Globalization weakens spread of industrialization within South?

Geneva, 21 Dec (Chakravarthi Raghavan) - Under the current process of globalization, while industrial activity has spread from the developed to geographically close developing countries in sectors that are intensive in immobile primary factors and not too heavily dependant on linkages with other firms, only those developing countries with an already established industrial base have achieved industrialization in other sectors, according to an UNCTAD discussion paper (No.174).

The findings in the paper - “Industrialization in Developing Countries: Some Evidence from a New Economic Perspective” - pose a major challenge to developing countries on how to extract from their increasing integration into the international trading system the elements that will promote industrialization and, in particular, how to create the critical mass of linkages that provide pecuniary externalities to industrial firms, according to its author Jorg Mayer.

While traditional trade and economic theory sees differences in relative factor endowments, technology or policy regimes to be determining differences in the patters of economic activities across countries, the new ‘economic geography’ contributions emphasize mechanisms that lead to agglomeration of industrial activities in geographic space and show why even initially similar countries can develop very different production and trade structures.

The current process of globalization - advocated and promoted by the Washington-based Bretton Woods Institutions (IMF and World Bank) and the Geneva-based World Trade Organization, as well as by the EC and the US - involve rapid liberalization of trade and investment (and a decline in trade barriers) and a growing role for intermediate inputs into world trade.

Such liberalization, according to the advocates of these theories, results in rapid economic growth and manufacturing activity and results in poverty reduction. However, there has been considerable economic literature and empirical evidence over the past few years challenging these theories.

According to the new economic geography models, Mayer says, the structure of production in individual countries is determined, as in traditional trade theory, by the interaction between country characteristics and industry characteristics. But while traditional trade theory focusses on relative factor endowments of countries and factor intensities of goods, the mechanisms of the new geography models also take account of market size and the geographical distance of countries from the markets of the main developed countries, as well as of transport intensity of industrial sectors, including the size of transport costs and the dependence on intermediate inputs.

In terms of its implications for evolution of industrial structures in developed and developing countries as the forces of globalization gain strength, Mayer says on the basis of existing literature that there is no unified theoretical model with a consistent set of assumptions that could be applied to test a set of specific empirical predictions regarding the evolution of industrial structure and trade patterns of countries.

While keeping this caveat in mind, Mayer sums the broad empirical predictions as:

·        a strong rise of exports from both developed and developing countries in sectors where production stages are easily separable, components are less labour-intensive than final goods, and demand for final goods is small in the developing country;

·        manufactured exports grow more rapidly in developing than in developed countries;

·        manufacturing value added declines in developed countries and rises in developing countries, but the bulk of manufacturing value added remains in the developed countries; and

·        manufactured exports in developing countries grow more rapidly than manufacturing value added.

Analysing the data - his own calculations using mainly the database of 34 countries and 22 industrial sectors for the period 1980-1998 in Nicita A and Olarreaga M (2001) Trade and production 1976-1999, World Bank Working Paper 2701 - the Mayer paper brings out that in terms of country-specific evidence, “there appears to be little correlation between the growth of manufactured exports and manufacturing value added for any of the developing economies.”

[In terms of the data and database, Mayer points to the problems of deficiencies of data and the lack of data for China regarding wearing apparel and footwear.  The Nicita and Olarreaga paper gives its data sources, mentioning among others GTAP 4 for the input-output table for each country. After recent controversies around a discussion paper by a WTO staff member on the trade in the textiles and clothing sector, GTAP has acknowledged some of the deficiencies including in mis-classification of several apparel items under textiles.]

All Asian economies (Hong Kong China, South Korea, Singapore and Taiwan province of China, Indonesia, Malaysia, the Philippines, Thailand and China) increased their shares in world exports of manufactures.

But in Latin America, this was true only for Mexico; the other major economies in Latin America - Argentina and Brazil - have been unable to increase their shares in world exports of manufactures.

Similarly, Mayer finds that with the exception of Hong Kong China and the Philippines, all east Asian economies increased their shares in world manufacturing value added. But none of the Latin American economies were able to do so. “This gives empirical support to one of the key implications of the new economic geography models, namely that the move of industrial activity away from the developed countries does not benefit all developing countries at the same time or in the same way.

Examining the local Gini coefficients for manufacturing value added, Mayer says that the country-specific evidence supports the predictions that changes in geographic concentration of economic activity differ across countries. Morever, the results for manufacturing value added show that little industrial activity has spread to developing countries - even though a number of developing countries, notably Malaysia and Mexico, experienced a sizable change in their structure of manufactured exports.

“Thus, a change in a country’s structure of manufactured exports does not necessarily imply a corresponding change in its structure of manufacturing income.”

In testing the broad empirical predictions on how the current process of globalization has affected industrialization in developing countries, the findings in Mayer’s paper support the predictions that the decline in trade barriers has weakened the importance of industrial linkages in developed

countries and favoured the spread of industrial activity from developed to geographically close developing countries. But this has occurred in sectors that are intensive in immobile primary factors and not too heavily dependent on linkages with other firms - that is in traditional labour intensive sectors such as apparel, leather products and foot-wear.

By contrast, he adds, there is no indication of a significant spread of industry in sectors that would strongly rely on forward and backward linkages in developing countries.

“This is exemplified best by the electrical and non-electrical machinery sectors that continue to be among those for which agglomeration is strongest. Hence, the recent wave of international production fragmentation in these sectors has not been associated with a strengthening of either forward (e.g. through increased domestic production of intermediate production inputs) or backward linkages (e.g. through increased domestic output demand from other domestic manufacturing firms or consumers) in developing countries.”

There has been a sizable change in both the size and structure of manufactured exports from developing countries, but not in their manufacturing value added.  The findings also show that the increase in the share of developing countries as a group in world exports of manufactures has not been accompanied by concomitant increase in their share in world manufacturing value added.

Similarly, the sectoral structure of manufacturing exports from developing countries has become more similar to that of manufactured exports from developed countries, but the sectoral structure of manufacturing value added has not.

In other words, the pattern of manufactured exports from developed and developing countries have converged, contrary to the patterns of manufacturing value added.

“Perhaps most importantly,” says Mayer, “the findings point to an important difference in the extent to which the spread of industrial activity benefits the industrialization process in developing countries and suggests that this difference depends on their existing level of industrial development. Developing countries in an early stage of industrialization that attract relocating industrial activity mainly on the basis of factor-price differences, such as probably exemplified best by Malaysia and Mexico, experience a change in their structure of manufactured exports accompanied by little change in their manufacturing value added.

“By contrast developing economies whose well-established industrial base allow them to enjoy linkage-related effects, such as exemplified by South Korea and the Taiwan Province of China, experience a change in the structure of manufacturing value added without necessarily experiencing a concomitant change in their structure of manufactured exports. To the extent that this is the case, a continuance of the observed spread of industry would reinforce existing differences between developing countries with regard to their level of industrial development.

“Thus, a major challenge facing developing countries is how to extract from their increasing integration into the international trading system the elements that will promote industrialization and, in particular, how to create the critical mass of linkages that provide pecuniary externalities to industrial firms. Experience of successful countries, such as South Korea, suggests that this means combining the opportunities offered by world markets with a growth strategy that mobilizes the capabilities of domestic institutions and investors.  The accumulation of capital, both human and physical, and the provision of appropriate infrastructure with a view to raising productivity clearly continue to be key factors in this regard.

“Also important are trade policy measures by developed countries designed to reduce access barriers to imports of high-value goods from developing countries.”

While these findings give support to the broad empirical predictions of new economic geography models, “they do not allow favouring one specific theoretical approach over others,” stresses Mayer. – SUNS 5714

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