Sectoral upgrading a half century later – 2010 is not 1960

There is an increasing consensus about the need of poorer economies to shift away from low technology, low productivity areas into new product areas, particularly to generate non-commodity exports. The figure below shows the low level of manufactured exports from the poorest region, sub-Saharan Africa (SSF) as well as from Southeast Asia (SAS) compared to other regions. It is this disparity that many have in mind in urging a sectoral transformation. In the 1950s and early ‘60s there was an argument for a “big push” in development premised on export pessimism.

*lcn- Latin America & Caribbean, mea- Middle East & Africa, SAS - Southest Asia, ssf- Sub-Saharan Africa, eap- East Asia & Pacific, and eca- Europe & Central Asia

The emphasis on the big push and balanced growth continued until the 1970s when the success of export oriented countries in Asia such as Korea and Taiwan (China) demonstrated that it was possible to escape  the need to have balanced  internal growth. Annual export growth of 15 percent or more helped to effect a major transformation in many of the newly industrialized Asian nations.  A critical question is whether five decades later this option is still open.

The earlier experience is likely to be difficult to replicate. First, the generation of huge industrial complexes benefitting from agglomeration economies, particularly in China, makes it difficult for new entrants to compete. Second, over the next decade the major international macroeconomic adjustment will consist of the reduction in excess demand by a few countries, notably the U.S., and a concomitant increase in domestic absorption of GDP in a number of surplus countries mainly in Asia. To achieve a share of (relatively) contracting U.S. imports will not be easy nor will it be easy for non-Asian emerging markets to penetrate the Chinese and other Asian markets as they redirect their own production toward domestic uses. This is not to say that world exports will be absolutely stagnant, simply that rates of growth that prevailed from the 1960s to 2007 are extremely unlikely to continue. Realistically domestic markets will prove critical over the next decade.

It can be argued that it is always possible to find a niche in which a country may achieve low costs and thus penetrate advanced markets. But this niche may be difficult to identify and exploit. Consider the options facing a typical relatively poor country with low physical and human capital and technology. How could it identify a specific set of products and will this work? Which sectors are candidates for export expansion, ignoring for the moment the precise policies that might be pursued? There are many determinants of potentially competitive exports: the national economic environment including real exchange rate evolution; tariffs on imports used in export production; infrastructure including roads, electricity supply, port facilities; firm level managerial knowledge including both engineering knowledge and labor relations; and the productivity of individual workers.

Governments intending to foster development of individual sectors face a formidable set of knowledge requirements such as predicting the rate of TFP growth in individual sectors within a country and in comparable foreign sectors. While a few individual emerging market manufacturers might be able to identify a product in which they possess a comparative advantage most are likely to be caught between the high technological capacity in the OECD nations and the mass production capabilities and agglomeration economies that have developed over the last four decades in China and other Asian nations, and more recently in some parts of Eastern Europe. Extant mass production and the close links already established between international production and purchasing networks are particularly important.  Much of international trade is in the hands of these networks. Simply building up production capacity of a few firms in one sector is unlikely to be a successful strategy without the ability of firms to find a place in these networks.

This implies that the earliest steps should be fostering the rural sector to provide a demand for simpler manufactured goods that have a natural transportation cost advantage. Simultaneously, policies could be pursued to encourage firms to achieve a position on the radar screen of international supply networks. A parallel effort could be made to help countries attract FDI which provides both technological knowledge and marketing networks. Much could be learned from the experiences of the relevant agencies in emerging economies such as Mauritius and Singapore that undertook such efforts and had considerable success and would not regard currently poor nations as potential competitors.