Participation of developing countries in World Trade: Overview o and underlying factors

WT/COMTD/W/15 16 August 1996 Committee on Trade and Development

Participation of developing countries in World Trade: Overview of major trends and underlying factors
Note by the Secretariat

Summary and conclusions

This paper provides an overview of major trends in the participation of developing countri in world trade over the past two decades, followed by a brief examination of some of the factors that were associated with trends for different groups of developing countries - in particular, the sharply different trade performance of most developing countries in Asia (v positive) and that of a number of the poorest developing countries (very disappointing).

Part I on Major Trends in Developing Countries' Trade Performance documents a numbe key developments in world merchandise trade:See footnote 1

* The share of manufactures in world merchandise trade fluctuated in the range of 55 per cent between 1973 and 1985, then increased sharply, reaching 75 per cent by 1995.

* After peaking at 28 per cent in 1980 (mainly due to exports of fuels), the share of developing countries in world merchandise trade declined until the second half of the 198 after which it resumed growing as petroleum prices bottomed out and the developing countries continued to expand their share of world trade in manufactures.

* Since 1980, the share of developing countries in world exports of mining products (mainly fuels) has fallen by a quarter, while their share of world trade in manufactures ha doubled from 10 to 20 per cent.

* As a group, the Asian developing countries have out-performed the other developing countries by a wide margin in terms of their share of world trade, their share of FDI flows developing countries, and their ratio of trade-to-GDP.

* A comparison of 25 developing countries whose export growth between 1985 and 19 exceeded the world average, and a group of 35 developing countries whose exports in 199 were below the 1985 level, shows a high correlation between export performance and the share of manufactured goods in merchandise exports.

* A comparison of the export performance of the least developed countries (LLDCs) si 1980 with that of all developing countries confirms not only a strong correlation between export performance and the share of manufactures in exports, but a similar positive correlation between exports and both the share of investment in GDP and the share of manufactures in GDP. (This point and the preceding one are supported by the results of a

recent World Bank study summarized in Box 1.)

Part II on Factors Underlying the Varied Trade Performances of Developing Countries be with a brief review of selected key external factors that are generally believed to play a r in explaining the variation in trade performance across groups in the past two decades:

Access to foreign markets. While the average level of protection in the industrial countrie relatively low, there are serious barriers to entry in certain sectors of particular interest t developing countries - including agriculture, textiles, clothing and fish and fish products. Developing countries have also expressed concern about preference erosion, tariff escalat and the risks in being left out of the proliferating free trade areas and customs unions. Wh these considerations clearly are relevant to understanding the trade performance of developing countries as a group, they are less helpful in explaining why some developing countries have experienced a dynamic growth of exports while others have seen their expo stagnate or even decline; indeed, in some instances the countries with a poor export performance had better access to industrial country markets than those countries whose exports expanded rapidly.

Capital inflows. The data document the well-known trend for official development aid to represent a much smaller share, and private capital flows a much larger share, of capital flows to developing countries.See footnote 2 While the share of developing countries in to world FDI flows more than doubled from 15 per cent in 1986-90 to more than 35 per cent i 1994, the share going to the LLDCs remained stagnant at an insignificant 0.4 per cent. Indeed, ten developing countries received nearly 80 per cent of the FDI going to developin countries.

Other external factors. Due to their typically smaller size and less diversified economic structure, many developing counties are more strongly affected by, and more vulnerable t changes in the international environment than the industrial countries. Over 1984-93, the estimates that fluctuations in world interest rates on their outstanding debts, cyclical changes in industrial country demand for their exports, and declines in primary commodity prices, combined to reduce the average growth rate of those developing countries with th lowest growth performance by three-quarters of one percentage point. Mention should be made of one factor that straddles the external/domestic distinction, namely the debt burd of the LLDCs. There is an emerging consensus on the need to address the LLDCs' debt burd by new methods and approaches, and the IMF and the World Bank are considering a plan t would bring the level of debt down to a manageable level for LLDCs pursuing sound econom policies. Next, the paper considers domestic factors that are commonly believed to play a role in explanations of differences across countries in the degree of participation in world trade:

Trade policies and participation in the WTO. For the most part, the countries which have experienced strong export growth have lower levels of import protection than countries w stagnant or declining exports. Looking at trade regimes more broadly, developing countrie which are WTO members will benefit from the new rules and disciplines agreed to in the Uruguay Round, as regards both the security of their access to the markets of trading partners, and the transparency and predictability of their own trade regimes. Commitmen in their goods and services schedules also help lock-in reforms in the trade regime, thereb adding to the credibility of the reforms in the eyes of foreign and domestic investors. However, for developing countries - and especially for the LLDCs - to take greater advanta of the benefits to be drawn from the multilateral trading system, there needs to be an

expansion of their human resources and institutional infrastructure in the trade policy are

Export concentration. In most of the least developed and other low-income countries, primary products - incorporating low levels of processing - continue to account for the bul both national production and exports. Given the changing structure of world trade describ at the beginning of this paper, it is not surprising that most of the countries that have participated little or not at all in global integration are primary commodity-dependent countries with relatively small and highly inefficient manufacturing sectors. However, a recent World Bank study calls into question the conventional wi sdom that commodity dependence is always bad for economic growth, concluding that countries can be both commodity dependent and have high export and income growth.See footnote 3

Macroeconomic policies. Countries which recorded above-average export growth and abilit to attract FDI reported median inflation rates well below those in the less successful performers, along with considerably less real exchange rate volatility. The less successful groups, moreover, tended to have higher budget deficits, more volatile deficits, and defic that declined at a slower rate (those in the poorest performing group actually expanded th deficits during the 1980s). The experience of different countries' reform efforts suggest th stable macroeconomic policies, structural reforms, and outward-oriented trade and investment regimes go a long way to provide economic stability and thereby lower the risk premium attached to investment in LLDCs - a precondition to attracting foreign investors. those countries which have persisted in economic reforms, the positive results are becomi apparent.

Other domestic factors. Inadequate and inefficient road/rail/air transport facilities, stora facilities and telecommunications have also acted to limit the supply-side response of developing countries, with the problems being especially serious in the LLDCs. At the institutional level, many developing countries, particularly LLDCs, lack a transparent legal and regulatory framework, including company and bankruptcy laws and investment codes. most LLDCs, the private sector is constrained not only by shortages of capital, but also of entrepreneurial, managerial, technical and marketing skills. Efforts to enhance export performance will require not only technical assistance aimed at strengthening the institutional infrastructure for trade and trade policy, but also initiatives aimed at enhanc the outward orientation of the private sector. Enterprise-oriented technical cooperation programmes can underpin efforts to improve international marketing and business development.

Interaction among external and domestic factors. In reality, the many external and domes factors that determine a country's export performance - and more generally the pace of it integration into the global economy - do not operate independently. There is a complex interaction, both positive and negative; a factor in one category can interact with others i the category, and developments in external factors can improve or worsen the effects of domestic factors and vice versa.

I.

Major trends in developing countries' Trade Performance

The changing structure of world trade

Over the past two decades developments in the three broad product categories of world merchandise trade have differed sharply. While the value of exports of mining products (mainly fuels) and agricultural products rose between four and five times, those of manufactured goods increased nine times (Chart 1.A). Most of these differences in long te

developments can be attributed to volume rather than price changes. On a volume basis, manufactured exports more than tripled, in contrast to gains of 70 per cent and 25 per ce respectively, for agricultural products and mining products (Chart 2.A). Nominal prices fo mining products as a group in 1994 stood about 3 times above their level in 1973, while those of manufactures and agricultural products were up 2.8 and 2.2 times, respectively (Chart 2.B).See footnote 4

After fluctuating in the range of 55 to 60 per cent between 1973 and 1985, the share of manufactures in merchandise trade had increased sharply to around 78 per cent by 1995 (Chart 1.B). The remaining 22 per cent is divided about equally between agriculture and mining. Agricultural products experienced a slow but steady erosion of their share over the two decades, from more than 20 per cent of world trade in 1973 to somewhat more than 1 per cent in 1995. The share of mining products - heavily influenced by oil prices - peaked 1980 and dropped sharply thereafter. In 1995, the share of mining products in world merchandise trade was around 11 per cent, compared with 17 per cent in 1973 and 28 per cent in 1980. Trade performance of the aggregate of developing countries

Taking into account the very large share of primary products in developing countries' expo in the 1970s (more than three-quarters), it is not surprising that the share of developing countries (as a group) in world merchandise trade peaked in the same year as the share of mining products did, namely 1980 (Table 1). Following the historical peak share of 28 per cent that year, the share of the developing countries in world merchandise trade declined line with oil prices over the first half of the 1980s. Once oil prices bottomed out in 1986, t share of the developing countries started to rise again, largely due to their growing share world trade in manufactured goods.

Table 1 Share of developing countries in world merchandise exports, 1973-1995

(Percentage based on value figures) 1973 1980 1985 1990 1995p Agricultural products 27 Mining products Fuels Manufactures Total merchandise Note: 55 68 7 19 28 64 72 10 28 29 49 54 13 23 25 50 60 15 21 26 47 57 20 22

(1) In this table, China is not included in developing country group.

(2) 1995 figures are provisional.

As is evident from Table 2, the product composition of developing countries' merchandise exports has changed dramatically in the past decade; particularly as regards manufactures (close to a doubling of the share to nearly two-thirds) and mining products (a decline in th

share of more than half to less than one-quarter). The strong gains in manufactures brough the share of developing countries in world exports of manufactures to 20 per cent last yea double the 1980 share and nearly triple the 1973 share.

Table 2 Product structure of developing countries merchandise exports, 1973-95

(Percentage based on value figures) 1973 1980 1985 1990a 1995p Agricultural products 30 Mining products Fuels Manufactures 47 39 22 15 65 61 19 100 17 47 43 34 100 14 34 29 50 100 14 22 19 62 100

Total merchandiseb 100

aBreak in time series can affect comparison between 1985 and 1990. bIncluding unspecified products. Note: (1) In this table, China is not included in developing country group.

(2) 1995 figures are provisional. Trade performance of developing countries by region

Trends in their respective shares in world merchandise trade over the past decade varied among the regions. While the developing countries in each of the major regions recorded export growth, as can be seen from Chart 3, the developing countries in Asia increased the market share dramatically, while Latin America's share stagnated and those of Africa and t Middle East declined. As a result, the shares of Africa and the Middle East in world merchandise trade are now below that of China.

There is a relatively close link between this trade performance and the share of manufactures in the merchandise exports of the respective regions. Figures in Table 3 for developing Asia (excluding China), China, and the group of "other developing countries" reveal a highly different product structure of merchandise exports. While manufactures account for more than 80 per cent of total merchandise exports for China and other developing countries in Asia, the corresponding share for the group of "other developing countries" is less than half that figure. Developing Asia and China have high shares not only manufactures but also in many of the fastest growing product categories, such as office an telecom equipment, clothing and other consumer goods (such as footwear and toys). In 19 the group of "other developing countries" exported more mining products than manufactur goods, and the share of agricultural products in their exports was also noticeably higher th for developing Asia and China.

Table 3 Global trade and the product structure of selected developing areas,

1985-94
World exports: annual growth rate 1985-94 Manufactures of which: - Office and telecom equipment - Clothing - Other consumer goods Agricultural products Mining products Fuels Total merchandise 12 .3 7 .6 6 .7 1 .8 -2 .6 -8 .1 2 .8 26.2 8.3 10.7 10.4 7.3 5.8 100.0 8 .2 18 .7 24 .2 12 .2 5 .3 3 .4 100 .0 3 .2 4 .5 4 .0 18 .4 42 .1 36 .6 100 .0 5 .8 81.2 82 .0 38 .3 Product structure of exports in 1994 Developing Asia* China

Other developin countries

*Excluding China.

Another factor which distinguishes developing Asia and China on one hand, and all other developing countries combined on the other, is their respective participation in the globalization process. Data on the evolution of trade-to-GDP ratios, and on inflows of fore direct investment (FDI), are useful, albeit rough, indicators of the extent of integration in the global economy. As regards the ratio of trade in goods and services to GDP, the contra between developing Asia (including China) and other developing countries is evident in Chart 4. For the Asian developing countries a dramatic doubling in their trade-to-GDP ratio can be observed for the 1974 to 1994 period; if China is excluded from developing Asia, th trade-to-GDP ratio is significantly higher; however, the trend increase in the ratio is very similar. The "other developing countries" as a group, in contrast, have trade-to-GDP ratios 1994 which are - despite the recovery since 1986 - not much different from the 1974 levels.See footnote 5

Along with a more favourable trade performance over the past decade, the developing countries in Asia also recorded a much stronger investment performance. Most South East Asian countries reported ratios of domestic fixed investment to GDP of around 30 per cent during the 1985-1994 period, while those of Latin America and Africa fluctuated around

20 per cent. At the same time, the former countries were more open and attractive to foreign direct investment. As is evident from Chart 5, developing Asia and China attracted most of the FDI flows to developing countries. Inflows into China alone are estimated to be roughly equivalent to the FDI inflows to Latin America, while Africa and the Middle East attracted only very small shares of the FDI flows to developing countries. A closer look at the strong and weak trade performances

In order to examine trade performances on a more disaggregated level, two partially overlapping comparisons are developed briefly below (a third comparison is given in Box 1 page 14). The first involves comparing a group of countries that recorded above average export growth during 1985-94, with a group of countries that recorded negative export growth over that same period (see Annex for the composition of the two groups).

Among the 25 countries that recorded above average growth of merchandise exports durin 1985-94, 15 reported "steady" above average growth (that is, for both the sub-periods 198 90 and 1990-94). A large majority of these steady strong performers - 12 out of 15 countrie export mainly manufactures (the share of manufactures in their respective merchandise exports ranged from 70 to 97 per cent in 1994). Half of the remaining ten strong (but not "steady" exporters) also export principally manufactured goods. As regards the 35 countrie whose exports in 1994 were below the 1985 level, only four export principally manufactur A review of those four traders reveals that very particular factors explain their presence among the poor performers.See footnote 6

Although the comparison between the poor and strong performers indicates a correlation between the share of manufactures in total merchandise exports and the growth of total merchandise exports, there are at least two important examples where strong export grow coincided with a moderate share of manufactures in total merchandise trade. In the case o Viet Nam, the high and steady export growth (from a very low level of exports in 1985) is linked not only to the rapid rise in exports of manufactures, but also to the development o oil fields which led to significant exports of crude oil, and to strong exports of food (mainl rice). The rise in exports of crude oil and manufactured goods can be partly attributed to sharp rise in FDI inflows, especially in the 1990's.

Chile is another country with a strong export performance and a very low share of manufactures (traditionally defined) in total exports (17 per cent). The success of Chile is linked to the successful diversification into "new" (sometimes highly processed) agricultura products and an above average performance for its largest single export product, namely

copper. Even though all copper exporters benefited from the fact that copper prices increased faster than the prices of other commodities, Chile increased its share in global copper output from 16 per cent in 1985 to 26 per cent in 1993 (while at the same time, th share of copper in Chile's total merchandise exports declined from 47 to 38 per cent). Oth dynamic exports included fish, shell fish, fruits, wine and wood pulp. Important elements the export expansion of both copper and agricultural products were the wide ranging liberalization and privatization programs and the associated inflow of FDI, which gives Chi one of the largest stocks of FDI per capita in Latin America.

Much of the concern about marginalization centres on the group of least developed countries (LLDCs). The source of this concern is readily apparent from the figures in Table as is the motivation behind the search for lessons in the experience of East Asian economi Low trade-to-GDP ratios, low investment and small shares of manufacturing in GDP and exports, are common traits of the typical LLDC.See footnote 7 It should be added that Bangladesh - by far the largest country among the LLDCs - is a partial exception. With a hi share of manufactures in its total merchandise exports (83 per cent in 1994), it figured among those traders which expanded their exports faster than world trade through 1985-9

The wide range of experience among developing countries is also examined in a recent Wo Bank report, using some of the same variables mentioned above (such as the share of manufactures in exports).See footnote 8 Box 1 reproduces the principal conclusions of tha analysis, the latter two of which anticipate points made later in this paper.

Table 4 Comparison of trade performance and other selected indicators for different groups of developing countries, 1980-94
All developing countries Merchandise exports: value Annual percentage change 1980-90 1990-94 Merchandise exports: volume Annual percentage change 1980-90 1990-94 Merchandise exports Per capita ($) 1994 260 28 2,700 3 .7 9 .0 0 .6 3 .8 9 .8 10 .6 3 .2 8 .7 Least developed countries 1 .4 1 .3

Six East Asia Tradersb 11 .5 12 .0

Merchandise exports Share in GDP (%) 1993 Exports of manufactures Share in merchandise exports (%) 1992 Manufacturing output Share in GDP (%) 1980 1990 Gross fixed investment Share in GDP (%) 1980 1990

24

--

59

21

85

21 23

11 9

---

26 26

16 15

---

aDeveloping country figures include China. bWTO Secretariat estimates. The six traders are Chinese Taipei, Hong Kong, Republic of Korea, Malaysia, Singapore and Thailand. Hong Kong re-exports are excluded.

Source: UNCTAD, Handbook of International Trade and Development Statistics, 1994; an The Least Developed Countries, 1996 Report, Annex II, Basic Data on the Least Developed Countries. Box 1: Disparities in global integration Reproduced from Chapter 2 of Global Economic Prospects and the Developing Countries, World Bank, April 1996

Developing countries as a group have participated extensively in the acceleration of globa integration, although some have done much better than others. ... This chapter reviews developing countries' widely varying experience with integration over the past ten years and explores the causes and implications of the large disparities. ... The analysis draws fo main conclusions:

* Changes in integration were highly differentiated. Many developing countries becam less integrated with the world economy over the past decade, and a large divide separate

the least from the most integrated. It is striking, for example, that the ratio of trade to GDP fell in forty-four of ninety-three developing countries over the past ten years, while the ratio of FDI to GDP fell in more than a third.

* Countries with the highest levels of integration tended to exhibit the fastest output growth, as did countries that made the greatest advances in integration. Many low-incom countries are among the least integrated, however, and some became even more marginalized during this period, experiencing both falling incomes and reduced integratio But other low-income countries - including some of the largest - were among the fastest integrators.

* Sound policies play an important role in determining both growth and the speed of integration. Policy reforms designed to increase an economy's growth and stability are likely to influence a country's speed of integration, both directly and through their effect on growth. Reforms that promote stable macro-economic conditions, realistic exchange rates, and open trade and investment regimes are also important for growth and integration. * Improvements in the external environment and modest reforms in many lagging integrators suggest that their growth rates may show some improvement in the next decade. But if current policies and trends persist, many developing countries can expect fall further behind OECD countries in per capita GDP.

Table 2-2 Speed of integration of developing countries, early 1980s to early 1990s (number of countries) Ranking East South Asia Asia Latin America and the Caribbean 5 5 9 2 9 5 21 2 4 2 5 13 Middle East and North Africa Sub-Saharan Africa Europe and Central Asia

Fast integrators Moderate integrators Weak integrators Slow integrators Total

3 2

2 10 10 14 36

5 2

2 9

Source: World Bank staff estimates

Note: To summarize integration trends, the analysis... uses a speed of integration index derived from changes between the early 1980s and early 1990s in four of the indicators discussed above: the ratio of real trade to GDP, the ratio of FDI to GDP, Institutional Investor credit ratings, and the share of manufactures in exports. The speed of integratio index is the simple average of changes in the four indicators over the period expressed as

standardized scores.

On the basis of this index, developing countries are grouped in four categories ranging fro "fast integrators" (those with the highest index values) to "slow integrators" (those with th lowest; table 2-2). This classification is not intended to derive a precise categorization of individual countries but rather to develop evidence about the factors that might account for large differences in the speed of integration among groups of countries, and the consequences of this for performance. Commercial Services

It appears that the share of developing countries in world exports and imports of commerc services increased between 1987 and 1994 (however, the share remains somewhat below t share of developing countries in world merchandise trade).See footnote 9 This is entirely d to the performance of the Asian developing countries, as other regions reported a stagnati or declining share in world services trade. As regards the three major categories of commercial services - transport, travel and other business services - the available data suggest that the developing countries as a group have increased their market shares in all three categories since 1987.