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Clearing the Way for Exports

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1971
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Jack Baranson

The expansion of exports of manufactured goods is one of the main goals of industrialization programs in many developing countries; the export of agricultural commodities and other raw materials is often inadequate and uncertain. For many developing countries, too, efforts toward further industrialization are now seriously hampered by high-cost industries nurtured under systems of protection and progressive autarky. A shifting of emphasis to outward-oriented industries opens the path to further and more efficient growth; it provides a developing country with an opportunity to expand exports beyond primary commodities, with all their disadvantageous price fluctuations. Diversification may range from the further processing of agricultural commodities and raw materials to the production of fabricated goods for world markets.

The lion’s share of export trade in manufactured goods is in the hands of industrialized countries endowed with capital, equipment, and managerial skills to design, produce, and market industrial products. The less developed countries (LDC’s) export only a small fraction of the manufactured goods in world trade—about $5.5 billion of the $112.3 billion total in 1967. About $1.9 billion (35 per cent) represented trade among the developing countries themselves. Most of this $5.5 billion was in traditional consumer products, such as textiles and clothing, or standard intermediate goods such as plywood or semiprocessed materials or basic chemicals.

Gaps and Prospects

A recent analysis of trade in manufactured goods among industrialized countries indirectly reveals some of the gaps in the export capabilities of the LDC’s.1 First, trade tends to occur between “technologically compatible” economies, i.e., those with similar capacities to absorb technology and to adapt products or techniques to changes in supply and demand. Second, there is a growing importance in “research-intensive” goods, i.e., products derived from industrial activities with a high input of research and development and technically skilled labor and management. And third, there has been dramatic growth in overseas investments and associated transfer and licensing agreements in connection with export growth. The study notes that small countries such as Switzerland and the Netherlands have increased their share of research-intensive products through specialization in a limited range of products.

The best prospects for the expansion of LDC exports in manufactured goods seem to be in the direction of standardized goods, requiring less technical and managerial skill, emphasizing low-wage labor, and utilizing raw materials with low opportunity costs. This is in line with Professor Raymond Vernon’s product cycle thesis, which argues that new products are first imitated in other developed countries and eventually reproduced in the LDC’s. Manufacturing specializations also depend upon the economic size of the LDC, its stage of sector development, and the capabilities of individual firms. In Japan, for example, aircraft producers continue to import those components and parts that would be costly to procure in the Japanese economy because certain “firm-specific” or “system-specific” technical or industrial knowledge is deficient.

Development of Capabilities

The development of exports from less developed countries depends first upon the willingness of developed countries to accept adjustments in the international division of labor that assigns to the LDC’s manufacturing roles in the comparative advantage range. The situation faced by most LDC’s is that the interest that developed countries have in their exports is confined to raw materials or limited processing to reduce transport costs. The traditional pattern in world trade has been to procure required raw materials internationally and to process in or near the consumer markets. This is in part due to the necessity of combining several ingredients from various world sources into a single end product. The tendency is also to tailor product variations to local consumer demands. This is the basis for the widely accepted view that export industries must evolve from production for home markets. But this pattern is changing with the revolution in transport and communications and the versatilities of multinational firms that now manufacture and market internationally. Even now the exports of Israel, Korea, and Taiwan in diamonds, plywood, rubber goods, and transistor radios are not based on extensive or representative home markets. Also, the traditional concept that commercial enterprises gravitate toward large urban centers has gradually given way to decentralized plant locations where labor and land are more economical. For example, leading clothing manufacturers based in New York now find it economical to operate plants in Hong Kong, Taiwan, Korea, and Puerto Rico to supply the U. S. market—despite the added freight duty.

TRADE IN MANUFACTURES, 1967
Value of TradeTrade of

Developing

Countries as

Proportion of

World Trade
Average Annual Rate of

Growth, 1964-67
WorldDeveloping

Countries
WorldDeveloping

Countries
Billion U. S. dollarsPer Cent
Chemicals14.880.664.411.012.8
Engineering products60.160.711.111.316.4
Textiles and clothing12.272.0316.55.88.7
Other manufactures25.002.07*8.29.915.9
Total manufactures112.315.474.811
Source: General Agreement on Tariffs and Trade, International Trade, 1968 (Geneva, 1969), pp. 114-15.

Not available.

Other manufactures are mostly precious stones, plywood and veneers, and leather goods.

Source: General Agreement on Tariffs and Trade, International Trade, 1968 (Geneva, 1969), pp. 114-15.

Not available.

Other manufactures are mostly precious stones, plywood and veneers, and leather goods.

COMMENTS FROM INTERNATIONAL FIRMS

This article is based on the replies to a questionnaire addressed by the author to 30 international firms. The questions sought detailed answers based on the firm’s own experience. Some of the questions…. In which areas could LDC’s increase their production for world markets? What are the major obstacles to export expansion? What steps would you recommend to help develop production in LDC’s for export or to overcome obstacles in world markets?

Some excerpts from the replies:

“It may seem strange to you that I attach such big importance to sales channels. This is indeed a point which one seldom finds covered in textbooks, but it is extremely important and it may well appear to be more important to the international distribution of labor than labor cost, because on it depend production runs which in our type of industry are mostly of greater importance than wages in determining cost.”

(Dutch firm)

“In the field of agriculture, we are planning in a less developed country a joint venture project to process cocoa beans into cocoa butter for export to Japan. The export of cocoa beans itself from the said country is also possible but we are thinking of processing off-grade beans which are unexportable as beans for quality reasons.”

(Japanese firm)

“Since the main issue of your enquiry is what further processing adds to the price it may be interesting to note that in this particular cost sector the cost is relatively unaffected by the stage of processing, i.e. the cost for freezing, storage and distribution of a (reasonably) highly processed product is usually not higher per weight unit than for the raw material. Meats in carcas form, for instance, are more costly to freeze, store and distribute than deboned meats in block form. This rule holds true in the case of most perishables as long as one excludes the extremes of refined processing which aim at adding pure convenience to the product. One obvious fact is, of course, that the more refined forms of processing create a demand on technological skill and operational know-how which I assume may be difficult to meet in some of the developing countries.”

(Swedish firm)

“The manager of our coffee and tea department informs me that he has been approached on a number of occasions by Indian and Ceylonese tea firms, suggesting that he buy direct from them instead of via London. His experiences have invariably been that the packaging provided by those Asian firms has been inadequate and that they have lacked the competence to provide the necessary marketing support for their products. In consequence attempts to import directly have proved to be failures, and it has not been possible to dispose of the goods through the normal trading procedures.”

(Swedish firm)

“I see distinct possibilities for increasing the exports of pharmaceuticals among the developing countries by planning production on a regional basis and serving a number of countries from one production center. For the smaller countries this may well be the only way to service them.”

(U.S. firm)

The reduction or elimination of discriminatory tariffs and quotas and the securing of tariff preferences is a second area of long-term adjustment that would improve the position of less developed countries in world markets. Tariffs in most developed economies discriminate against processed goods, generally allowing duty-free entry only to raw materials used in their own processing and fabricating plants. According to the estimates of the United Nations Conference on Trade and Development, the average effective tariff on a cross section of manufactured products containing imported raw materials amounted to one third of value added. For many items, such as textiles and processed beef, there are absolute restrictions or quotas imposed on imports. International transport and handling charges also tend to favor unprocessed bulk commodities, and LDC’s are charged disproportionately high rates (relative to actual handling costs) for finished goods or even semiprocessed materials. The combined effect of tariff and freight charges often forces an LDC—with all its other built-in disadvantages—to compete at costs below domestic prices in foreign markets.

Aside from tariff barriers in competition with domestic producers, know-how—for example, the skills of buyers and the knowledge of marketing networks—is a rare and costly commodity. This is why joint ventures with foreign firms to market processed materials and goods may be essential.2 But foreign enterprises are still often understandably reluctant to locate processing and fabrication facilities in the LDC’s for world markets. In some such countries, domestic prices and exchange rates are unstable, and firms are subject to arbitrary governmental actions that affect costs, revenues, and profits. This political and economic uncertainty underlies the widespread reluctance on the part of industrialized countries to become dependent upon less developed countries for anything more sophisticated than the raw material stage.

The Consortium Approach

A third adjustment involves the development of indigenous capabilities in the LDC’s to adapt and absorb transferred technology through international partnerships and other international transfer arrangements. Competing in world markets also requires resources and capabilities in marketing, manufacturing, and research. In the long term, developing economies need to help develop indigenous managerial and technological resources and capabilities to conceive, design, organize, and carry out production programs that can compete in world markets. During transitional periods, developing countries can either enter into partnership arrangements with international firms or, under consortium arrangements, engage in coproduction and comarketing activities.

One example of the consortium approach is the ADELA Investment Company, S.A., which is exploring two sets of institutional arrangements designed to improve export proficiency. One is a clearinghouse to locate and obtain industrial technology for manufacturing affiliates in developing countries. The other is an export promotion center to bring together international partners in marketing and manufacturing. In Taiwan, Korea, and, more recently, Mexico, industrial parks have been organized to produce for export. These areas have promotional agencies to attract foreign enterprise and to facilitate investment in export industries.

The Industry Cooperative Program of the Food and Agriculture Organization is another example of an approach that can help to develop export potential in the LDC’s. Projects conceived and implemented by this group of international industrialists include a food canning operation in Turkey producing for export in the European Common Market and an international consortium organized in the Dominican Republic to process food products and market them abroad.

A Japanese Example

Trading firms in Japan provide a third model for export expansion. These firms have been active in the development of both markets and raw material resources overseas and in importing much-needed industrial technology and know-how. They are now instrumental in pioneering new industrial areas, such as the development of ocean resources, food preservation and distribution, and mass housing. They combine the marketing, manufacturing, and research capabilities needed to establish new industries in world markets. The Japan Development Bank supports these efforts by financing projects that “enhance Japanese firms’ competitive position in world trade.” 3

Other Means

Developing countries may be able to develop export activities through hard bargaining with international marketing and manufacturing groups within the existing framework of emerging national capabilities and international trade structure. Developing economies, with the assistance of international agencies, can use what bargaining power they have—for example, access to LDC resources and markets—to enter into agreements with international marketing and manufacturing groups that are willing to help producer countries to expand domestic processing and fabrication for world markets. Research and development programs at the company level can become another ingredient of success in export development. Firms like Nestle and Unilever have had to adapt product-mix and materials sources to shifts and changes in consumer tastes and in supply conditions. In some fields, product innovation may be a means of entering new markets and extending market shares; for example, the development of instant coffee has helped to increase the consumption of coffee beans tenfold since 1939. Cost-reducing innovation and the development of better raw materials also contribute to competitiveness in world markets—for example, cocoa beans with higher fat content.

The reformulation of commercial and economic policies is a fourth area where adjustment in order to expand exports is needed. For example, the “sellers’ market” of import substitution must be converted to an environment that pays serious attention to costs and efficiency. Countries that seek to industrialize should strive to export at an early phase in order to develop new high-quality human resources and to spur the adaption of new technology and efficient methods—goals difficult to attain under systems of national protection. Professor Albert Hirschman argues that only “a cohesive, vocal, and highly influential national bourgeoisie is likely to carry industrialization beyond relatively safe import substitution to the risky export-oriented stage.” 4

Both protection for import substitutes and subsidies for exports should be limited to the infant industry rationale of eventual competitiveness, once the “learning curve” effects and achievable scale are realized. The progressive replacement of tariff and exchange controls with price mechanisms that can gauge relative efficiencies may also be indispensable. Regional integration may help to open up new trade opportunities, provided that national development has not saturated the market. Competitive export financing terms can also help to redress the cost disadvantages under which LDC’s operate. Labor policies that keep wage increases in line with productivity gains may also be indispensable for capitalizing on the limited opportunities to compete in world trade. This is demonstrated by the experiences of Puerto Rico, the Republic of China, Hong Kong, and Korea.

The Ultimate Capability

Opportunities to expand income and employment in economically advantageous areas of industrialization depend ultimately upon LDC’s capabilities to market internationally and to produce value added in the comparative advantage range. A chief source of comparative advantage for most countries is still low-wage labor employed in production with high-value output. But high-value activities can often be realized only in combination with imported technology and skills. This means freer trade in production inputs as well as in end products if LDC’s are to move to higher levels of output with the human and physical resources that are available to them.

A Note on the New Delhi Session of UNCTAD and Implications for International Trade of Changes in Technology and Industrial Structure,” Economic Bulletin for Europe, Vol. 20, No. 1 (1968), pp. 55-72.

For related recommendations on the role of international enterprise in developing economically advantageous industrial opportunities, see “Finance and Development Interviews William S. Gaud of the International Finance Corporation,” Finance and Development, March 1970, pp. 12-18.

See Japan Development Bank, Annual Report (April 1, 1969-March 31, 1970), p. 10.

Albert O. Hirschman, “The Political Economy of Import-Substituting Industrialization in Latin America,” The Quarterly Journal of Economics, Vol. LXXXII (February 1968), p. 28.

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