Syndicate content

The Nuts and Bolts of Trade: Stepping up to Manufacturing in the Development Ladder

John Wilson's picture

With the global recovery slow to pick up speed, the latest World Economic Outlook (WEO) isn’t exactly an uplifting read. However, for those of us with an eye on the developing world there are some bright spots: the low-income-countries (LICs) in Africa, for example, have returned to their pre-crisis growth rates and their economies are expected to expand by a respectable 6.5 percent in 2012. 

Despite this seemingly good news, there are some dark clouds on the horizon. The WEO attributes the quick rebound to the fact that the African LICs were, “largely shielded from the global financial crisis owing to their limited integration into global manufacturing and financial networks.”  Although limited international exposure is a boon in the short-term, it also signals trouble down the road.

A recent UN report paints a rather gloomy picture. Africa is the least diversified region in the world, and the trend doesn’t look encouraging. Manufacturing as a proportion of GDP in the region peaked at the beginning of the 1990s, and fell precipitously from 15.3 percent in 1990 to 10.5 percent in 2008—just 1 percent of the global share.

As Rodrik and McMillan point out in a paper that the former presented at the Bank in April and the latter discussed at a conference at the World Bank recently, “the countries that manage to pull out of poverty and get richer are those that diversify away from agriculture and other traditional products.” Far more so than agriculture and natural resources, manufacturing is a driver of innovation, has significant spill-over effects and boosts demand in other sectors of the economy, and creates more and better employment opportunities.

Manufacturing and trade are tightly linked. Trade can create economies of scale. It also allows firms to take advantage of new technologies, promote innovation, and attract foreign investment. Research shows that all of these factors contribute to long-term growth.  So although the LICs in Africa seem to be doing alright for the time being thanks to high commodity prices and solid consumer demand at home, this will not ensure the long-term growth and job creation that is needed to lift millions out of poverty.

The UN report correctly points out that as China and India work their way up the value chain, African countries will have an opportunity to fill the manufacturing void left behind.  Africa can be – over time – in a good position to supply the growing middle classes in the emerging markets with manufactured goods. However, due to a host of issues, from transportation bottlenecks to inefficient border procedures, many African economies are simply not competitive enough at present. In order to fully embrace these opportunities, LICs will have to work on significantly lowering the burden on exporters.

With limited resources, the focus should squarely be on establishing the effectiveness of various trade measures in order to squeeze as much impact as possible out of each dollar. Evidence-based advice is particularly important now that the Bank has shifted its emphasis from broad trade liberalization reforms to more targeted measures aimed at tackling the supply-side constraints and “behind-the-border” issues that act as a drag on countries’ export potential. Depending on the individual countries, strategies should arguably include some combination of trade facilitation programs, infrastructure projects, competitiveness and diversification interventions, market access support, and regional integration initiatives. However, the specific measures to be adopted should be based, as much as possible, on evidence of what works best.

It’s generally more challenging to rigorously evaluate trade measures than health or education interventions (which is not to say such evaluations are easy to conduct – they are not). The difficulties notwithstanding, the Bank’s research group has been at the forefront of developing innovative ways to rigorously evaluate trade interventions. I mentioned some recent work in my previous blog post, but there are many other examples—most notably a new book edited by Olivier Cadot, Ana Fernandes, Julien Gourdon, and Aaditya Mattoo exploring ways to apply impact evaluation to trade assistance.  New research at the Bank (Ferro, Portugal-Perez, and Wilson 2011) included in the book shows a positive effect of aid to services on downstream manufacturing sectors.  This is true across regions – and income levels.

In short, trade assistance – including targeted aid – can be a strong vehicle for positioning LICs to diversify and take advantage of the unsteady global recovery and the opportunities embodied by millions of new middle class consumers. This will complement the great work our colleagues are doing in other areas, as integration into the global economy will create more and better jobs for the increasingly healthy and higher educated working-age populations. The stakes are high. Now more than ever, policy makers need to know what works best.