Chapter

II Overall Trends

Author(s):
International Monetary Fund
Published Date:
January 1992
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Output, Trade, and Foreign Investment

The sustained recovery in economic growth following the 1981–82 recession was accompanied by a rapid expansion of trade (Chart 1) and a further integration of the world economy; for the 1980s as a whole, the growth of world trade exceeded output by 50 percent. Economic performance varied among the major groups of countries: Asia experienced the most rapid growth of output and exports since 1983, followed by North America, and Western Europe; the other developing countries fared less well. The Asian region also experienced the most rapid growth of intraregional trade in recent years (Table 1). The growth of output and trade slowed in 1990–91, in part reflecting the recession in North America and the United Kingdom; however, in contrast to 1981–82, demand pressures remained strong in Germany and Japan. Among the major industrial countries, a notable development was the rapid growth of U.S. export volumes after 1985 and the slower growth in Japan’s export volumes, owing to exchange rate movements and shifts in relative cyclical positions (Table A1).

Chart 1.Real Trade and GDP Growth, 1960–90

(Annual changes, in percent)

Sources: General Agreement on Tarriffs and Trade; and International Monetary Fund, World Economic Outlook, various issues.

Table 1.Developments in Regional Trade Flows, 1980–89(Average annual percentage change in value)
1980–891989
North America with Asia11.09.5
Western Europe with Asia10.59.0
Central and Eastern Europe and the former U.S.S.R. with Asia7.03.5
North America with Western
Europe6.57.0
Intra-Asia10.010.5
Intra-North America8.07.0
Intra-Western Europe6.57.0
Source: General Agreement on Tariffs and Trade, International Trade, 1989–90.

The postrecession period also witnessed a rapid expansion of foreign direct investment (FDI). Between 1983 and 1989, it is estimated that FDI flows expanded at an annual rate of nearly 30 percent, or three times faster than merchandise trade flows. FDI, which is highly cyclical, was boosted by the sustained economic expansion during this period as well as institutional and structural factors, including the deregulation and liberalization of financial markets, shifts in comparative advantage, technological advances in international communication and transportation, and efforts to circumvent protection in major world markets. The share of services in the outward stock of FDI increased significantly during the 1980s, reflecting the growing importance of trade in services, particularly financial, retail, and professional services, which often require the establishment of overseas facilities to conduct business.18 Overall, the developing countries received a declining share of FDI flows, although investment in developing Asia, China, and Mexico grew substantially.

Adjustment pressures in the industrial countries continued during the 1980s as the fast-growing Asian and other developing countries gained market shares in exports of manufactures (Table A2). The share of industrial countries in world trade in manufactures has declined steadily during the past two decades, reflecting longer-term shifts in comparative advantage. In traditional industries with standardized technologies, such as textiles and clothing, footwear, steel, auto parts, and consumer electronics, comparative advantage has shifted to lower-wage countries. The globalization of investment and production has facilitated the transfer of technology and industry to developing countries, a process that increases the trade and welfare gains from specialization provided that countries adapt to the ongoing structural changes in the world economy.

During the 1980s, these longer-term adjustment pressures were intensified by the global recession in 1981–82 and the large swings in exchange rates and external imbalances resulting in part from the stance of macroeconomic policies in major industrial countries. Progress in addressing macro-economic imbalances has helped to alleviate pressures for protection, but trade friction remains high among the industrial countries and, with slower growth in some of the major countries, pressures for protection have recently re-emerged in sectors with excess capacity, for example, the automobile sector.

To some extent trade friction is a natural outcome of the growing importance of the external sector in industrial country economies (Table 2) and the closer integration of their economies through trade and investment flows. The industrial countries remain both the largest source and destination of foreign direct investment. While greater economic interdependence conveys many benefits, the “spider’s web” of cross-investments has intensified competition in domestic and third markets, created disputes in areas where GATT rules are nonexistent or unclear, and raised questions concerning the relevance of existing trade rules.19 It has also increased awareness of the effects of domestic policies on trade, investment, and international competition. A notable example is the U.S.-Japan Structural Impediments Initiative, which seeks to address domestic policies that are considered impediments to external adjustment, market access, and competition.

Table 2.Merchandise Trade(In percent of GDP)
19731988
Canada39.647.5
United States10.816.2
Japan16.615.9
France28.336.5
West Germany33.347.7
Italy31.032.1
United Kingdom35.940.7
Source: General Agreement on Tariffs and Trade, International Trade, various issues.

Trade Trends in Developing Countries

For developing countries as a group the volume of trade increased significantly in the latter part of the 1980s. The growth of export volumes increased to an annual average of 6 percent in 1987–90, compared with 5 percent in 1983–86 and stagnant levels in the 1970s (Table 3). Excluding the developing countries in Europe, which include countries of Eastern Europe and the Commonwealth of Independent States, export volumes grew by over 8 percent in 1987–90, up from about 4 percent in 1983–86. The impact of liberalization measures and adjustment policies is likely to have made an important contribution to this turnaround. The rebound in import volumes was even more marked, changing from a decline in 1983–86 to an annual average growth rate of more than 6 percent in 1987–90. This compares with the real GDP growth of the developing countries of about 3 percent in 1987–90.

Table 3.Developing Countries: Export Volumes, 1973–90(In annual average percent changes)
1973–821983–861987–90
Export volumes
Total Developing Countries0.24.75.7
Africa–2.44.42.3
Asia9.210.511.8
Europe14.35.1–4.2
Middle East–5.1–1.15.4
Western Hemisphere1.92.67.2
Subregions
Sub-Saharan Africa–1.01.71.0
Four Asian NIEs213.313.411.4
Import volumes
Total Developing Countries7.3–0.56.5
Africa4.7–6.51.2
Asia8.86.712.9
Europe13.12.62.4
Middle East13.9–10.4–0.4
Western Hemisphere3.6–4.84.7
Subregions
Sub-Saharan Africa0.7–3.00.1
Four Asian NIEs210.18.115.7

Regional developments in the growth of export volumes have varied significantly. Export volumes of African countries increased by an average of about 3 percent a year in the 1980s, compared with declines of about 2 percent annually in 1973–82, but the turnaround in export volume growth was much weaker for sub-Saharan Africa. In Western Hemisphere countries, export volumes have increased substantially since 1987, growing at an average rate of 7 percent as their far-reaching reforms have taken hold. The growth of exports from Asia since the start of the 1970s has been dramatic; up to 1988, the newly industrializing economies (NIEs)20 have had very high growth rates of exports, but subsequently this growth has slowed and has been outpaced by the growth of exports from other open Southeast Asian countries. The only group that experienced an appreciable slowdown in export growth in the recent period was the developing countries of Europe, where trade has been disrupted by developments in the former U.S.S.R. and the transition away from regional trading arrangements.21

With respect to imports, Asian countries had the highest growth in imports in real terms among the developing regions, at 13 percent a year in 1987–90, reflecting their reliance on imported raw materials and components, the strong growth of domestic demand, and import liberalization measures. The growth rate of import volumes in Western Hemisphere countries has also increased, to 5 percent, as their economies have opened up and access to financial markets has improved. Continued economic problems in sub-Saharan Africa have resulted in little respite from the declining volume of imports. Imports of the developing countries in Europe grew steadily from the 1970s up to the end of the 1980s at 3–4 percent a year, but have fallen sharply in 1990–91.

Developing country exports of manufactured goods, which increased by 14 percent a year during the eight years to 1988, grew much more rapidly than exports of primary products (Table A3) and, by 1988, manufactures accounted for more than half of total exports. Machinery and transport equipment displayed the fastest growth at 18 percent a year; this product group is now the largest product group and about the same magnitude as consumer goods exports, the main product group in 1980. Between 1973 and 1988, the developing countries’ share of world exports of manufactured goods doubled and this was reflected across most manufactured products (Table A4); an exception is textiles and clothing where trade is controlled under the Multifiber Arrangement. Over the same period, the importance of developing countries as a market for traded goods increased substantially from 18 percent of total non-oil imports in 1973 to 30 percent in 1988. The growing importance of developing countries in world trade has been reflected in their greater role in the Uruguay Round trade negotiations. For the first time they have been asked to make concessions in the “new” areas of interest to industrial countries (services, investment, and intellectual property) in exchange for improved market access in areas where they have a comparative advantage (agriculture, textiles, and clothing).

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