CETRI
Specialisation ?
Developing countries are supposedly better off after specialising in relatively simple activities contributing to global supply chains, such as primary commodity production and low-skill, labour-intensive manufacturing.
Why should developing countries specialise in producing and exporting mineral or agricultural primary commodities ? After all, most economists recognise the greater gains in growth, employment, and income from dynamic modern activities, especially manufacturing.
Comparative advantage supposedly gained by trade liberalisation supposedly ensures gains from international specialisation. However, tropical agriculture has instead experienced falling relative prices rather than higher-value-added secondary and tertiary activities in the North.
As Hans Singer and Raul Prebisch showed in 1950, export prices for primary commodities have fallen much more over the long term relative to the prices of manufactures. Bilge Erten has shown these trends continuing into the early 21st century.
Evidence since the late 20th century suggests that the prices of manufactured goods produced by developing countries have fallen relative to those of more sophisticated, high-tech goods from more developed economies.
Intellectual property rents
Due to intense competition among developing countries producing ‘generic’ manufactures, developed-country firms secure higher rents from intellectual property rights (IPRs) – namely, ‘surplus’ from monopoly power so conferred – on their manufactured exports.
The latter are priced higher due to the ‘exclusive’ monopoly power protected by IPRs and ‘branding’ strengthened by transnational law with the establishment of the multilateral World Trade Organization and related law on trade-related intellectual property rights (TRIPS).
In fact, the prices of generic primary commodities and ‘unbranded’ manufactures have fallen due to more intense competition. In contrast, the prices of ‘exclusive’ products, due to monopoly IPRs and transnational corporate branding, remain higher.
However, such rents do not accrue to mass-produced generic products, whether primary commodities or manufactures made with easily accessible materials and production techniques, subject to intense market competition.
The last decade-long commodity ‘super-cycle’ price boom, which ended around 2004, generated windfall earnings and investible capital. While it undoubtedly lifted many boats for growth, if not development, it did not contradict longer-term trends.
Biased theory
The economic literature on development, trade, and monopolistic competition recognises the possibility of increasing – not just diminishing – returns to scale in manufacturing, enabling average costs to fall.
Such gains from trade are not from one-time ‘static’ improvements in resource allocation. Instead, these benefits stem from dynamic changes driven by production expansion, specialisation, and differentiation for larger markets.
Potential gains from greater external market access can be significant, but only if building on an existing industrial base, capacity and capabilities. Proactive support through appropriate industrial, investment, and technology policies can be crucial.
This pragmatic developmental approach to trade policy contradicts the neoclassical Heckscher-Ohlin ‘pure’ trade theory, the received conventional wisdom invoked by contemporary advocates of trade liberalisation.
Some Keynesian economists promoted balance-of-payments-constrained growth. Cross-border flows of goods and services are determined by the level and growth rate of economic activity, with the exchange rate determining relative prices.
This approach, implying fewer gains from trade, is rejected by trade liberalisation advocates. Developing countries’ gains from specialisation are reduced by falling relative prices, with consumers benefiting from productivity gains at the expense of producers.
If developing-country firms do not manufacture products at productivity levels comparable to those in developed countries, claims of trade gains from consumers’ ‘love of variety’ become quite irrelevant.
Agricultural trade liberalisation
The Western push for agricultural trade liberalisation sought to eliminate tariffs to ensure food security while ignoring subsidies that developed countries could afford.
Although agricultural export subsidies have been largely eliminated, OECD food producers continue to benefit from production subsidies, thereby enabling productivity and trade gains.
As many developing countries became net importers of subsidised agribusiness exports from OECD exporters, price increases due to subsidy withdrawal hurt consumers, especially in developing countries.
Comparable gains in developing-country agriculture have often been modest due to the decline in infrastructure and support services, especially after the imposition of the ‘neoliberal’ Washington Consensus by the West in the 1980s.
The increasing private foreign corporate domination of agricultural research, development, and extension has also significantly reduced net gains to developing-country smallholder farmers.
Neoliberal reforms, including structural adjustment programmes, have reduced, contracted out or privatised government and public-sector alternatives. This raised the costs of credit, marketing, and inputs, including seeds, fertilisers, herbicides, pesticides, machinery and fuel.
While trade liberalisation of manufactured imports eroded the policy space needed for investment and technology policies for development, agricultural trade liberalisation has undermined ‘food security’ in most developing countries.
Thus, many African net food-exporting nations became net food importers in the 1980s, following the neoliberal reforms imposed by structural adjustment programmes on indebted nations.
