Terms of Trade Reversal The Challenge to Development Strategy

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Terms of Trade Reversal? The Challenge to
Development Strategy

• IKD Seminar
• 18th January 2007

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Terms of trade decline

• The prevailing post WW2 wisdom
• But, Singer/Prebisch
• Commodities are inputs into manufactures
• Demand low for commodities as incomes rise
• Demand for commodities falls as their price
  increases
• Synthetic substitute for natural materials
• Low innovation barriers to entry

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And then one other Singer insight

• Labour markets
• Cost-plus pricing in high income countries
• Reserve army of labour in low income economies
• So manufactures vs commodities really a surrogate
  for high income vs low income

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Manufactures-commodities terms of trade
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The drive to industrialisation

• Close association between incomes and
  industrialisation
• Manufactures are (relative to agriculture) income
  elastic and price inelastic
• Manufacturing embodies rents agriculture does
  not
• Manufacturing can be labour intensive primary
  commodities are very capital intensive

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The Asian Drivers upset the applecart
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Share of manufacturing value added
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Chinas growth is not unique..
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But its not just the Asian Drivers
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Market share of five largest retail chains (2000)
AC Nielson, cited in Bell 2003
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With what consequences?

• Growing productive capacity means heightened
  competition
• Growing concentration in buying power
• Manufacturing caught between a rock and a hard
  place

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World Manufacturing Export Price, 1986-2000
IMF, World Economic Outlook Database
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EU Imports from China
Source Euratex data as reported by Nathan
Associates
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Caught between a rock and a hard place
Percentage of sectors with negative price trends,
1988/9-2000/2001 by technological intensity and
country-grouping
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Employment in Chinas formal sector manufacturing
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The picture is not so bleak for commodity
producers
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Actual and projected global share of Chinas
consumption of base metals
Source Macquarie Mining
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Source Macquarie Mining
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Enormous demand potential
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All this has implications for the producers of
manufactures
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And for the producers of commodities?

• Commodities price boom
• Dutch disease
• Zambian copper, tobacco, maize and cotton
• Armed conflict
• Corruption
• Managing surpluses
• LA and ownership
• Chile and copper
• Venezuela and oil

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And for agriculture?
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Appropriating rents in the coffee sector

• There are more varieties of coffee and with a
  greater variety of taste than they are of wine
• Blue mountain coffee prices are not subject to
  the factors of supply and demand that affects
  other commodities. The price is fixed (2001)
• Illy sells at 10/230gm compared to 1.50, and
  farmers get 30 more.

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Escorial wool

• Maghreb sheep taken to New Zealand in 1828.
• Numbers are now severely limited by NZ farmers
• Resources put into marketing in 1990s
• We have created clean air between the generic
  commoditised Merino wool
• Escorial scarf retails at more than 600

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And for income distribution

• Manufacturing is labour intensive
• Commodities are
• Capital intensive
• Generally foreign owned
• Kleptocracy
• Armed conflict

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Innovation is key to sustainable incomes
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THE SCHUMPETERIAN INNOVATION SCHEMA
2nd round innovation
3rd round innovation
1st round innovation
Rate of profit
Avrge rate of profit
Innovation rent
Time
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Endogenous rents

• Technology rents
• Human Resource rents
• Organisational rents
• Relational rents
• Design rents
• Marketing rents

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Exogenous rents

• Resource rents
• Policy rents
• Infrastructural rents
• Financial intermediation rents

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Value chains are increasingly global and dynamic
Competitive pressures
Services
Services
Production
Design
Marketing
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Our existing architecture is limited

• Competences and dynamic capabilities
• But mostly within the firm
• Types of upgrading
• Process upgrading
• Product upgrading

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An upgraded architecture on innovation

• Competences and dynamic capabilities are now a
  value chain challenge
• Wider perspective on upgrading
• Process upgrading
• Product upgrading
• Functional upgrading
• Chain upgrading

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Implications for Development Strategies
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Sectoral choice

• Sectoral choice?
• Agriculture
• Commodities
• Manufactures
• Services
• Or positioning within sectors?
• Back to Schumpeter and rents

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Policies to facilitate innovation

• Macro policies
• Cross sectoral policies and market failure
• Sectoral and regional targeting

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Income inequality and marginalisation

• Meeting the challenge in production
• Funding the challenge through production
• Dont take politics out of this