a cure-all of all the problems: see Rodrik 1992 on the limits of trade policy reform.

Trade policy in SSA works the same way that it does elsewhere. High levels of trade restrictions=an important obstacle to exports in the past, and their reduction improved trade performance in SSA. The removal of export restrictions, dismantling of marketing boards, relaxation of quantitative restrictions on imports, and lowering of import tariffs increases traditional and non-traditional exports.

SSA different conditions, its poor infrastructure, its geography, its dependence on a limited number of primary product do not make it a special case in which exports are not responsive to prices or to the traditional instruments of commercial policy. Trade reforms=potent instrument for raising trade volumes, but their influence on economic growth is generally much weaker

See Rodrik 1997. Trade policy and economic performance in SSA: the WTO has led to an increasing confusion between the objective of trade policies and development: trade openness cannot substitute for a development strategy.

 

For a more nuanced view: the notion of export product space: notion also used by Rodrik; see Hausmann, Rodríguez and Wagner. 2006. Growth Collapses: majority are of short duration. Countries fall into crises for multiple reasons, including wars, export collapses, sudden stops and political transitions. But a measure of the density of a country's export product space is significantly associated with lower crisis duration.

 

 

For a review of the disagreements, see Baldwin 2003 Openness and Growth: What's the Empirical Relationship?: disagreement concerning how a country's international economic policies and growth interact, despite a number of multi-country case studies utilizing comparable analytical frameworks, numerous econometric studies using large cross-country data sets, and important theoretical advances in growth theory.

Reasons for the disagreements? see Francisco Rodriguez and Dani Rodrik (2001) criticising multi-country statistical studies where openness is associated with higher growth rates. Rodriguez and Rodrik: openness simply in the sense of liberal trade policies seems to be no guarantee of faster growth.

However, the conclusion of country studies or multi-country statistical tests that lower trade barriers in combination with a stable and non-discriminatory exchange-rate system, prudent monetary and fiscal policies and corruption-free administration of economic policies promote economic growth still seems to remain valid.

 

 

·                     The theoretical criticisms from the theory of the constraint by the balance of payment on the link growth-openness – in line with Nicholas Kaldor's theories:

See Thirlwall 2003 Trade, the Balance of Payments and Exchange Rate Policy in Developing Countries: liberalisation stimulates export growth, but has raised import growth by more à worsening of the balance of trade and the balance of payments.

Adverse balance of payments consequences of trade liberalisation constrain the growth of output and living standardsàimportance of sequencing and degree of liberalisation.

 

See Hussain 1999. The Balance-of-Payments Constraint: The balance-of-payments constrained growth rate model: the balance of payments position is the main constraint on growth, because it imposes a limit on demand to which supply can adapt.

Explaining growth rate differences by quantifying contributions of export growth, capital flows and changes in the terms of trade show that in contrast to Asia, the low SSA growth rates are explained by low export expansion relative to the imports required for growth.

This poor performance of SSA is attributed to the low magnitudes of their dynamic Harrod foreign trade multipliers determined by the respective income elasticities of demand for exports and imports. The low dynamic foreign trade multipliers of SSA are direct products of their excessive dependency on the exportation of primary products

 

 

·                     Another critique: institutions matter: the 'quality' of institutions has a positive impact on a country's level of openness and trade flows; domestic infrastructure still more important than institutions: see Jansen and Nordås 2004 Institutions, Trade Policy and Trade Flows.

 

·                     Critique from UNDP= the multilateral trade regime should maximize human development. Globalisationàvulnerability, insecurityàfocus away from liberalisation and market access towards providing developing countries with greater 'policy space.'

Trade liberalisation=does not generate self-sustaining growth, poverty reduction, human development. Historically, successful development strategies=institutional innovations at odds with the current multilateral trade liberalization (see UNDP 2002).

 

·                     Another criticism of the positive link trade openness-growth: regarding the methods used to prove the links

See the criticisms of both approaches, Sachs and Warner and Rodrik, by Srinivasan and Bhagwati 1999 Outward-Orientation and Development: Are Revisionists Right?: on the argument that all these studies are based on cross-country regressions: regressions have to rejected because of weak theoretical foundation, poor quality of data, inappropriate econometric methodologiesà only case studies are appropriate.

 

See the critique by Rodríguez (2006), Openness and Growth: What Have We Learned?: empirical research on the link between openness and growth in cross-country data

= a close reading of the evidence presented in Warner (2003), Dollar and Kraay (2002) and Wacziarg and Welch (2003), does not alter the conclusion that standard measures of trade policy are basically uncorrelated with growth.

One could conclude that openness is not important for growth. An alternative interpretation is that such results are simply indicative of the pitfalls of cross-country regression analysis.

Or: a positive (or negative) relationship between trade and growth could well exist but failed to be picked up because the information contained in the data is not sufficiently strong.

 

 

6. Other effects of trade reforms: effects on poverty, inequality, investment and the fiscal balance

 

·                     The impact of trade openness on poverty?

See UNCTAD LDC Report 2004 on linking international trade with poverty reduction: great variability in the impact of trade liberalisation from country to country and amongst different groups, depending on their factor endowments and expenditure patterns.

+in different conditions, international trade might be beneficial to growth and poverty reduction: when, e.g., growth is not enclave-led (e.g., Guinea, Madagascar), when there is domestic market integration and not a high prevalence of subsistence production (reliance on non-tradables àpoorest are bypassed by trade liberalisation), when rural population pressure not too strong, when possibility of non-agricultural employment: what UNCTAD calls 'inclusiveness of economic growth'.

LDCs: Trade liberalisation may have intensified commodity specialisation and aid dependence.

 

See the IMF point of view: the review of the literature by Berg and Krueger 2003: effects of trade openness on poverty via the effects of openness on income growth and via the effects on distribution for a given growth rateà trade openness has a positive effects on growth and no systematic effects on the poor beyond its effects on overall growth.

For the IFIs: there is a positive relationship between trade liberalisation and poverty reduction: core assumption of the PRSPs,

The impact of trade reform on poverty=from economy-wide liberalisation to changes in the living standards of individual households. Mainly through reducing tariffs, it leads to changes in the prices of traded goods.

 

Changes affect poverty levels along 3 pathways: - prices changes; - enterprise and changes in wages and employment (and shifting between formal-informal sectors); - government revenue, taxes and spending: see McCulloch et al. 2001 Trade Liberalisation and Poverty: A Handbook).

See the review of transmission mechanisms, vulnerability by Winters, McCulloch and McKay. 2004. Trade Liberalization and Poverty: The Evidence So Far.

 

Openness exposes to increased risk and vulnerability: in situations of poverty, the ability to cope with risk is very low.

 

See Balat and Porto 2005, Globalization and Poverty Impacts in Rural Zambia: on the links between globalisation and poverty in Zambia during the 1990s, and the poverty impacts of non-traditional export growth + consumption and income effects. On the consumption side, maize marketing reforms and the elimination of maize subsidies.

= complementary policies matter: the introduction of competition policies at the milling industry acted as a cushion that benefited consumers but the restriction on maize imports by small-scale mills hurt them.

On the income side, agricultural export growth to estimate income gains from international trade, which are associated with market agriculture activities (cotton, tobacco, hybrid maize) = Zambian households would earn higher income, but if complementary policies (e.g., infrastructure, credit).

 

 

·                     Impact of trade openness on inequality and income distribution.

See the review in Goldberg and Pavcnik (2004), Trade, Inequality and Poverty: What Do We Know? Evidence from Recent Trade Liberalization Episodes: ambiguous effects of trade liberalisation: but clear negative effects on unskilled workers.

 

Inequality depends on factor endowments: more inequality in land and capital-intensive countries. Trade openness changes relative prices, reallocates resources, introduces new production techniques. Complex changes, and effects theoretically unclear: see Spilimbergo et al. 1999 Income Distribution, Factor Endowments and Trade Openness.

Effects on wage inequality: trade openness increases wage dispersion and may have a negative impact on unskilled workers.

 

Non linear effects of the impact of openness (trade/GDP ratio) and FDI on relative income shares across the entire income distributionàin contrast to traditional international trade theory, at low average income level, it is the rich who benefit from openness; in countries at higher income levels, the relative income of the poor and the middles classes rise/the rich: for those interested, see Milanovic 2002 Can we Discern the Effect of Globalization on Income Distribution?, based on household surveys.

 

·                     Trade liberalisation may increase investment instability: via 'jumps' in the level of investment, changes in the terms of trade; it may lead to boom-bust cycles of investment: see Razin et al. 2002 Trade Openness and Investment Instability.

Many problems: the sequencing and timing of trade reforms, picking the winners, income distribution.

 

 

·                     The negative fiscal effects of trade liberalisation: one of the most serious problems

Recognised by most studies: trade liberalisation is beneficial for growth, but is a costly process.

=negative effects on the fiscal balance in SSA countries, given the historical dependence of their revenue structure on external trade.

Trade liberalisation may exacerbate fiscal difficulties, lead to larger deficits, accelerate inflation, create political difficulties for the government, make the reform incredible. (on Kenya, see Bevan 2000, on fiscal implications)

 

The IMF aware of this key problem: See Baunsgaard and Keen. 2005. Tax Revenue and (or?) Trade Liberalization: reliance on trade taxes as a source of government revenue: in SSA, trade taxes account for an average of about 1/4 of all government revenues.

Further liberalisation - proliferating regional agreements, bilateral agreements with the EU or other developed countries, or prospective multilateral tariff reduction under the Doha round: which potential impact on tax revenues?

Question: can such revenue losses be recouped from the domestic tax system while maintaining the gains from the trade reform itself: especially in strengthening domestic indirect taxes.

But theory: in practice? Baunsgaard and Keen. 2005: panel data for 111 countries over 25 years. Have countries recovered from other sources the revenues they have lost from trade liberalisation? High-income countries have. For middle-income countries, recovery has been in the order of 45–60 cents for each dollar of lost trade tax revenue

Revenue recovery has been extremely weak in low-income countries (which are those most dependent on trade tax revenues): they have recovered no more than about 30 cents of each lost dollar.

No evidence that low-income countries with a value added tax/VAT have recovered more than those without. No evidence that a VAT has made it easier to cope with the revenue effects of trade liberalisation.

Many low-income countries also face revenue pressures from other sources – lowering corporate tax, intensified international tax competition- negative impact of further trade liberalisation.

 

BUT: This negative relationship not found in other studies, including IMF: see Agbeyegbe, Stotsky, and WoldeMariam 2004, IMF: trade liberalisation not strongly linked to aggregate tax revenue + with one measure, it is linked to higher income tax revenue.

 

For a WB view, see  Zafar. 2005. Revenue and the Fiscal Impact of Liberalization: The Case of Niger: the principal reasons for low revenue mobilisation are (1) the adverse fiscal impact of trade liberalisation, (2) the defiscalization of agriculture in the 1970s, (3) the collapse of the uranium boom in the 1980s, and (4) the poor record of the VAT in mobilizing revenue. The large reduction in tariffs during the 1980s and 1990s in the context of structural adjustment programs and West African regional integration initiatives had adverse effects on trade tax revenue during the period 1980–2003. But higher import levels after 1994 succeeded in partially mitigating the revenue losses.

The experience of Niger shows that without accompanying macroeconomic policies, parallel improvements in tax and customs administration, and success in mobilizing domestic taxes, most notably the VAT, trade reform can have adverse fiscal consequences.

 

For a WTO view of adjustment costs, see Bachetta and Jansen 2003 Adjusting to Trade Liberalization: the Role of Policy, Institutions and WTO Disciplines: necessity to differentiate adjustment costs/gains of trade liberalisation – e.g., periods of unemployment, relocation of workers - and income effects of trade liberalisation, stemming from investment decisions and quest for competitiveness

In the mid 1990s: tariff revenue exceeded 30% of the government's total tax revenue in more than 25 developing countries, vs. in high-income countries tariff revenues typically represent less than 2% of total tax revenue.

 

See on the example of Ghana Bhasin and Kobina Annim, 2005, Impact of Elimination of Trade Taxes on Poverty and Income Distribution in Ghana: elimination of trade related import taxes or elimination of export taxes accompanied by an increase in VATà effects on household poverty and income distribution?

 

 

·                     Effects on production – its quality and quantity

Example of the dismantling of marketing boards and 'filières' and liberalisation of marketisation. E. g. Côte d'Ivoire, Cameroun, Nigeria. In some cases, decline of product quality (eg cocoa).

But disagreements with the criticisms of the dismantling of the marketing or stabilization boards: see Tollens and Gilbert (2003) on cocoa in Cameroon= no decline in quality after liberalisation of the cocoa market.

In some cases, liberalisation of commodity marketsàgreater role of intermediaries.

Direct exposure of producers to world prices and their uncertainties, removal of subsidies to fertilizer=diminution in terms of quality or quantity (e.g. groundnuts in Senegal).

See Badiane and Kinteh 1994 on trade pessimism and groundnut exporters: the role of groundnuts in international markets has changed dramatically, as has their role in the economy of SSA producers: 3%annual average decline of groundnut production over 1961-87. In contrast, expansion of groundnut production in China, India, and the United States.

See Larsen 2002 on oligopoly, privatisation: cotton in Zimbabwe: example of the privatisation of the cotton marketing board in Zimbabwe: it replaced state monopoly with a private oligopoly, little competition on prices. Market concentration and collective private action prevented downgrading of cotton lint after liberalisation.

See Akiyama et al. 2000, Commodity Market Reforms: the outcomes of reforms varied across countries, according to the government role in processing and financing, land and other input markets, the policies of other countries, external events like booms or currency crises.

 

See Brambilla and Porto, 2005, Farm Productivity and Market Structure. Cotton Reforms in Zambia: the impacts of cotton marketing reforms on farm productivity in rural Zambia.

= elimination of the Zambian cotton marketing board (in place since 1977). Following liberalization, the sector adopted an outgrower scheme, whereby firms provided extension services to farmers and sold inputs on loans repaid at the time of harvest.

2 phases of the reforms: a failure of the outgrower scheme, then success. During failure, farmers pushed back into subsistence and productivity in cotton declined. Then improvement: farmers devoted larger shares of land to cash crops, and farm productivity increased.

 

 

7. the Constraints on trade in SSA

 

·                     Structural constraints: SSA international competitiveness, especially in manufacturing. Lower labour productivity in SSA than in competitors - emerging economies.

SSA countries may have gained in competitiveness through the exchange rate (e.g., devaluation of the CFA franc in 1994), but little improvements in productivity growth; unit labour costs remain high, e.g. in Senegal (see Mbaye and Golub 2002 Unit Labour Costs, International Competitiveness and Exports: the Case of Senegal).

 

·                     Political economy of trade reform

Beyond the usual 'winners'-'losers' analysis, magnitude of the distributional consequences of trade reform?

SSA governments cannot compensate the losers from trade liberalisation because of the amount of redistribution required so high it absorbs the efficiency gains generated by the reform. Problems of incomplete information as a source of resistance to reform (see Rodrik 1998 Why is trade reform so difficult in Africa?).

 

 

·                     Constraints stemming from structure and policy: transaction costs, poor infrastructure, lack of human capital.

The key problem of insfrastructure

From Alberto Portugal-Perez and John S. Wilson. 2008. Trade Costs in Africa: Barriers and Opportunities for Reform, Washington D. C., the World Bank, policy research working paper 4619:

 

 

 

See the WB approach, Djankov, Freund and Pham. 2006. Trading on Time: the detrimental effect on trade of delays.

Correlation between infrastructure and export diversification: infrastructure is a key problem for competitiveness in SSA, particularly power and rural electrification (but also transport, telecommunications, etc).

Transportation costs are much higher in SSA than any other region of the world. Transportation costs accounted for some 60% of the total price of cassava in Central African countries (IFAD roundtable 18-1-2005)

SSA countries use larger share of their foreign exchange earnings to pay for international transport services. In 1970, net freight payments to foreign nationals absorbed 11% of SSA export earnings: 15% by 1990. For landlocked SSA countries, freight cost ratio exceeds 30%, as exports must transit in neighboring countries: see Amjadi and Yeats 1995 Have Transport Costs Contributed to the Relative Decline.

 

 

See Antoine Bouët, Devesh Roy and Santosh Mishra, Why is Africa marginalized in world trade? Telos (website), 22 October 2007. In debates about globalization, Africa's ability to take advantage of trading opportunities has always been under contention. Data indicate that the continent's share of world exports has declined sharply, from about 5.5% in 1975 to about 2.5% in 2002. At face value, this declining share points to an increased marginalization of Africa in world trade. However, it is possible that Africa is trading only as much as it should given the level of factors determining trade (such as income and market access).

Thus, in the debate over trade versus aid, proponents of the ineffectiveness of aid often argue that African trade prospects can be improved by enhanced market access, mainly via discriminatory preferences vis-à-vis the rest of the world. This begs the question: how good is current market access for Africa relative to the rest of the world?

Data on average duties faced on exports highlight contrasting stories. On average, African market access is better than that Latin America, Asia, and the Pacific region. There are significant variations within Africa, however, with 21 countries having better access than the world average, and 11 countries incurring export duties of less than 2 percent. Thirty-two countries have market access below the world average, with 13 countries incurring average export duties of more than 10 percent and Malawi facing an average tariff of 23 percent.

This contrasting picture of countries across Africa arises from two different effects. First, countries that are highly specialized in highly protected agricultural products––such as meat, milk, sugar, or some cereals– are penalized, as are those that export to protectionist countries. At the same time, however, preferential access, given by countries throughout the world, decreases average export duties for countries to which it is granted. This is what we will call the "true preference margin."

Trade preferences will potentially increase exports from Africa for only a selected group of countries. Thus, since African countries enjoy good market access, it must be explained by the export structure of these countries. The benefit to Africa occurs due to specializations in oil, gas, and mineral products or commodities that are not highly taxed throughout the world. Within Africa, exports from Benin, Malawi, Mauritius, Swaziland, and Togo are penalized due to specializations in highly protected products, while preferences only partially compensate. In contrast, Angola, Chad, the Democratic Republic of Congo, and Libya are advantaged.

Moreover, an important policy question remains whether even with enhanced preferences Africa would continue to export less than expected. To answer this question, a recent study undertaken at the International Food Policy Research Institute uses an econometric model to analyze the patterns of bilateral trade (that is, trade between two countries), which is formally specified as a function of the trading costs and Gross Domestic Product (GDP) of both the exporting and the importing countries. The variable of interest is the variable indicating that the exporter is an African country. Globally, if local infrastructure is not taken into account, the coefficient of the latter variable is significantly negative, indicating that GDP, geographic distance, and access to foreign markets do not fully explain Africa's low trade performance. In the same sample, however, if local trade-related infrastructure is included (that is, air and road transportation and communications infrastructure), the significance of this variable is removed or at least becomes smaller.

Having established that trade related infrastructure is a potential factor in Africa's lower than expected trade flows, we enable all possible interactions across types of infrastructure. Considering two infrastructure variables (road density and cell phone density) and estimating their impact on trade without imposing any form of relationship between those variables (substitutabilities/complementarities…), the study finds statistically significant impacts of infrastructure on trade. In particular the marginal impact of mobile density rises significantly for the most recent sample. Since the mobile phone density increased significantly recently, the study explains this increased marginal impact to follow from network effects implying that the same percentage increase in cell phone density is much more productive now, given a significantly higher base number of cell phone users.

Further in a counterfactual exercise, all countries in the sample are set to have the same level of road density and the marginal impact of cell phones is evaluated when all countries have a road density equal to the highest 50 percent of the sample and 90 percent of the sample, respectively. When the common level of road density increases, the marginal impact of cell phones also increases. This is a supporting evidence that road and cell phone infrastructure are complementary.

The policy interpretation of these assessments indicates that even if preferences were to enhance export levels, it is possible that African trade would remain low, possibly due to low levels of trade-related infrastructure. This implies that interventions to improve both the level and quality of infrastructure could yield high returns, albeit depending on significant complementarities.

 

 

 

 

8. The Impacts of Developed countries policies: protection, subsidies, Market access to developed countries

 

·                     The key problem of subsidies (US, EU) or protection (e.g. Japan)

For the WB, the damages to SSA trade due to the trade distortions – subsidies - of richer countries (EU, US, Japan).

In 2001, industrialised countries distributed $311 billion in subsidies to their own producers, 7 times more than they gave to development (230 billion per year, FAO 2004). Under the 1994 Uruguay Round, the US agreed to limit spending on domestic agricultural support programs to $19.1 billion per year. To be compared to, e.g., EU total farm exports: $214 billion in 2001.

àoverproduction of meat, cereals, putting prices down in developing countries where majority of the population lives off of agriculture (e. g. in Mali or Brazil)

See example of Ghana: farmers produce tomatoes, then processed into tomato paste; but the government-supported tomato canneries closed down because of structural adjustmentà surge in imports of subsidised Italian tomato paste. Many tomato growers are now constrained to sell them at whatever price they can get (IFAD forum 17-1-2004, see IFAD website)

 

 

·                     The example of cotton, a successful export for West African countries, threatened by US subsidies (and China), which cause a production surplus.

Cotton = 30 to 44% of total merchandise exports in 5 West SSA countries: Benin, Burkina Faso, Chad, Mali, Togo, during 1998-99: see Baffes 2004, The 'Cotton Problem', WB.

Even if recent rise in prices because of China, cotton prices decline = 5% in 2002, 19% in 2001 because of large production increases in the US and China.

Prices in 2002 were less than half of their 1995 highs; they reached 30-year nominal lows. At the beginning of the 2000s, U.S. support to its cotton producers: $3 billion, and China's $2 billion. See WB GEP 2002; on cotton in SSA, see Badiane et al. 2002 Cotton Sector Strategies in West and Central Africa.

In 2002, support to the cotton sector by US, EU and China=6 billion$=more than ¼ of the global value of production, coinciding with possibly the lowest prices in history in real terms: see Baffes 2004.

 

See Ian Gillson, Trade: How cotton subsidies harm Africa, ODI Opinions 54, September 2005 = Cotton trade and production are highly distorted by policy. In recent years, subsidies have accounted for 1/5^th of producer earnings. In Benin, Burkina Faso, Chad, Mali and Togo, cotton accounts for 5–10% of GDP, more than 1/3 of total export receipts and over 2/3 of the value of all agricultural exports.

Their removal could result in a world price increase of 11% or more. European subsidies account for as much as 38% of the loss of earnings in West and Central SSA.

 

For those interested, on cotton, see the WTO website, special site on cotton issues

See also the Sahel and West Africa Club website, Addressing the cotton crisis in West Africa: many papers on the issue.

For those interested; see Ben Shepherd, 2004, The Impact of US Subsidies on the World Cotton Market: A Reassessment, Paris, Sciences Po = dissenting view, i.e. subsidies have only a limited impact on prices despite their effects on production and consumption. The dynamic relationships between quantities, prices, stocks and subsidies are found to be considerably more complex than conventional wisdom.

 

 

·                     The problem of market access: the protection of developed markets against the imports from developing countries.

SSA products (commodities) access to developed countries markets is relatively open. But protectionism in the North is a serious impediment: see Ng and Yeats 2000 on the Recent Trade Performance of SSA.

Low tariffs for raw materials, higher tariffs for SSA processed products.

Improving market access is an issue strongly advocated by the WB, against trade policies pursued by particular countries, and bilateral policies.

 

A key problem: the protection in products of particular interest to developing countries.

For many economists, the costs of protection are huge.

Average tariffs faced by developing countries may be low, but problem of 'tariff peaks', higher than average, applied to commodities such as sugar or horticultural products.

 

See FAO 2004, The State of Agricultural Commodity Markets, Rome, FAO: highest tariff peaks on agricultural imports in developed countries = 350% for tobacco, 277% for chocolate, 171% for oilseeds, 134% for poultry.

Tariff escalation in agricultural commodity chains deters diversification

Between 6% and 14% of Quad (Canada, EU, Japan, US) tariff lines are subject to 'tariff peaks'. In Canada and the US, tariff peaks concentrated in textiles and clothing; in the EU and Japan, in agriculture, food products and footwear.

This protection=obstacle for countries taking first steps up the technology ladder

+effect of these tariffs aggravated by the subsidisation of agriculture in OECD countries, which depresses world prices of commodities and increases their volatility, by quotas in textiles and clothing trade (but abolition of the MultiFiber Agreement= also a problem for some developing countries).

Agricultural markets=among the most heavily distorted.

Agricultural exports to the OECD face tariffs that exceed those on typical inter-OECD exports by factors of 10 or more (see an IMF-WB 2002 study of market access).

 

 

·                     The impacts of trade arrangements, in particular multilateral (with developed countries)

The impact of the WTO, more recently of the Doha Round: a few lines, as it would justify a course per se.  Huge literature.

Negotiations of the WTO Doha 'Development' Round stalled at the end of July 2008.

 

For many economists: positive impact of multilateral liberalisation

For those interested, see Julio J. Nogués. 2007. Agricultural Protectionism and Poverty: A Perspective from Latin America, Paris, American University of Paris, working paper 45, April: Growth of world trade that is consistently higher that of GDP shows a clear contribution of multilateral negotiations to growth in industrialized countries.

 

 

 

Among many other studies: see Polaski 2006. Winners and Losers: Impact of the Doha Round on Developing Countries: at the aggregate, global level, any of the plausible trade scenarios will produce only modest gains. Given relatively low gains, the adjustment costs to which countries expose themselves when they change trade policies may loom larger than in the past.

 

A synthesis is in Low, Mchumo and Muyambo, 2006, Africa in the World Trading System.

A key issue: trade in services: see Hoekman 2006. Liberalizing Trade in Services: A Survey, WB: the WB strongly supports trade liberalisation. Increasing evidence that services liberalisation is a major potential source of welfare gains.

 

 

The WTO rules have positive aspects: e.g., the inclusion of smaller countries into a multilateral system.

But WTO rules weigh heavily on the prospects of the poorest SSA countries for catching up: now placed in a much more constraining and competitive global context than in the 1960s, when Asian developmental states initiated their growth.

WTO: increasing penetration into domestic economic and social activities: e.g. services, standards, property rights, investment.

Strong limitations on the possibility to implement industrial policies, as did states in East Asia: subsidised loans, variable taxes and differentiated tariffs.

Industrial policies more difficult in a globalised world, and with WTO regulations of international trade.

In contrast, for the neoclassical approach: growth results from good macroeconomic policies, e.g. fiscal discipline, controlled inflation and adequate real exchange rate levels, which create high levels of saving and investment.

 

But there are negative effects of multilateral trade liberalisation for many countries:

See Trade Preferences. End of Quotas Hits African Textiles, By Thomson Fontaine, IMF African Department, IMF Survey, July 5, 2007. Swaziland, Lesotho, Madagascar were favored for textile investments in 1990s, and textile exports boomed 2000-04. But the phasing out of textile quotas in January 2005 hurt these countries, i.e. when quotas maintained under the World Trade Organization (WTO) Agreement on Textiles and Clothing (ATC) – the MFA/Multifiber arrangement - were phased out on January 1, 2005. These countries were particularly favored for investments in textiles because of they had not met their quotas under the MFA.

 

 

·                     The impact of SSA preferential arrangements with developed countries: see the lecture on regional integration.

Multiplication of bilateral and regional arrangements=multiplication of FTAs (free trade arrangements) and bilateral investment agreements or BITs (bilateral investment treaties; 1800 today, estimation UNCTAD)

E. g. arrangement EU-ACP (African, Caribbean and Pacific) countries (78 countries). Mitigated impact of past EU-ACP agreements.

Same doubts regarding the new Cotonou Agreement (2000), replacing the Lomé Convention= trade, aid and political cooperation treaty between the EU and the ACP countries in matters of market access, technical assistance and other issues à to facilitate the economic and political integration of the ACP countries into world markets

= individual bilateral treaties between the EU and ACP countries tailored to each ACP region (West Africa, i.e. ECOWAS, Eastern and Southern Africa, etc). =new EPAs (Economic Partnership Agreements) proposed by the EU.

South Africa=separate arrangement with the EU.

 

Trade barriers are a real problem, but they do not entirely account for the SSA poor performance.

SSA exports enjoy OECD tariff preferences, significant competitive advantages over similar goods shipped from other countries

Example of the South African clothing industry's modest export performance, with trade arrangements with the US and the EU (especially in the domestically-owned part of the sector): path dependency, historical factors. Better performance of some mainly foreign-owned firms.

 

Another example: the AGOA with the US (African Growth and Opportunity Act) (2000). Objective= incentives for SSA countries to open their economies and build free markets= liberal access to U.S. market available for country or region where no previous Free Trade Agreement, e.g., duty-free and quota-free treatment for eligible apparel articles (see UNCTAD-GSPs, 2003, Handbook on the Scheme of the United States of America).

BUT: sustainability?? See ex. Lesotho.

 

 

9. The concepts of commodity chains, global value chains

 

·                     Research on supply responses: value-chain analysis.

Agricultural commodity chains=vertically integrated, market concentration= a few large companies dominate world agricultural commodity markets

Concentration of market power=e.g., the global coffee chain= 25 million farmers and workers, 4 international traders (39%), 3 roasters (45%), 30 grocers (33%), 500 million consumers

In the global coffee value chain=the share of final sales value accruing to farm=10% (ex-farm processing=21%, export agent=8%, insurance freight=2%, global buyer=8%; roaster 29%; retailer=22%). To compare with the plantation worker in the bananas chain=2% (see FAO 2004 The State of Agricultural Commodity Markets)

 

International trade takes place along global supply networks or value chains. Dominant developed country supermarkets are able to dictate standards, quality, production criteria and employment conditions to suppliers. Enterprises depend on gaining access to these chains. Value-chain models: what ways small producers are included or excluded from global trade networks.

See Gibbon 2002 on clothing in South Africa.

Other example, in the South African fruit industry, the growing dependence on value chains increases insecurity and vulnerability of workers through the use of seasonal and contract labour (see Barrientos et al. 2002).

 

 

·                     The 'global commodity chain' approach:

E.g. coffee: deep transformation of the global coffee marketing chain in the last 2 decades in the international coffee trade regime, of regulation at the domestic level in producing countries, and on changes in corporate strategies and consumption patterns. Important changes in the organisation of the chain, its mode of governance, the ownership characteristics and the distribution of income along the chain: see Ponte 2001, winners/losers in the global coffee commodity chain.

 

See Daviron and Ponte 2005, The Coffee Paradox: International trade has grown dramatically in the last two decades, and trade is an important source of revenue. Yet, while many low-income countries have been exporting tropical commodities for a long time, they are still poor.

Coffee paradox: the coexistence of a 'coffee boom' in consuming countries and of a 'coffee crisis' in producing countries. Because what farmers sell and what consumers buy are becoming increasingly 'different' coffees. It is not material quality that contemporary coffee consumers pay for, it is mostly symbolic quality and in-person services. As long as coffee farmers organisations do not control parts of this 'immaterial' production, they will keep receiving low prices.

 

 

·                     The negative impact of cartels anticompetitive practices

TNCs impose over-costs, via price cartels

E.g. in maritime transport: Associated Central West African Lines abused its dominant position by providing rebates to shippers that complied with its policies.

See Levenstein et al. 2003 International Price-Fixing Cartels and Developing Countries: effects of private international cartels on developing countries

=indirect effects on developing country producers, either as competitors or co-conspirators + direct effects of cartels on developing country consumers.

=in 1997, developing countries imported $54.7 billion of goods from a sub-sample of 19 industries that contained a price-fixing conspiracy during the 1990s. These imports represented 5.2% of total imports and 1.2% of GDP in developing countries.

 

 

·                     There are success stories: e.g., non traditional exports

Resource-rich countries in Latin America and Southeast Asia could have become commodity-dependent economies. But they diversified their exports.

=move towards export-oriented industrialisation based on natural resource endowments (e.g., Indonesia and Malaysia), or to diversify within the primary sector itself (e.g., agribusiness in Chile and Colombia).

Natural resources are not always a curse. They may be a possible basis for export-led growth, potential for export diversification. There are different routes to diversification, e.g., resource-based manufacturing and processing of primary products

 

In the large SSA countries, manufacture share of exports rose from 19 to 28% from early 1980s to early 1990s (Mauritius, South Africa). The share of food in total exports rose from 14 to 19%, but decline of 20% points for fuels: see Ng and Yeats 2000 On the Recent Trade Performance of Sub-Saharan Countries.

 

Traditional primary product exports are not enough => non-traditional activities, both exporting and efficiently import-substituting. SSA achieved remarkably little diversification of traditional primary exports.

Non-traditional exports grew at rapid rates, in total exports and in total GDP, from the early 1980s, in Tanzania, South Africa, Kenya, Mauritius, Zimbabwe. In Mauritius, South Africa and Zimbabwe, non-traditional exporting of manufactured products: in Kenya and Tanzania, in primary production, primary processing and tourism.

Role of the real exchange rate and of incentives: a variety of forms: direct subsidies, liberal foreign exchange retention allowances, import duty rebates, income tax concessions, subsidised credit, export processing zones. But SSA did not develop supply-side supports to encourage investment in non- traditional exports as in South-East Asia or Latin America. Investment rates: 16-23% of GDP in the 1990s: below those necessary for growth: see Helleiner 2002 on non-traditional export promotion.

 

Examples: flowers, fruits, vegetables.

E.g. in Kenya, households involved in export horticulture had higher incomes than those that did not, particularly in rural areas: see McCulloch and Ota 2002.

Growth in SSA cut flower exports: from $13 million in 1980 to some $200 million at the end of the 1990s: led by Kenya, half of SSA flower exports, with Zimbabwe, Zambia, Uganda, South Africa, and Cote d'Ivoire.

 

International trade in horticultural products—fresh and processed fruits and vegetables, cut flowers: a dynamic dimension of international agricultural trade: successes by Brazil, Chile, Mexico, Colombia, and Thailand.

In SSA, mixed results: supply of higher-value fresh fruits and vegetables to Europe+ intra-regional trade in lower value, or processed fruit and vegetable products.

Private processing and marketing of products - fresh and processed fruits and vegetables, meat and dairy products, fresh and processed fish, oilseeds/edible oils, nuts and spices: higher value foods increasingly important in SSA in household consumption and expenditures, agricultural and manufacturing value added.

Wide variations between countries= South Africa, Cote d'Ivoire, Kenya: main SSA horticultural exporters.

For the WB: horticultural exports success stories= technical learning, technology transfer, complementary industries which enhance product demand, increase in freight/flights (tourist industry).

 

 

 

Source: Department of Economic and Social Affairs Division for Sustainable Development, Trends in Sustainable Development: Africa Report, UN, New York 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annex: From UNCTAD 2003 Trade performance and commodity dependence