Prsentation PowerPoint

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Competition and the Fallacy of Composition
Module 2 Trade, Financial Flows and
Macroeconomic Management


Joerg Mayer November 2002
http//www.unctad.org/p166
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Competition and the Fallacy of Composition

• Standard advice to developing countries Move
  from primary sector to (labour-intensive)
  manufactures, because
• Labour more plentiful than natural resources
  more scope for expansion
• Easier to upgrade to skill- and
  technology-intensive manufactures
• More stable demand
• Higher income elasticity of demand (export
  expansion without fall in prices).

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Competition and the Fallacy of Composition

• What is the probability of labour-intensive
  exports from developing countries becoming
  oversupplied and what policy responses would this
  call for?

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Three issues

• Manufacturing terms of trade of developing
  countries vis-à-vis developed countries
• Factors affecting the risk of a fallacy of
  composition for exports of labour-intensive
  manufactures
• Skill profile of world labour force
• Market access conditions for labour-intensive
  manufactures in developed countries and more
  advanced developing countries
• Conclusions measures needed to help developing
  countries benefit more from trade integration.

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1. Terms of trade of developing countries

• Barter terms of trade Relative price of exported
  good in terms of imported good.
• Income terms of trade (purchasing power of
  exports) barter terms of trade multiplied by
  volume of exports.
• Meaningful only if
• No alternative use for employed labour
• No additional resource cost in foreign exchange
• Fallacy of composition
• On its own a small developing country can
  substantially expand its exports without flooding
  the market and seriously reducing the prices of
  the products concerned, but this may not be true
  for developing countries as a whole, or even for
  large individual countries (China and India).

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Traditional debate (Prebisch-Singer)

• Terms of trade between non-fuel primary
  commodities and manufactures are on a downward
  trend
• Difference in income elasticity of demand
  between primary commodities and manufactures
• Upward supply bias for commodities because of
  surplus labour.

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More recent debate

• Terms of trade between manufactures exported by
  developing countries vis-à-vis those exported by
  developed countries
• Difference in technological capacity between
  countries
• Upward supply bias for labour-intensive
  manufactures because of surplus labour.
• Empirical evidence
• No unambiguous downward trend
• Prices of manufactured exports of developing
  countries tended to weaken vis-à-vis those of
  developed countries, especially for the less
  skill-intensive manufactures.

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2 - Factors affecting the risk of a fallacy of
composition for exports of labour-intensive
manufactures (1/3)

• Skill profile of the world labour force
• Integration of highly populated low-income
  countries has led to strong increase in number of
  low-skilled workers in world trade
• Middle-income countries lost their competitive
  edge in low-skilled manufactures they must
  upgrade their production structure.

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2 - Factors affecting the risk of a fallacy of
composition for exports of labour-intensive
manufactures (2/3)

• b) Market access conditions for labour-intensive
  manufactures
• North-South trade
• The majority of developing countries with
  capacity to expand exports of labour-intensive
  manufactures continue to face significant
  barriers in developed countries
• Quota regulations in textiles and clothing
• Tariff peaks cover mainly labour-intensive
  manufactures
• Tariff escalation
• Labour-intensive manufactures are often excluded
  from preferential tariff schemes (e.g. GSP).

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2 - Factors affecting the risk of a fallacy of
composition for exports of labour-intensive
manufactures (3/3)

• South-South trade
• Market-access barriers applied among developing
  countries do not seem to play a key role for the
  fallacy of composition
• Effectively applied tariffs in developing
  countries are on average higher than in developed
  countries
• But the tariff level varies by country and is
  lower in medium- and high-income developing
  countries.
• This is important because
• Medium- and high-income developing countries do
  not have a comparative advantage in
  labour-intensive manufactures
• Import demand for labour-intensive products rises
  with the level of income.

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• Preferential market access provided by developed
  to developing countries in PTAs have a
  significant impact on the distribution of market
  shares in traditional labour-intensive
  manufactures
• Growth in Chinas export lagged behind that of
  countries with preferential market access
• Performance of Eastern European countries and
  Turkey much less impressive in US than in EU
  market
• Similarly, Mexico is much less successful in EU
  than in US market.

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3. Conclusions Measures needed to help
developing countries benefit more from trade
integration

• Industrial economies faster growth to improve
  access for labour-intensive manufactures
• Middle-income developing countries
• Improved access to technology to speed up growth
  and free up markets for lesser developed country
  entrants
• Improved access to adequate short-term financing
  to help manage external shocks without dampening
  trade prospects
• Larger developing countries greater reliance on
  domestic and regional sources of growth and
  declining outward orientation.