Structural Change in Trade in Manufactured Goods Between Industrial and Developing Countries SWP396 WA.SJ' GTON. D.C. 7U431 World Bank Staff Working Paper No. 396 June 1980 Prepared by: Bela Balassa The Johns Hopkins University and The World Bank Copyright © 1980 The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. The views and interpretations in this document are those of the author and should not be attributed to the World Bank, to its affiliated organizations, or ti any individual acting in their behalf. The views and interpretations in this document are those of the author and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting in their behalf. WORLD BANK Staff Working Paper No. 396 June 1980 STRUCTURAL CHANGE IN TRADE IN MANUFACTURED GOODS BETWEEN INDUSTRIAL AND DEVELOPING COUNTRIES This paper examines the pattern of structural change in trade in manufactured goods between the industrial and the developing countries. It reviews recent changes in this trade and analyses its commodity composition in the light of the comparative advantage of the two groups of countries. The paper further provides projections on the growth of manufactured trade between the industrial and the developing countries in the period 1978-90. The results point to the increasing importance of the developing countries as markets for the manufactured exports of the industrial countries. It is further shown that, notwithstanding the protectionist measures applied by the industrial countries, the developing countries' exports of manufactured goods have grown rapidly and are expected to do so also in the future. At the same time, these exports do not represent a serious threat for any of the industries of the industrial nations. Thus, under projections made assuming present trade policies to continue, domestic production in the industrial countries would continue to rise even in the case of textiles and clothing. Prepared by: Copyright Qc) 1980 Bela Balassa, The Johns Hopkins University The World Bank and the World Bank 1818 H Street N.W. Washington, D.C. 20433 U.S.A. STRUCTURAL CHANGE IN TRADE IN MANUFACTURED GOODS BETWEEN INDUSTRIAL AND DEVELOPING COUNTRIES Bela Balassa This paper was present-ed at tfe' Symposium -on-"Industrial Policies for the 80's," held- -in .a,'driidoon.may-5 to9, 1980.-- The- author .is Professor of Political Economy at Johns Hopkins University and Consultant at the World Bank. He is indebted to Joung-Yong Lee for research assistance. The opinions expressed in the paper are the author's own and should not be construed to represent the views of the World Bank. STRUCTURAL CHANGE IN TRADE IN MANUFACTURED GOODS BETWEEN INDUSTRIAL AND DEVELOPING COUNTRIES Bela Balassa This paper set out to examine the pattern of structural change in trade in manufactured goods between the developed industrial (for short ind- strial) and the developing countries. Section I of the paper will review recent changes in this trade. In Section II, the comparative advantages of the industrial and the developing countries in manufactured goods will be analyzed and changes in the commodity composition of their trade indicated. Section III will appraise the prospects for trade in manufactures between the two groups of countries until 1990 under the assuhiption that existing policies in the industrial countries continues during the eighties. In the conclusion, the policy implications of the findings will be drawn. I. Trade in Manufactured Goods Between Industrial and Developing Countries This section reports on changes in trade in manufactured goods between the industrial countries and the developing countries during the 1973-78 period. The former group is defined to include the United States, Canada, the European Common Market,-/ the European Free Trade Association,-/ and Japan; within the 3/ 4/ latter group, data for OPEC-/ and for the non-OPEC developing countries- are separately shown. The two groupings exclude the countries of Southern Europe (other than Portugal); Australia, New Zealand, and South Africa; and the centrally planned 1/ Belgium, Denmark, France, Germany, Ireland, Italy, Luxemburg, Netherlands, and the United Kingdom. 2/ Austria, Finland, Iceland, Norway, Portugal, Sweden, and Switzerland. 3/ Algeria, Ecuador, Gabon, Indonesia, Iran,Iraq, Kuwait, Libya, Nigeria, Quatar, Saudi Arabia, United Arab Emirates. 4/ The countries of Latin America and the Caribbean, Africa (other than South Africa), Asia (other than Japan), Oceania (other than Australie and New Zealand), excluding centrally planned economies and the OPEC countries. - 2 - economies. While the countries of Southern Europe may be appropriately includ- ed in the deVeloping country group, this has not been done in the present study because the future trade prospects of these countries are intimately linked with their accession to the Common Market, to take place during the eighties. Manufactured goods are defined as commodity classes 5 to 8 in the UN Standard International Trade Classification less nonferrous metals (68). Trade in manufactured goods will be examined first in value terms, indicating changes in the balance of trade, and subsequently in volume terms. Changes in trade volumes will further be related to the rate of economic growth, and the results will be evaluated with reference to the trade policies followed by individual countries and country groups. Changes in the Balance of Trade in Manufactured Goods The value of the manufactured exports of the industrial countries to the OPEC countries increased slightly more than fivefold between 1973 and 1978 while the reverse flow of these commodities remained at very low levels (Table 1). As a result, the industrial countries' trade surplus in manufactured goods with OPEC rose from $12.3 billion in 1913 to $63.5 billion in 1978. This increase covered 69 percent of the rise in the oil import bill of the industrial countries with OPEC, from $28.7 billion in 1973 to $102.9 billion in 1978.1! The extent of coverage of the increase in oil imports by manufactured exports to OPEC, however, varies to a considerable extent among the industrial countries and country groups. The relevant ratios for 1978 are: the United States, 38 percent; Canada, 56 percent; the European Common Market, 99 percent; the 1/ GATT, InternationaZ Trade, 1978/79, Geneva, 1979, Table B to F -- The data for 1978 are preliminary. TAB.LE I TRADE BEIVEEN TIlE INDUSTRIAL COUNTRIES AND TIlE DEVELOPING tOUNTRIES IN MANUFACTURED OODS - (billion dollars, f.o.b.) United States Canada EEC EFTA Japan Induatrlal Countrfes Export Import Balance Export Import Belance export Imprt Balance Export Import Balance Export Imoort Balance Exnort Imnort Balance 1973 2.43 .06 2.37 .17 0.00 .17 7.00 .42 6.58 .69 .04 .65 2.56 0.00 2 56 12.85 52 12.33 1974 4.27 .09 4 18 .29 0.00 .29 11.63 .40 11.23 1 19 .07 1.12 5.16 .02 5.14 22 54 .58 21.96 1975 8.00 .09 7 91 .56 0.00 .56 20.00 .46 19.54 1.96 .05 1.91 8.12 0.00 8.12 38.64 .60 38.04 1976 9.90 .09 9.81 .75 0.00 .75 23.11 .53 22.58 2.79 .05 2.74 8.94 .02 8 92 45.49 .69 44 RO 1977 10.50 .09 10.41 .83 0.00 .83 29.42 .66 28.76 3.21 .07 3.14 11.50 .03 11.47 55 46 .85 54.61 1978 11.97 .14 11.83 1.04 0,00 1.04 34.56 1.11 33.45 3 72 .09 3.63 13.57 .05 13 52 64 86 1.39 63.47 Non -OPEC , Countriea 1973 10.18 7.34 2.84 .57 .54 .03 15.92 4.68 11.24 2 46 .76 1.70 9.66 2. 20 7.46 38. 79 15.52 23.27 1974 16.10 9.74 6.36 .88 .75 .13 23.04 5.83 17.21 3 53 1.02 2 51 14.90 2.52 17.38 5.45 19.86 39 59 1975 17.75 8.89 8.86 1.04 .75 .29 25.81 6.85 18.96 3.74 1.18 2.56 14.26 2.01 12.25 62 60 19.68 47.92 1976 18.25 12.96 5.29 1.05 1.20 -.15 25.21 8.92 16.29 3.77 1.38 2.39 15.57 2.88 12.69 63.85 27 34 36.51 1977 18.84 15.62 3.22 1.08 1,17 -.09 29.74 10.88 18.86 4.49 1.82 2.67 19.83 2.97 16.86 73 98 32.46 41 57 1978 23 54 20.93 2.61 1.24 1.27 -.03 37.28 14.10 23.18 5.89 1.93 3 96 25.64 4.27 21.37 93.59 42.50 51.09 Developi ng Cnuntrfes Together 1973 12.61 7.40 5.21 .74 .54 .20 22.92 5.10 17.82 3.15 .80 2.35 12.22 2.20 10.02 51 64 16,04' 35.60 1974 20.37 9.83 10.54 1.17 ,75 .42 34.67 6.23 28.44 4.72 1.09 3.63 20.06 2.54 17.52 80 99 20.44 60 55 1975 25.75 8.98 16.77 1.60 .75 .85 45.81 7.31 38.50 5.70 1.23 4.47 22.38 2.01 20.37 101.24 20 28 80.96 1976 28.15 13.05 15.10 1.80 1.20 .60 48.32 9.45 38.87 6.56 1.43 5,13 24.51 2.90 21.61 109.34 28.03 81.31 1977 29.34 15.71 13.63 1.91 1.17 .74 59.16 11.54 47.62 7.70 1.89 5.81 31.33 3.00 28.33 129.44 33.31 96.13 1978 35.51 21.07 14.44 2.28 1.27 1.01 71.84 15.21 56.63 9.61 2.02 7.59 39.21 4 32 34.89 158.45 43.99 114 56 Source: C;ATT, Internttionel Trade 1976177 and 1978/79. Note (a/ Stl'C Commodity Classes 5 to 8 lesn 68 (nonferroas metals)) -3- European Free Trade Association, 119 percent; and Japan, 65 percent. The observed differepces in these ratios are largely explained by intercountry differences in the rate of growth of oil imports and in the initial coverage of oil imports by manufactured exports to OPEC, while the rate of expansion of the exports of manufactured goods to OPEC has varied little among the industrial countries. Thus, the ratio of 1978 to 1973 oil imports ranged from 7.5 in the Unite4.States to 2.6 in the European Common Market and the 1973 coverage of oil imports7by manufactured.exports to OPEC varied from 68 percent in EFTA to 21 percent in Canada. In turn, the ratio of 1978 to 1973 exports of manufac- turned goods to OPEC was between 5.0 and 5.5 in the major industrial countries and-.country groups; it was 6.1 in Canada. * Intercountry differences in the rate of expansion of manufactured * expo.rts from the industrial countries to the non-OPEC developing countries have also been rather small. Japan occupies first place, with a ratio of 1978 to 1973 exports of 2.7, followed by the European Free.Trade Association (2.4), the European Common Market and the.United States (2.3), and Canada (2.2). The differences are larger as regards the growth of manufactured imports from the non-OPEC developing countries; the ratios of 1978 to 1973 imports are 3.0 in the European Common Market, 2.9 in the United States, 2.6 in the European Free Trade Association, 2.4 in Canada, and 1.9 in Japan. Changes in the industrial countries' trade balance in manufactured goods with the non-OPEC developing countries have been further affected by their initial position in this trade, as expressed by the ratio of manufactured exports to imports in 1973. This ratio was the highest in Japan (4.4), -4- followed by the European Common Market (3.4), the European Free Trade Associa- tion (3.2), with the United States (1.4) and Canada (1.1) far behind. Given its high initial trade position, slightly above-average export expansion, and substantially below-average import growth, Japan experienced by far the largest increase in its trade surplus in manufactured goods with the non-OPEC developing countries. This increase, from $7.5 billion in 1973 to $21.4 billion in 1978, accounted for fully one-half of the rise in the combined manufactured trade surplus of the industrial countries with the non-OPEC developing countries from $23.3 billion to $51.1 billion. The EEC and EFTA also increased their trade surplus in manufactured goods with the non-OPEC developing countries; the increase was from $11.2 billion to $23.2 billion in the first case and from $1.7 billion to $4.0 billion in the second. In the same period, the U.S. trade surplus with these countries declined from $2.8 billion to $2.6 billion. With very similar export and import trends, differences in the 1973 trade position of the EEC and EFTA, on the one hand, and the United States, on the other, explain the observed differences in the results. Changes in the Volume of Manufactured Trade and in the Gross Domestic Product Table 2 provides data on changes in the volume of trade in manufactured goods between the industrial and the developing countries in the 1973-78 period. Information is also provided on the rate of growth of GDP in the industrial countries and on their "apparent" income elasticities of import demand for manu- factured goods originating in the developing countries, derived by dividing the rate of growth of these imports by that of GDP. -5- Table 2 The Rate of Growth of Manufactured Trade between Industrial and Developing CountrIes and that of the Industrial. Countries' Gross. Domestic Product (percent.) Exparts Imports Non- All. Al, Apparent Income OPEC OPEC LDC: LDC, GDP Elasticity 1963-197'3-/, industrial Countries - -. 8.2 16.5 4.6 3.6 1978-1%90 . " 12.0 7a.8 %9.P 12.5 3,.9 3.2 19713-19X72. United States 23.72 6.3 10.6 11.1 2_5 4.4 Canadfa. 33.'2 8.8 16.5 6. 8 3.4 . 2.0 EEC 23.3 6& _ Z5 I5.l .2.1 Z . 5.8 EFTA 23.8 5.4 10.7 8.4. 1.5 5.6 Japan. 26.4 9.9 14.2 3.0; 3.6 0.8 Industrial.Countries, total 24.2 1. 2 12.5 10.2 2.5 . 4.1 of which 1974 45;.3, 24.5 29.7i 4.2 0.4 10.5 19725 .52. - -4.5, 11.5 -1.5 -0.8 1.9 1976 16.4 0.7' 6.7' 27.3. 5.2. 5.3 1977 . 12.9 71.8 9.9 7.6& 3.6 2.1 1978 1.11 9.6; 6.0 15.5 4.0 3.9 Sources.. 1963-1973 United Nations, Monthly BuZletin of Statistics and Yearbook of National Accounts Statist-ics, various issues. 1973-1978 Value of Trade -- GATT, International Trade, 1978/79. United Values -- GATT, Network of itrLd Trade by Areas- and Commodity Classes, 1955-1976, Geneva, 1978 and International Trade,. 1977/78 and 1978/79 and United Nations, Monthly Bulletin of Statistics. Gross Domestic Product -- OECD, National Accounts of OECD Countries, 1979, and Economic Outtook, December, 1979, United Nations, Yearbook of National Accounts Statistics, 1978 1978-1990: See Section III below. Note: (a) Estimated by use of regression analysis. -6- The table shows an apparent income elasticity of import demand of 4.1 for the industrial countries in the 1973-78 period; their combined manufactured imports from the developing countries rose at an average annual rate of 10.2 percent in volume terms as compa;ed to an average rate of growth of GDP of 2.5 percent. The volume of manufactured imports from the developing countries increased more rapidly in the preceding decade (16.5 percent a year)!, when considerably higher rates of GDP growth-(4.6-percent) were associated with a lower apparent income elasticity of import demand (3.6). The results for the 1973-78 period were affected to a considerable extent by the 1974-75 recession. In 1975, the industrial countries' GDP was slightly below the 1973 level and the volume of their imports of manufactured goods from the developing countries was only 3 percent higher. In the following three years, growth rates averaged 4.3 percent for GDP and 16.5 percent for the volume of manufactured imports, i.e. an apparent income elasticity of 3.8. The relevant results are 3.8 percent and 11.5 percent, corresponding to an apparent income elasticity of import demand of 3.0, if we limit our attention to the last two years on the grounds that the results for 1976 represented a "rebound from the recession. At the same time, substantial differences are observed among indus- trial countries and country groups in regard to both their GDP growth rate and the rate of increase of their imports of manufactured goods from the developing countries. Japan leads in terms of the rate of GDP growth (3.6 percent) but trails the other industrial countries by a considerable margin as far as the growth of the volume of manufactured imports from the developing countries is concerned (3.0 percent a year), with an apparent income elasticity of import demand of 0.8 for the 1973-78. period. Canada was second to Japan -7- in terms of GDP growth rates (3.4 percent a year), and had the second-lowest growth rate of manufactured imports originating in the developing countries (6.8 percent), with an apparent income elasticity of 2.0. The European Common Market and the European Free Trade Association had the lowest GDP growth rates (2.1 percent and 1.5 percent) and the highest apparent income elasticities of import demand (5.8 and 5.6), with the volume of manufactured imports from the developing countries rising at average annual rates of 12.1 percent and 8.4 percent, respectively. GDP growth rates in the United States equalled the average for the.industrial countries in the period 1973-78 (2.5 percent) while the rate of growth of imports (11.1 percent) and the apparent income elasticity of import demand (4.4) were slightly above the average. Table 2 further shows that the volume of manufactured exports of the industrial countries to the developing countries increased at an average annual rate of 12.5 percent between 1973 and 1978, the relevant results being 24.2 percent to OPEC, and 7.2 percent to non-OPEC, countries. Relative rates of growth of exports and imports in value terms show identical results as the terms of trade in manufactured goods did not change between the two groups of 1/ countries.- The time pattern of.exports and imports, however, exhibited substantial variations. The volume of manufactured exports from the industrial countries to .the OPEC countries grew by nearly one-half in 1974 and by more-than one-half in 1/ Tables 1 and 2. -8- 1975, reflecting the tripling of OPEC export earnings in 1974 and the adjust- ment to the higher level of earnings in 1975. But, the rate of growth of manufactured exports to the OPEC countries declined rapidly in subsequent years, with practically no change shown in volume terms in 1978. The results are explained by the slowdown in the rise of oil earnings in 1976 and in 1977 and the absolute decline of these earnings in 1978. The volume of manufactured exports to the non-OPEC developing countries increased by one-fourth in 1974, declined slightly in 1975, and remained practically unchanged in 1976. The relevant growth rates are 7.8 percent and 9.6 percent in 1977 and in 1978, respectively. For the 1973-78 period as a whole, these exports rose at an average annual rate of 7.2 per- .cent, corresponding to an apparent income elasticity of import demand of 1.8 as.the GDP.of the non-OPEC.developing countries grew 4.1 percent a year. The apparent income-elasticity is 3.0 for the OPEC countries whose gross domestic product rose by 8.2 percent a year between 1973 and 1978.1/' The combined GDP of the developing countries increased at an average annual rate of 5.3 percent between 1973 and 1978 as compared to a rise of *12.5 percent a year in the volume of their manufactured imports from the industrial countries, corresponding to an average apparent income elasticity of import-demand of 2.4. The rate of growth of GDP was higher (6.2 percent). and that of manufactured imports from the industrial countries lower (8.2 percent) in the.1963-73 period, when the apparent income elasticity of import 1/ United Nations, Yearbook of National Accounts Statistics, 1978 and World Bank Data Base. - 9 - demand was 1.3.-/ However, during the earlier period, the income and the import shares of the OPEC countries were much smaller. The Policies Applied Following the quadrupling of oil prices, the OPEC countries attempted to increase their absorption of manufactured imports at a rapid rate. While in 1974 these countries had an export surplus of $84 billion, the surplus fell to $53 billion in 1975 and to $43 billion by 1978.-V Apart from the rising imports of the capital-surplus oil exporters, foreign borrowing on the part of the other OPEC countries contributed to this result. Foreign borrowing also contributed to the high rate of growth of the manufactured imports of the non-OPEC developing countries from the industrial countries. The net overall trade deficit of these countries rose from $15 billion in 1973 to $37 billion by 1978,3i/ with much of the increase being financed by borrowing abroad. Foreign borrowing permitted the non-OPEC developing countries to increase their import surplus in manufactured goods vis-a-vis the industrial countries from $23 billion in 1973 to $51 billion in 1978, notwithstanding their higher oil bill. Foreign borrowing represented a policy response on the part of the non-OPEC developing countries to the oil crisis and the 1974-75 world recession. The promotion of exports, to be discussed below, was another form of policy response. At the same time, the high and rising apparent income 1/ Estimated by regression analysis from data published in United Nations, Monthly Bulletin of Statistics and Yearbook of National Accounts Statistics. 2/ GATT, International Trade, 1978/79, Table G. 3/ Ibid. - 10 - elasticity of import demand does not give evidence of overall import substitu- tion in manufactured goods during this period.l/ The rapid growth of their exports of manufactured goods to the non-OPEC developing countries favorably affected economic activity in the industrial countries. Such effects were of particular importance in 1974, when the volume of these exports rose by one-fourth while the industrial countries were sliding into recession. In recent years, too, the increase in the export surplus of the industrial countries in manufactured trade with 'the non-OPEC developing countries had a multiplier effect on their national economies as -it was not fully offset by higher primary imports. Notwithstanding the rise in their.export surplus, the industrial countries' imports of manufactured goods from the.developing countries grew rapidly, with the apparent income elasticity of.import demand rising from 3.6 in.1963-73 to 4.1 in 1973-78. These results do not provide evidence of increased.protectionism on the part of the industrial countries. While the effects of the "new protectionism" were noticeable.in 1977 when the volume of manufactured imports from the developing countries increased by only 9 percent, the rise was 16 percent in 1978 when improvements were made on the protection front.2/ And, available information points to further rapid increas- es in 1979.-/ 1/ On the relevant methodology and its application to three developing count- ries, see Bela Balassa, "Policy Responses to External Shocks in Selected Latin American Countries," presented at the NBER/FIPE/BEBR Conference .on. Trade Prospects among the Americas: Latin American Diversification and the New Protectionism, held in Sao Paulo Brazil on March 24-26, 1980, and to be published in the Quarterly Review of Economics and Business and in Portuguese translation in Estudios Economicos. 2/ Bela Balassa, "The Tokyo Round and the Developing Countries," Journal of World Trade Law, March/April 1980, pp. 93-118. 3/ GATT "International Trade in 1979 and Present Prospects: First Assessment by the GATT Secretariat," Geneva, February 15, 1980. - 11 - The observed changed could not, however, be explained on the basis of demand consideratiots alone. While access to industrial country markets has provided opportunities for export expansion, the exports of manufactured goods from the developing countries had responded to the policies followed by these countries. A number of developing countries adopted an export-oriented strategy during the sixties and have continued with this strategy after 1973. Available evidence suggests that countries following an export-oriented strat- egy were better able to surmount the adverse effects of the quadrupling of oil prices and the 1974-75 world recession than countries with an import-substitu- tion orientation.-/ Although supply factors have had a crucial role in determining the overall rate of expansion of manufactured exports by the developing countries, the allocation of these exports among the industrial countries has been affect- ed by the trade policies followed by these countries. It has often been said that the United States has traditionally been more open to imports from developing countries than the other industrial nations. Data for 1973 offer only weak evidence in support of this proposition. Thus, excluding trade between the United States and Canada that takes place largely in the framework of multinational corporations and one-third of which is subject to free trade treatment under the U.S.-Canada automotive agreement, as well as trade within the European free trade area in manufactured goods encompassing the EEC and EFTA, the ratios of imports from developing countries to the total imports of 1/ See Bela Balassa, "The Newly-Industrializing Countries After the Oil Crisis" mimeo. Table 3 Imports of Manufactured Goods by Induatrial Countries 1973 1978 Incremental Ratios (1973-1978) M/GDP MDC/GDP C LDC/ M/GDP MLDC /GDP MLDC/ AM/AGDP AMLDC /GDP AMLDC/ United States 3.28 0.57 17.37 4.60 1.00 21.74 6.71 1.69 25.17 excluding Canada 2.49 0.57 22.90 3.65 1.00 27.42 5.50 1.69 30.70 Canada 14.83 0.43 2.90 15.29 0.61 3.99 16.05 0.87 5.42 excluding United States 3.43 0.43 12.53 3.51 0.61 17.37 3.64 0.87 23.89 EEC 11.32 0.48 4.24 13.44 0.77 5.73 15.93 1.11 6.97 excluding Intra EEC Trade 3.86 0.48 12.45 4.89 0.77 15.74 6.09 1.11 18.23 excluding Intra European Trade 2.65 0.48 18.08 3.31 0.77 23.26 4.08 1.11 27.20 EFTA 18.82 0.48 2.55 18.34 0.62 3.38 13.15 0.56 4.26 excluding Intra EFTA Trade 15.38 0.48 3.12 15.38 0.62 4.03 11.36 0.56 4.93 excluding Intra European Trade 3.32 0.48 14.44 3.48 0.62 17.84 2.67 0.56 20.98 Japan 2.38 0.53 22.57 1.80 0.44 24.43 1.38 0.37 26.80 Industrial Countries 7.19 0.52 7.23 8.39 0.78 9.30 9.61 1.07 11.13 excluding U.S.-Canada and 2.60 0.52 20.03 3.17 0.78 24.58 3.78 1.07 28.27 Intra-European Trade Source: GATT, International Trade, 1978/79, OECD, Economic Outtook, December 1979 and National Accounts of OECD Countries, and United Nations, Yearbook of National Accounts Statistics, 1978. Notes: 2M = total imports of manufactured goods. X DC = manufactured imports from developing countries. GDP = gross domestic product. - 12 - manufactures and to the gross domestic product were not substantially higher 1/ in the United States than in the EEC and Japan (Table 3).- The increased opening of the American economy, together with the deterioration of its competitive position, contributed to rapid increases in U.S. imports of manufactured goods between 1973 and 1978, with the developing countries increasing their share in the total. Thus, the incremental ratio of manufactured imports originating in the developing countries to the gross domestic product was substantially higher in the United States (1.69) than in the European Common Market (1.11) during this period, although the differences are smaller as far as the incremental share of the developing countries in their manufactured imports (30.7 percent and 27.2 percent, respectively) is concerned. The contrast with Japan is much more pronounced. With an apparent income elasticity of import demand of only 0.8, the ratio of Japan's manu- factured imports from the developing countries to its GDP fell from 0.53 in 1973 to 0.44 in 1978, corresponding to an incremental ratio of 0.37 between 1973 and 1978. In the same period, the incremental share of imports from developing countries in the total imports of manufactured goods was 28.3 percent in Japan. Japan used a variety of formal and informal measures to limit the imports of manufactured goods, in particular from developing countries. These measures were liberalized in 1978.2!/ As a result, the volume of manufactured imports from the developing countries increased by more than one-fourth between 1/ The differences are larger if comparison is made with Canada and, as far as the share of developing countries in total manufactured imports is concerned, with EFTA. In the case of Canada, protection against LDC products affected the outcome. In turn, the results for the EFTA countries reflect the importance of the United States as supplier. 2/ "The Tokyo Round and the Developing Countries," op. cit. - 13 - 1977 and 1978,1/ following a decline in the 1973-77 period. A consideration of the imports of all manufactured goods originat- ing in the developing countries does not suffice, however, to appraise the effects of the trade policies followed by the industrial countries. For this purpose, it is further necessary to examine the commodity composition of imports, since some products encounter non-tariff barriers in the industrial countries while others are subject only to tariffs. This question will be taken up in Section II below. II. Comparative Advantage and the Commodity Composition of Trade in Manufactured Goods In an earlier paper,-/ the author has shown that the pattern of world exports of manufactured goods can be explained in terms of intercommodity differences in capital-labor ratios and intercountry differences in capital endowments. The indicators of comparative advantage derived in that paper will be utilized in the following to analyze the pattern of export-import ratios in trade in manufactured goods between the industrial and the non-OPEC developing countries in 1973. Subsequent changes in the commodity composition of this trade will further be examined, with consideration given to the factors that influenced the observed results. Finally, the role of the newly-industrial- izing countries in the exports of manufactured goods from the developing countries will be noted. 1/ For sources, see Table 2. 2/ "A 'Stages Approach' to Comparative Advantage" in Economic Growth and Re- sources, Vol. 4, National and International Issues (Irma Adelman, ed.) London, Macmillan, 1979, pp. 121-56; published in an abbreviated form as "The Changing Pattern of Comparative Advantage in Manufactured Goods" Review of Economics and Statistics, May 1979, pp. 259-66. - 14 - The Structure of Comparative Advantage In order to examine the comparative advantages of the industrial and the developing countries in their mutual trade in manufactured goods, the capital-labor ratios reported in the earlier paper have been averaged in the eleven commodity category breakdown employed in GATT statistics, using U.S. production data as weights.-/ The estimated ratios pertain to physical as well as to human capital. The former has been obtained as the ratio of the (physical) capital stock to employment; the latter.has been estimated as the discounted value of the difference between the average and the unskilled wage, taken to represent the return on investment in human capital. The relevant data are shown in Table 4.2/ Although the eleven commodity category scheme involves a consider- able degree of aggregation, substantial differences are observed in capital- labor ratios among the individual categories. The ratio of physical capital per worker (expressed in thousand U.S. dollars per worker) is the highest for iron and steel (27.7) and for chemicals (21.4); it is the lowest for clothing (2.4) and for other consumer goods (6.7). The ratio of human capital per worker is also the lowest for clothing (11.0), followed by textiles (16.6); it is the highest for household appliances (39.1) and for office and telecommun- ication equipment (35.2). Combining physical and human capital, iron and steel (55.9), household appliances (47.4) and chemicals (46.9) are at the upper, 1/ The capital-labor ratios themselves have been derived from the data of the U.S. Industrial Census. Their use in the present context assumes equal substitution elasticities between capital and labor across industries. 2/ In addition to these "stock" coefficients, in the earlier paper "flow" coefficients are also reported, representing profits per worker in the case of physical capital and the average wage in the case of human capital. The stock coefficients are preferred, however, in view of fluctuations in profit rates over time and the inclusion of the unskilled wage in the average wage figure. Table 4 Comparative Advantage Ratios and Trade in Manufactured Goods between Industrial and Developing Countries Capital per Worker Export Surplusa- Export-Import Ratio- Ratio of 1978 to 1973 Tradeb' Ratio of RTCs- Physical Human Total 1973 1978 1I9 1978 Export Import Export in imports from $ thousand $ billion non-OPEC LDC OPEC non-OPEC LDCa Iron and Steel 27.71 28.15 55.85 3.00 5.73 6.45 5.82 1.95 2.16 3.45 76 Chemicals 21.37 25.51 46.88 5.43 12.02 6.90 7.91 2.26 2.53 3.38 47 Other Semimanufactures 19.59. 24.21 43.80 -O.l 0.58 1.00 1.10 2.57 2.34 5.17 58 Engineering Products, subtotal 9.61, 29.38 38.99 18.52 45.16 6.01 4.61 2.59 3.38 5.74 83 Machinery for Specialized Industries 9.44. 28.34 37.79 6.81 16.79 53.98 29.46 2.50 4.54 5.01 90 Office and Telecommunication Equipment 7.91. 35.22 43.15 1.13 2.31 1.88 1.62 2.50 2.91 5.09 75 Road Motor Vehicles 12.89. 25.40 38.39 3.39 8.76 38.67 21.37 2.64 4.78 5.31 91 Other Machinery and Transport Equipment 9.66 30.27 39.93 6.62 16.80 7.07 5.20 2.70 3.67 6.81 77 Household Appliances 8.29' 39.09 47.38 0.47 0.31 1.42 1.08 2.56 3.36 5.43 95 Textiles 10.00 16.62 26.62 0.32 0.05 1.16 1.01 1.58 1.81 2.50 55 Clothing 2.37. 11.00 13.37 -3.03 -8.75 0.11 0.09 2.18 2.81 5.88 81 Other Consumer Goods 6.73 25.99 32.72 -0.86 -3.70 0.80 0.49 2.55 3.22 7.24 90 Manufactured Goods, total 11.89. 26.11 38.00 23.29 51.14 2.50 2.20 2.41 2.74 5.04 75 1 Source: Capital per Worker: Bela Balassa, "A 'Stages' Approach to Comparative Advantage" op. '1.t. Exports and Imports: GATE, International Trade 1978/79 and GATT tapes. Note: (a) Industrial countries' exports to, and imports from, the non-OPEC developing- countries. (b) Ratio of the industrial countries' exports and imports, respectively, in trade with developing countries. (c) Newly industrializing countries, defined to include Argentina, Brazil, Chile, Mexico, Uruguay, Israel, Hong Kong, Korea, Singapore ~~~~~~ ~~~~and Taiwan. - 15 - clothing (13.4) textiles (26.6) and other consumer goods (32.7) at the lower, end of the range (Table 4). If engineering products are considered as a single group, 1973 export-import ratios in trade between the industrial countries and the non-OPEC developing countries largely correspond to the pattern of comparative advantage as represented by capital-labor ratios, the only exception being semimanufac- tures.-/ As shown in Table 4, iron and steel and chemicals with the highest overall capital-labor ratios also, had the highest export-import ratios (6.5 and 6.9 respectively) in 1973. Apart from semimanufactures, engineering products placed next in terms of overall capital-output ratios (39.0) as well as export- import ratios (6.0). At the other extreme,. the exports of the industrial countries to the non-OPEC developing countries hardly reached one-tenth of their imports in the case of clothing that exhibits by far the lowest capital-labor ratio. The next lowest export-import ratio (0.8)-is shown for the other. consumer goods cate- gory, including shoes, travel goods, toys, sports goods, and a variety of miscellaneous products, which exhibit the second-lowest capital intensity. A seemingly aberrant result is observed in the case of other semi- manufactures that had an export-import ratio of 1.0 in 1973, notwithstanding their relatively high capital-labor ratio (43.8). However, several of the commodities included in this category are natural resource products, which fact provides an advantage to developing countries that possess the resources in question. Also, the category is rather heterogeneous as it includes capital- 1/ The OPEC countries have been excluded from these comparisons as they export practically no manufactured goods. - 16 - intensive products, such as pulp and paper, as well as labor-intensive products, such as leather and rubber manufactures, when weighting by U.S. production imparts an upward bias to the estimated average capital-labor ratio for the group as a whole. Apart from their above-average capital intensity, the sophistication of the production process and the need for the availability of precision- engineered parts, components, and accessories limited the export possibilities of the developing countries in a variety of engineering products. These factors in large part explain the very high export-import ratios in the trade of the industrial countries with the non-OPEC developing countries in ,the case of machinery for specialized industries (54.0) and road motor vehicles (38.7). In turn, the export-import ratio was 7.1 for the other machinery and transport equipment category, which also includes some relatively simple products, such as bicycles. Finally, 1973 export-import ratios were relatively low for office and telecommunication equipment (1.9) and for household appliances (1.4). In both instances, physical capital-labor ratios are substantially lower than for the average, although relatively high human capital intensity raises their overall capital-labor ratio. At the same time, within the first category developing countries exported chiefly electronic components that are highly labor intensive, while in the second category radios were of importance in the production of which relatively simple techniques are utilized. We have further calculated weighted averages of capital-labor ratios for the exports and the imports of the industrial countries in their trade in manufactured goods with the non-OPEC developing countries, the weights being the value of exports and imports in the eleven commodity-group breakdown. In 1973, the relevant ratios for exports (expressed in thousand U.S. dollars per worker) were 13.8 for physical capital and 27.5 for human capital, totalling - 17 - 41.3. In turn, average capital-labor ratios for the manufactured imports of the industrial countries from the non-OPEC developing countries were 9.8, 25.1,. and 34.8, respectively. The results indicate the comparative advantages of the industrial countries in capital-intensive commodities vis-a-vis the non-OPEC developing countries. This conclusion applies also to the industrial countries and country groups, taken individually, with percentage differences in average capital-labor ratios for their exports and imports in trade in manufactured goods with the non-OPEC developing countries ranging between 18 percent in the United States to 36. percent in Canada. At the.same time, for the industrial countries, taken together,. as well as-for the individual countries and country groups,. the extent of.comparative advantage vis-a-vis the non-OPEC developing countrie7s-appears to.be greater.in regard to physical than for human capital. Changes in the Commodity Composition of Trade, 1973-1978 Industrial Country Exports In the exports of the industrial countries to OPEC in the 1973-1978 period, above-average increases are shown for consumer goods; the ratio of 1978 to 1973 exports was 5.3 for motor-vehicles, 5.4 for household appliances, 5.9 for clothing and 7.2 for other consumer goods as against an overall average of 5.0.1/ In turn, the lowest ratios are observed in the case of iron and steel (3.5), chemicals (3.4) i and textiles (2.5). Finally, machinery and equipment exhib- ited average ratios (5.0 to 5.1), except for the high ratio shown for the "other 1/ For lack of price indices on a commodity group basis, export ratios have been expressed in terms of current prices. - 18 - machinery and transport equipment" category (6.8) where aircraft and other military equipment are of importance. Given the limited domestic production of manufactured goods in most of the OPEC countries, these results tend to reflect patterns of domestic use. It would then appear that, on the whole, increases in oil earnings were used more to increase consumption and military expenditure than to raise in- vestment levels. Iron and steel, chemicals, and textiles experienced smaller than average increases in industrial country exports of manufactured goods to the non-OPEC developing countries also. In these three commodity categories, the ratios of 1978 to 1973 exports were 2.0, 2.3, and 1.6, respectively, as compared to an overall average of 2.4. The relevant ratio is 2.6 for the consumer goods categories, the only exception being clothing (2.2). Finally, the ratio of 1978 to 1973 imports of machinery and equipment was 2.5, except that the imports of military equipment raised this ratio to 2.7 for the other machinery and transport equipment category. These results conflict with the popular image, which has found its way into economic models, that the non-OPEC developing countries would limit their consumer goods imports in favor of the imports of machinery and equip- ment. In fact, with clothing imports being small in absolute terms, the imports of consumer goods appear to have increased somewhat more than the imports of capital goods, and increasesin the imports of military equipment were even larger. Industrial Country_Imp p orts In the imports of the industrial countries from the non-OPEC develop- ing countries, the largest increases are observed in the specialized machinery - 19 - and the road motor vehicles categories; the ratios of 1978 to 1973 exports are 4.5 and 4.8, respectively, as compared to an overall average of 2.7. But this result was achieved.from a very small base; in fact, between 1973 and 1978, the trade surplus of the industrial countries with the non-OPEC developing countries increased from $6.8 billion to $16.8 billion in specialized machinery and from $6.6 billion to $16.8 billion in motor vehicles. The next largest increases, with the ratio of 1978 to 1973 imports being,3.7 and 3.4, took place in the other machinery and transport equipment and the household appliances categories. Shipbuilding and the exportation of parts and components of machinery and transport equipment importantly contributed to the growth of imports originating in the non-OPEC developing countries in the-first case and radios and T.V. sets in the second. But while the trade surplus of the industrial countries declined in the second category, a substantial increase is shown for the first where aircraft and other military products are of importance. All in.all, the in4ustrial countries' imports of engineering products from the non-OPEC developing countries shows above-average increases, with the ratio of 1978 to 1973 imports being 3.4. As a result of these changes, by 1978 engineering products came to account for 29.4 percent of the manufac- tured imports of the industrial countries from the non-OPEC developing countries as compared to 23.9 percent in 1973.-/ In absolute terms, the most important categories are other machinery and transport equipment (4.0 billion in 1978), office and telecommunication equipment ($3.8 billion), and household appliances ($3.7 billion). 1/ Table 4 and the sources cited therein. - 20 - The ratio of 1978 to 1973 imports from the non-OPEC developing countries is the lowest for textiles (1.8) that have long been subject to restrictions in the industrial countries. The industrial countries have also benefited from technological change that has led to the application of more capital-intensive techniques. Nevertheless, with textile imports from the non-OPEC developing countries rising more rapidly than exports to these countries, the trade surplus of the industrial countries in textiles declined from $0.3 billion in 1973 to practically zero in 1978. In the same period, the trade deficit of the industrial countries with the non-OPEC developing countries in clothing rose from $3.0 billion to $8.8 billion. As noted above, the comparative advantage of the non-OPEC developing countries is the strongest in clothing; nor have there been techn- ological changes unfavorable to them in this industry. Thus, notwithstanding the limitations imposed in the framework of the Multifiber Arrangement, the ratio of 1978 to 1973 imports was 2.8 for clothing, exceeding the overall average. The industrial countries also experienced a rise in their trade deficit in other consumer goods with the non-OPEC developing countries from $0.9 billion in 1973 to $3.7 billion in 1978, with the ratio of 1978 to 1973 exports being 3.2. The commodities included in this category have relatively high unskilled-labor intensity and average skill intensity. With few excep- tions, these commodities have not been subject to restrictions in the industrial countries. Finally, increases in the imports of the industrial countries from the non-OPEC developing countries were below-average in the case of intermediate - 21 - products, where the relevant ratios are 2.2 for iron and steel, 2.5 for chemicals, and 2.3 for semimanutfactures. These products have the highest physical capital- labor ratio although, as we have.seen, the semimanufactures category also includes.natural-resource and labor-intensive products. Some Implications of the Results It appears that the OPEC as well as the non-OPEC developing countries have utilized increases in foreign exchange availabilities to expand the -imports of consumer goods and military equipment more rapidly than the imports of investment goods. Apart from conflicting with popular preconceptions, these results raise questions about the allocation of foreign exchange between current expenditures and investment in these countries. It further appears that the developing countries have made little headway in exporting commodities that are highly intensive in physical capital, require.sophisticated technology, or necessitate the availability of precision- *engineered parts, components, and accessories. Several.of the developing countries, however, have made progress in exporting skilled-labor intensive commodities, such as ships and T.V. sets, as well as parts, components, and accessories of engineering products to the industrial countries. Also,growth has been rapid in the exports of other consumer goods that have average skill intensity and are relatively intensive in unskilled labor. A few exceptions apart, products in these commodity categories do not encounter non-tariff barriers in the industrial countries. It should be added, however, that the exports of textiles and clothing, subject to limit- ations first under the Cotton Textiles and, subsequently, the Multifiber,Arrange- ment have also experienced a high growth rate. The exports of these commodities - 22 - increased at an average annual rate of 7.7 percent in volume terms as compared to the average rate of expansion of manufactured exports of 10.2 percent. The bulk of the manufactured exports of the non-OPEC developing countries to the industrial countries originates in the newly-industrializ- ing developing countries. This group has been defined to include developing countries where per capita incomes exceeded $1100 in 1978 and manufacturing production accounted for at least 20 percent of the gross domestic product. ,The countries in question are Argentina, Brazil, Chile, Mexico, Uruguay, Israel, Hong Kong, Korea, Singapore, and Taiwan. As shown in Table 4, in 1978 the share of the newly-industrializing countries in the manufactured imports of the industrial countries from the non-OPEC developing countries was 75 percent. This compares with the 46 percent share of these countries in the combined GDP of the non-OPEC developing countries. If comparisons are made with all (OPEC and non-OPEC) developing countries, the relevant shares are 73 percent and 33 percent. And, the four Far Eastern countries in the group, Hong Kong, Korea, Singapore, and Taiwan, accounted for 5 percent of the gross domestic product and 52 percent of the manufactured exports of the developing countries to developed country markets.-/ Compared to the other non-OPEC developing countries,the newly-indus- trializing countries tend to export relatively skill-intensive commodities. They have a high export share in engineering products (83 percent) that have higher skill-intensity than any other commodity category. Within the engineer- 1/ Data for the gross domestic product pertain to the year 1975 and have been expressed in 1975 prices and exchange rates. - 23 - ing.group, household appliances with a 95 percent export share of the newly- industrializing countries are the most skill-intensive. The export share of the.newly industrializing countries is also high in other consumer goods (90 per.cent)' that-have average skill-intensity, and it is the lowest in textiles (55 percent).that have low skill-intensity. They also have low shares in chemicals (47 percent) and in other semimanufactures (58 percent) that are intensive in.:physical.capital and.several of which embody natural resources. *And while.the newly-industrializing countries have an above-average share in clothing exports (81 percent) that are intensive in unskilled labor,.more .sophisticated items.have a higher than average share in their exports of these commodities. III.. Prospects for Trade in Manufactured Goods between Industrial and Developing Countries, 1978-90 This section.provides projections of the gross domestic product for industrial countries and country groups as well as for OPEC and non-OPEC developing countries in the 1978-90 period. It further presents estimates of prospective changes in manufactured trade between the two groups of countries in a seven commodity group breakdown, and relates these flows to the production, consumption, and trade of manufactured goods in the industrial countries. Projections of Economic Growth, 1978-90 Industrial Countries As shown in Table 5, GDP growth rates in the industrial countries averaged 4.6 percent in the 1963-73 period and 2.5 percent between 1973 and 1978. The deceleration of economic growth was the most pronounced in the European Free Trade Association, where the 1973-78 growth rate bar-ely exceeded - 24 - one-third of that in the 1963-73 period; it was the smallest in the United States whose GDP growth rate declined by less than one-third. The base scenario of the second World DeveZopment Report calls for a GDP growth rate of 4.2 percent for the industrial countries, taken together, in the 1980-90 period; GDP growth rates'under the high and the low growth scenarios, respectively, are 4.9 percent and 3.5 percent.-! For the same period, a study prepared for the United Nations by Wassily Leontief and Associates projects a GDP growth rate of 3.8 percent.-/ Finally, Interfutures estimates the average GDP growth rate of the industrial countries at 4.9 percent under the rapid convergent growth, and 3.6 percent under the moderate convergent growth, scenario for the 1975-90 period.-V 1/ World Bank, World Development Report, 1979, Washington, D.C., 1979, p. 18 (to be cited as WDR II) -- Compared to the definition of industrial coun- tries used in this study, the estimates include Australia and New Zealand and exclude Portugal. Making adjustments for these countries would not modify the results, however. The same conclusion applies to the estimated GDP growth rate of 4.1 percent a year for the 1978-90 period. 2/ Wassily, Leontief, Anne P. Carter, and Peter A. Petri, The Future of the WorZd Economy, A United Nations Study. New York, Oxford University Press, 1977, Annex VI. (To be cited as Leontief et. al. Unless otherwise noted, all references relate to Annex VI.) -- The cited estimates pertain to the same group of countries as in the present study, except that they ex- clude Portugal. 3/ Interfutures, Facing the Future, Paris, Organisation for Economic Co-Opera- tion and Development, 1979, pp. 121, 131, and 328 -- The estimates pertain to the entire OECD, thus including Southern Europe, Austalia, and New ,;ealand as well. The exclusion of these countries would hardly affect the results, however, as they account for only 7 percent of OECD GDP. Interfutures also provides additional scenarios, involving changes in social values in the industrial countries, with a consensus on slowing down economic growth; a rift between the industrial countries and the developing countries; and mounting protection on trade among the industrial countries, together with preferential ties between particular industrial countries and developing countries. The assumptions underlying these scenarios may be considered less realistic, however, and they are not reported here. - 25 - Although these estimates show considerable similarity, there are substantial differences in the projected pattern of growth for the individual *countries and country groups. As shown in Table 5, WDR II foresees the approx- imate:.maintenance of Japan's growth advantage vis-a-vis the other industrial countries, taken as a group, and a slightly higher GDP growth rate for the United States than for the EEC and EFTA. In turn, Leontief expects little difference in the growth performance of Japan and Western Europe but a much .lower GDP growth rate for the United States. Interfutures also sees the United States as the laggard while it postulates a substantially higher GDP growth rate for Japan than for the European Common Market. The estimates-by Interfutures are supposedly based on the convergence of productivity levels, with Japan catching up with the United States and. the Common Market reaching four-fifth of the U.S. per capita income level by the end of the century (p. 89).-/ While the convergence hypothesis appears reason- able, the Interfutures estimate is subject to error inasmuch as it expresses data for 1975, and for all subsequent years, in 1970 prices and exchange rates. Yet, the 1970 exchange rates were far from being equilibrium rates and under- went-considerable changes in later years, involving in particular the deprecia- tion of the U.S. dollar. The magnitude of the error can be indicated by comparing ratios of per capita incomes for the year 1975, estimated in 1970 and in 1975 prices and exchange rates. The relevant ratios, expressed as a proportion of U.S. 1/ Under the rapid convergent growth scenario, Interfutures postulates a long-run productivity growth rate of 1.84 percent for the United States on the basis of an estimate of the Council of Economic Advisors. This is raised to 2.2 percent in the period 1975-2000 because of the assumed catch-up to the pre-recession productivity trend (p. 121). - 25A - Table 5 Actual and Projected Growth Rates of the Gross Domestic Product-/ (percent) Present Actual WDRII Leontief Interfutures Study 1963-73 1973-78 1978-90 1980-90 1975-90 1978-90 A B2 United States 3.7 2.5 3.8 ) 3.6 2.6 3.5 ) 3.1 Canada 5.4 3.4 4.2 ) 4.0 3.1 3.7 EEC 4.6 2.1 3.7 ) 5.3 3.5, 3.6 ) 4.5 EFTA 4.3 1.5 3.7 ) na na 3.3 Japan 10.4 3.6 6.1 4.7 7.6 6.4 6.0 Industrial Countries, total 4.6 2.5 4.1 3.8. 4.9 3.6 3.9 Developing Countries 6.2 5.3 5. b 5.0 6.7-/6.0-/ 5.6 Sources: Actual: United Nations, Yearbook of National Accounts Statistics 1978 and World Bank. Projected: World Bank, World Development Report, 1979, Washington, D.C., 1979 and related documents -- base variant. Interfutures, Facing the Future, Paris, Organisation for Economic Co-operation and Development, 1979, pp. 121, 131, and 328. Scenario A: rapid convergent growth. Scenario B2; moderate convergent growth. Leontief, Wassily, Anne P. Carter, and Peter A. Petri, The Future of the World Economy, A United Nations Study. New York, Oxford University Press, 1977, Annex VI. Notes: (a) For definitions, see text. (b) 1980-90. (c) 1975-2000. - 26 - (10 <9 40 '1 incomes, are .54 and .73 for the European Common Market and .46 and .63 for Japan (p. 89).-/ Cortespondingly, utiliz-ng data expressed in 1975 prices and exchange rates, under Interfutures' rapid convergent growth scenario, *Japan would surpass per capita incomes in the United States by 8 percent in 1990 while the European Common Market would establish approximate parity -with the U.S.; furthermore, Japanese and EEC incomes would exceed the U.S. per capita income level by 42 percent and 11 petcent, respectively, in 2000 (pp. 13 and 89).2/ It appears, then, that the Interfutures estimates would lead to a divergence rather than a convergence of productivity levels and per capita incomes, with the EEC surpassing the United States and Japan surpassing both of them. In the present study, CDP growth rates have been estimated by utilizing the labot force estimates of Interfutures and postulating a conver- gent pattern of productivity levels among the industrial countries,except that Japan has been assumed to get ahead of the European Common Market. Interfutures projects the labor force to rise at an average annual rate of 1.2 percent in the United States, 0.4 percent in the European Common Market, and 0.8 percent in Japan between 19J5 and 1990. At the same time, the higher level of unemployment prevailing in 1975 would permit the United States to increase employment further to an extent greater than the other industrial countries (p. 138). We have nevertheless assumed that differential 1/ The source for data in 1975 prices and exchange rates is the 1978 World Bcnk Atlas, Washington, D.C., 1979, pp. 28-29. 2/ In the calculations, population growth rates estimated for the period 1975-2000 (United States 0.6 percent; Common Matket, 0.1 percent; and Japan 0.7 percent) have been assumed to apply to the 1975-90'period as well. - 27 - productivity growth rates would lead to increases in Common Market GDP (3.6 percent a year) slightly exceeding the U.S. growth rate (3.5 percent) and that a substantially higher growth rate would be experienced in Japan (6.0 percent). Still, substantial differences in per capita incomes would remain, with the EEC reaching 77 percent, and Japan 84 percent, of the U.S. level in 1990. Assuming further GDP growth rates of 3.7 percent for Canada and 3.3 percent for EFTA, the combined gross domestic product of the industrial countries would rise at an average annual rate of 3.9 percent in the period 1978-90. This projection compares with a 4.1 percent GDP growth rate project- ed under the base scenario of WDR II for the same period, a growth rate of 3.8 percent estimated by Leontief et. al. for 1980-90, and prospective growth rates of 4.9 percent and 3.6 percent under the two Interfutures scenarios for 1975-90. _evelopnie o un tres According to WDR II, the gross domestic product of the developing 1/ countries- would rise at an average annual rate of 5.6 percent under the base scenario and by 6.6 percent and 4.8 percent under the high and low growth scenarios, respectively, between 1980 and 1990. The corresponding projections are 5.0 percent for 1980-90 by Leontief et. al. and 6.7 percent under the rapid convergent growth, and 6.0 percent under the moderate convergent growth, scenario for 1975-2000 by Interfutures (Table 5). 1/ The estimates include the countries of Southern Europe (Cyprus, Greece, Israel, Malta, Portugal, Spain, Turkey 'and Yugoslavia) and exclude the capital-surplus oil exporters (Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates). Adjusting for these countries would not affect the results, however. - 28 - The WDR II and Interfutures estimates reflect the assumption that economic growth in the developing eiountries is linked with growth in the industrial countries. This relationship may be explained by reference to the fact that higher rates of economic growth in the industrial countries entail a more rapid increase of their imports from the developing countries and that growth rates of exports and GDP in the latter group of countries are positively correlated. / A positive correlation between rates of economic growth in the industrial and in the developing countries has been manifest in the past. As noted in Section II, GDP growth rates in the two groups of countries were 4.6 percent and 6.2 percent in the 1963-73 period and 2.5 percent and 5.3 percent in the 1973-78 period. At the same time, in the latter period, OPEC and non-OPEC countries need to be separately considered. This is because economic growth in the former group of countries, with an average annual increase of 8.2 percent a year between 1973 and 1978, was largely a function of increases in oil earnings while the transmission of economic growth from the industrial countries retained its relevance for the latter group that experience a' average annual GDP growth rate of 4.1 percent between 1973 and 1978. In the following, GDP growth rates for the two groups of developing countries will be separately estimated, with further distinction made between the capital-surplus oil exporters and other OPEC countries. Under the base scenario of WDR II, the gross domestic product of the capital surplus oil-exporting countries would rise at an average annual 1/ For empirical evidence on the latter point, Bela Balassa, "Exports and Economic Growth: Further Evidence," Journal of Development Economics, June 1978, pp. 181-89. - 29 - rate of 5.0 percent between 1980 and 1990 (p. 18). This estimate reflects the assumption that oil prices would remain unchanged in real terms. We have postulated that, following an increase by about two-thirds between 1978 and 1980, the real price of oil would remain unchanged during the eighties. Assuming further moderate increases in oil output, the real value of the export earnings of the capital surplus oil-exporting countries may double between 1978 and 1990. With increased investment activity, especially in Saudi Arabia that accounts for one-half of the total, the combined gross domestic product of these countries has been projected to rise at an average annual rate of 6.0 percent a year. This figure compares with CDP growth rates averaging 12.8 percent a year in the 1973-78 period,-/ when increases in the real price of oil and in oil production were considerably larger. The other OPEC countries experienced a rise of GDP of 7.1 percent a year between 1973 and 1978. Continued rapid growth is expected to occur in these countries, the exception being Iran where a long period will be needed to remedy economic,dislocation under the Revolution once political conditions stabilize. With Iran accounting for three-tenth of the total, we 1ha-ve'projected an average annual rate of growth of 6.0 percent in the other OPEC countries also. The growth of GDP in the non-OPEC developing countries will be much affected by economic growth in the industrial countries. Assuming the continua- tion of past relationships, a 3.9 percent rate of growth of GDP in the industrial 1/ United Nations Yearbook of National Accounts Statistics 1978 and World Bank Data Base. - 30 - countries may be accompanied by a 5.5 percent growth rate in the non-OPEC developing countries. With these countries accounting for nearly three-fourths of the combined gross domestic product of the developing countries, the average GDP growth rate foY the developing countries, taken together, would be 5.6 percent. The 5.6 percent figure equals the estimate of WorZd Development Report, 1979 which, however, entails a lower projection for the capital- * surplus oil. exporters and a.higher projection for the other developing countries. It exceeds the estimate by Leontief et. al. while it is .lower than the two Interfutures scenarios that appear to overestimate the growth potential. of the developing countries. Trade Projections, 1978-90 Industrial Country-Imports Under the base scenario of WorZd Development Report, 1979, the manu- factured exports of the developing countries are projected to rise at -an average annual rate of 10.9 percent.between 1976 and 1990 (p. 5). This figure barely exceeds the 10.2 percent rate of increase observed in the 1973-78 periodi-/ although WDR II expects the rate of growth of GDP in the industrial countries to be two-thirds higher than the actual growth rate of 2.5 percent in 1973-78 (Table 5). WDR II trade projections appear to be overly pessimistic. They seem .to have been influenced by the experience of the year 1977, when increased 1/ While the former estimate pertains to exports to all destimations and the latter to exports to the industrial countries alone, from WDR II it would appear that, if anything, the projected rate of grqwth of manufactured exports to the industrial countries is lower than the average (pp. 5, 27-28). -31 - protectionism in the industrial countries led to a slowdown in the growth of their manufactured imports originating in the developing countries. But, with an easing of protectionist trends and a slight increase in the rate of economic growth in the industrial countries the volume of their manufactured imports from the developing countries increased at a rate twice as high in 1978 than in 1977 (Table 2). This compares with the statement made in WDR II: "Preliminary information indicates that developing countries' manufactured exports grew somewhat faster in 1978 than in 1977" (p. 5). Leontief et. al. are even more pessimistic as they project the GDP of the industrial countries and the total manufactured exports of the developing countries, respectively, to rise at average annual rates of 3.8 percent and 8.5 percent between 1980 and 1990. These estimates correspond to an apparent income elasticity of import demand of 2.2 on the assumption that developing country exports to the industrial countries would rise at the same rate as their total manufactured exports. The apparent income elasticity is higher (3.2) for the period 1990-2000, when Leontief et. al. estimate industrial country GDP and the manufactured exports of the developing countries to grow at average annual rates of 2.9 percent and 9.4 percent. respectively. In turn, the UNIDO projection for the 1974-2000 period assumes a GDP growth rate of 3.0 percent for the industrial countries and an increase of 12.3 percent a year in their imports of manufactured goods from the developing countries, i.e. an apparent income elasticity of import demand of 4.1.-/ At the same time, UNIDO expects the share of the industrial countries 1/ Comparable estimates are not available in the Interfutures study. - 32 - in the manufactured exports of the developing countries to decline from 63.4 percent in 1974 to 54.0 percent in 2000, representing increases in the shares of intra-LDC trade and, in particular, of exports to the centrally planned economies.-V In estimating future trade flows in the present study, we have assumed an apparent income elasticity of demand of 3.2 in the industrial countries for manufactured imports originating in the developing countries. This compares with an apparent income elasticity of 3.6 in the 1963-73 period and 4.1 in 1973-78 (Table 2). In postulating a decline in the apparent income elasticity, consideration has been given to the fact' that the-base year figures of the imports of manufactured goods from the developing countries, and their share in industrial country markets, are considerably higher in the.period of projection.than in previous periods (Cf. pp. 38-40 below). At. the same time,. we have assumed the continuation of existing policies in the industrial countries, including the maintenance of the Multifiber Arragement. Given the 3.9 percent projected rate-of economic growth for.the industrial countries and the assumed apparent income elasticity of demand of 3.2, the industrial countries' manufactured imports from the developing countries would rise at an average annual rate of 12.5 percent between 1978 and 1990. At.the same time, we have followed WDR II in assuming that-the imports of machinery and equipment, and of engineering goods in general, would 1/ United Nations Industrial Development Organization, Industry 2000 -- New Perspectives, New York, United Nations, 1979, pp. 219-20 (to be cited as the UNIDO Report) -- Data for the industrial countries include Southern Europe, Australia, and New Zealand. - 33 - rise much more rapidly than the average.- The projected growth rate for this product group is 17 percent, reflecting expected rapid increases in the imports of consumer electronics, machinery, motor vehicles, and ships from the develop- ing countries, in particular the newly-industrializing countries, as well as the further extension of the international division of the production process, with rising imports of parts, components, and accessories of various engineer- ing products, first from the newly-industrializing, and subsequently from other, developing countries (Table 6). Correspondingly, the share of engineering products in the manu- factured imports of the industrial countries from the developing countries would rise from 29.6 percent in 1978 to 47.6 percent in 1990. For the same period, a decline in the combined shares of textiles and clothing from 31.4 percent to 18.1 percent is projected. These estimates reflect the assumption that the continuation of the Multifiber Arrangement would limit the rate of growth of the imports of textiles and clothing from the developing countries to 6 percent and 7 percent, respectively, between 1978 and 1990. The projec- ted growth rates may be on the low side, given the continued upgrading of the quality of developing country exports. At the same time, a shift in the origin of these imports is expected to occur from the newly-industrializing develop- ing countries to countries at lower levels of industrial development. Below-average increases are projected also for the imports of other semimanufactures (11 percent) and for other consumer goods (11 percent), where the shares of imports originating in the developing countries in the total 1/ The projections in WDR II are 15.3 for machinery and transport equipment and 9.0 percent for other manufactures for the period 1976-90 (p. 5); the differences are smaller, with growth rates of 9.5 and 8.2 percent, in the estimates by Leontief et. al. for the period 1980-90. Tablc 6 Trade in Manufactured Goods between Industrial and Developing Countries (in 1978 prices) E X P 0 R T S to IMPORTS from OPEC Non-OPEC Developing Coulntries Developing Countries 1978-90 1978-90 1978-90 1978-90 1978 Growth 1990 1978 Growth 1990 1978 Growth 1990 1978 Growth 1990 Sbillion Rate $billion $billion Rate $billion $billion Rate $billion $billion Rate $billion Iron and Steel 5.00 6.0 10.06 6.92 5.0 12.43 11.92 5.4 22.49 1.25 15.0 6.69 Chemicals 4.87 6.0 9.80 14.35 6.0 28.87 19.22 6.0 38.67 2.43 14.0 11.71 Other Semimanufactures 3.10 9.0 8.72 6.59 6.0 13.26 9.69 7.1 21.98 6.17 11.0 21.59 Engineering Products 46.14 13.3 207.36 57.66 9.0 162.40 103.80 11.2 369.76 12.99 17.0 85.47 Textiles 1.95 8.0 _ 4.91 3.70 4.0 5.92 5.65 5.6 10.83 4.12 6.0 8.28 w Clothing .47 9.0 1.32 .85 4.0 1.36 1.32 6.1 2.68 9.64 7.0 21.71 Other Consumer Goods 3.33 10.0 10.45 3.52 5.0 6.32 6.85 7.7 16.77 7.29 11.0 25.50 Manufactured Goods, 64.84 12.0 252.62 93.62 7.8 230.56 158.46 9.7 483.18 43.88 12.5 180.95 total Source: GATT, InternationaZ Trade, 1978/79 and text. - 34 D imports and in the consumption of the industrial countries,are relatively high. Finally, above-average increases are postulated for iron and steel (15 percent) and chemicals (14 percent) as some of the newly-industrializing countries can be expected to follow the example of Japan in exporting these commodities'. Still, the combined shares of the two product groups in the manufactured imports of the industrial countries from the developing countries would not reach 10 percent in 1990. While separate projections for the two groups of countries have not been made, the preceding considerations point, to changes in the export struc- ture of the newly-industrializing countries and of countries at lower levels of industrial development. In accordance with the stages approach to com- parative advantage, developing countries at lower levels of industrialization would increase their market share in unskilled-labor intensive products whereas the newly-industrializing countries would upgrade and diversify their exports.-/ Industrial CountryExpports The growth of the manufactured imports of the developing countries from the industrial countries will be determined by increases in their gross domestic product and in their foreign exchange earnings, as well as by their import substitution efforts. It is anticipated that increases in industrial capacity in the OPEC countries would lead to a decline in their apparent income elasticity of import demand for manufactured goods originating in the industrial countries. Nevertheless, in view of the expected rapid rise of foreign exchange earnings, an elasticity of 2.0 is projected, giving rise to 1/ For a discussion, see Bela Balassa, "A 'Stages Approach' to Comparative Advantage," op. cit. - 35 - an average annual increase in manufactured imports of 12.0 percent.- This compares to an apparent income elasticity of 3.0 in the period 1973-78. The OPEC countries are expected to make a considerable effort in expanding the production of iron and steel and of chemicals, thereby limiting the growth of imports of these commodities. Increases in domestic capacity are foreseen also in other semimanufactures, textiles, clothing, and some other consumer goods, leading to below-average increases in these imports. In turn, in view of the large investment effort under way in the OPEC countries and their inability to produce investment goods in substantial quantities during the eighties, imports of engineering products are projected to rise relatively rapidly. In the non-OPEC developing countries, the apparent inc,ome elasticity of demand for manufactured goods originating in the industrial countries was 1.8 in the 1973-78 period, representing a considerable increase as compared to an apparent incoifle elasticity of 1.3 in 1963-73. The relatively high elasticity in the more recent period reflects rapid increases in foreign borrowing by the non-OPEC developing countries as well as their increased participation in the international division of the production process, involv- ing in part the importation of manufactured inputs for further processing. The latter, but not the former, tendency is likely to continue during the period of projection. Correspondingly, we have assumed an apparent income elasticity of demand of 1.5 for these countries, resulting in increases of manufactured 1/ These estimates are considerably higher than the estimates earlier made by the author, which were based on the first World Development Report (Bela Balassa, "The Changing International Division of Labor in Manufactured Goods," Banca Nazionale del Lavoro, Quarterly Review, September 1979, pp. 243-85). - 36 - imports from the industrial countries at an average annual rate of 7.8 percent in the 1978-90 period. Again, above-average increases are expected for engineering products, in part because of the increased need of the non-OPEC developing countries for sophisticated machinery and transport equipment that the industrial countries can provide and in part because of the international division of the production process in engineering products. Conversely, increases are expected to be the smallest in relatively labor-intensive textiles, clothing, and other consumer goods. And, import substitution efforts are likely to limit increases in rela- tively capital-intensive iron and steel, chemicals, and other semimanufactures, too. These projections would entail an increase of 9.7 percent a year in the manufactured imports of the (OPEC and non-OPEC) developing countries from the industrial countries in the 1978-90 period as compared to the growth of their combined GDP at an average annual rate of 5.6 percent. The resulting apparent income elasticity of demand of 1.7 exceeds the 1.3 figure observed in the 1963-73 period when the relative importance of the OPEC countries was substnatially less. It is lower, however, than the apparent income elasticity of 2.4 in the 1973-78 period. WDR II and Interfutures do not provide estimates of the manufactured imports of the developing countries. In turn, Leontief et. al. project the total manufactured imports of the developing countries to rise at an average annual rate of 7.7 percent between 1980 and 1990, corresponding to an apparent income elasticity of 1.5 on the assumption that theirimports from the industrial countries would rise at the same rate as imports from all destinations. The apparent income elasticity is lower (1.3) for the 1990-2000 period, for which GDP and imports are projected to grow at rates of 6.0 percent and 7.9 percent, respectively. - 37 - Finally, the UNIDO report estimates that the developing countries would increase their imports of manufactured goods from the industrial countries at an average annual rate of 8.2 percent between 1974 and 2000 but does not provide GDP projections. At the same time, the report expects a decline in the share of the industrial countries in the manufactured imports of the developing countries from 84.0 percent in 1974 to 61.0 percent in 2000, representing increases in intra-LDC trade and in imports from centrally planned economies (p. 220). The Changing Importance of Trade in Manufactured Goods between Industrial and Developing Countries Estimated increases of 9.7 percent a year in the industrial countries' exports, and 12.5 percent a year in their imports, of manufactured goods in trade with the developing countries would'reduce their export-import ratio in these products from 3.6 in 1978 to 2.7 in 1990. Nevertheless, the expo-.t surplus of the industrial countries in'manufactured trade with the developing *countries would nearly triple,.from.$115 billion to $303 billion,during this period. In turn, UNIDO foresees a growth 'of 8.2 percent a year in the industrial countries' exports,, and 12.3 percent a year in their imports, of manufactured goods from the developing countries in the 1974-2000 period. As a.result of these changes, the.trade surplus of the industrial countries in manufactured goods traded with the developing countries would increase nearly four times between 1974 and 2000 while their export-import ratio would decline from 4.2 to 1.6 (p; 220). In turn, Interfutures projects the export- import ratio to fall from.3.1 in 1970 to 2.0 under the high convergent growth, - 38 - and to 1.7 under the moderate convergent growth scenario between 1970 and 2000 (P. 332).-V Comparable estimates are not available in WDR II while the projec- tions by Leontief et. al. pertain to the total manufactured exports and imports of the developing countries. According to these estimates, the trade deficit of the developing countries in manufactured goods would double between 1980 and 1990 and quadruple between 1980 and 2000 while the ratio of imports to exports would decline from 3.7 in-1980 to 3.5 in 1990 and to 2.9 in 2000. In the present study, it is projected that two-thirds of the increase in the export surplus of the industrial countries in manufactured trade with the developing-countries would occur in engineering products. An increase in the industrial countries' trade surplus is foreseen also in iron and steel and in chemicals. By contrast, the industrial countries' trade surplus in other semimanufactures and in textiles would decline,and their trade deficit in clothing and in other consumer goods would increase,during the period under consideration. The next question concerns the share of the developing countries in the industrial countries' exports and imports of manufactured goods. Exclud- ing trade between the United States and Canada and trade within the European free trade area in manufactured goods (to be referred to as partner country trade), the manufactured exports of the industrial countries amounted to $336.3 billion, and their imports to $180.2 billion, in 1978 (Table 7). In 1/ In interpreting these figures, emphasis should be given to changes in the ratios rather than the ratios themselves as the Interfuture figure for 1970 represents an underestimate. Table 7 Production. Trade and Consumption of Manufactured Goods in the Industrial Countries ($ billion in 1978 prices) Exports Imports World World World less Partner LDCs World less Partner LDCs Consumption Production _2___ countries Countries (1)'+(5)-(2) A. Absolute Values (1) (2) (3) (4) (5) (6) (7) (8) 1978 Iron and Steel 429.59 45.45 26.78 11.92 29.35 10.64 1.25 413.49 Chemicals 372.36 84.93 43.30 19.22 62.16 20.70 2.43 349.59 Other Semimanufactures 362.89 49.61 19.17 9.69 48.40 16.33 6.17 361.68 Engineering Products 1143.15 364.31 215.63 103.80 239.25 89.98 12.99 1018.09 Textiles 184:78 27.65 11.47 5.65 24.91 8.97 4.12 182.04 Clothing 85.39 13.32 3.22 1.32 24.11 13.98 9.64 96.18 1 Other Consumer Goods 532.11 40.90 16.70 6.85 43.81 19.61 7.29 535.02 w Manufactured Goods, total 3110.27 626.18 336.27 158.46 471.98 180.20 43.89 2956.07 > 1990 Iron and Steel 521.37 82.84 49.23 22.49 57.27 23.59 6.69 495.80 Chemicals 621.22 195.18 96.02 38.67 152.56 53.80 11.71 578.60 Other Semimanufactures 567.69 111.87 43.32 21.98 116.68 44.46 21.59 572.50 Engineering Products 2057.77 983.26 628.68 369.76 611.49 260.46 85.47 1685.00 Textiles 240.08 45.57 21.30 10.83 45.69 17.00 8.28 240.20 Clothing 115.07 24.32 6.14 2.68 48.35 30.12 21.71 139.10 Other Consumer Goods 794.50 93.44 38.94 16.77 106.84 52.34 25.50 808.90 Manufactured Goods, total 4917.70 1536.48 883.63 483.18 1138.88 481.77 180.95 4520.10 Source: GATT, International Trade, 1978-79, Table 6 and text. - 39 - the same year, exports to, and imports from, the developing countries were $158.5 and $43.9 billion, respectively, while the mutual trade of the industrial countries, excluding trade with the partner countries, was $105.6 billion as reported by the exporting countries and $110.7 billion as reported by the importing countries.-/ Finally, the industrial countries had manufac- tured exports of $72.2 billion and imports of $25.6 billion in trade with the rest of the world (Southern Europe, Australia, New Zealand, and South Africa, the centrally planned economies)and with unreported destinations.-/ In the mutual trade of the industrial countries in manufactured goods, an apparent income elasticity of 2.4 was observed in 1963-73 and an elasticity of 1.9 in 1973-77.-/ We have assumed that the decline in this elasticity will moderate in the future. For the period 1978-90, we have calculated with an apparent income elasticity of 1.8, resulting in an average annual rate of growth of 7.0 percent in this trade. Exports of manufactured goods to the centrally planned economies have been growing rapidly, financed in part by foreign loans. In 1978, these exports amounted to $30.1 billion as compared to imports of $10.2 billion. In view of limitations on their foreign borrowing, the centrally planned economies cannot increase their trade deficit at past rates. Correspondingly, we have 1/ The difference in the results were due in part to statistical discrepancy and in part to the cif valuation of imports in the EEC, EFTA, and Japan. 2/ GATT, International Trade, 1978-79, Tables B to F. 3/ United Nations, Monthly Bulletin of Statistics, June 1979 and Yearbook of NationaZ Accounts Statistics, 1978. - 40 - assumed a lower rate of growth for the exports (6.0 percent), than for the imports (7.0 percent) of the industrial countries in their trade in manufactured goods with the rest of the world that includes the centrally planned economies. In projecting the mutual trade of the industrial countries and their exports to the rest of the world, above-average increases have been assumed for chemicals and engineering products, approximately average increases for other semimanufactures and consumer goods,and below-average increases for iron and steel, textiles, and clothing. In turn, the commodity composition of the industrial countries' imports from the rest of the world is expected to resemble that of imports from the developing countries. The described changes in trade flows would entail an increase in .the share of the developing-countries in the industrial countries exports to non-partner countries.from 47.1 percent to 54.7 percent, and an increase in the developing countries' import share from. 24.6 percent to-37.6 percent, between 1978 and 1990. The incremental shares of the developing countries would be 59.3 percent for exports .and. 45.4 percent for imports during this period (Tables 7 and 8). The developing countries would assume especial importance as markets for the industrial countries in engineering products where they would provide nearly two-thirds of incremental exports1and their incremental share would exceed 50 percent in the case of other semimanufactures and textiles also. In turn, developing countries are expected to account for nearly three-fourths of the increment in clothing imports, and for approxi- mately one-half of the increment in the imports of other semimanufactures, Table 8 The Share of the Developing Countries in the Production, Consumption, and Trade of Manufactured Goods in the Industrial Countries 1978 1990 XLDC/X XLDC/P MLDC/M MLDC/C XLDC/X XLDC/P MLDC/M 'LDC/C Iron and Steel 44.5 2.8 11.7 0.3 45.7 4.3 28.4 1.3 Chemicals 44.4 5.2 11.7 0.7 40.3 6.2 21.8 2.0 Other Semimanufactures 50.5 2.7 37.8 1.7 50.7 3.9 48.6 3.8 Engineering Products 48.1 9.1 14.4 1.3 58.8 18.0 32.8 5.1 Textiles 49.3 3.1 45.9 2.3 50.8 4.5 48.7 3.4 Clothing 41.0 1.5 69.0 10.0 43.6 2.4 72.1 15.6 Other Consumer Goods 41.0 1.3 37.2 1.4 43.1 2.1 48.7 3.2 Manufactured Goods, total 47.1 5.1 24.6 1.5 54.7 9.8 37.6 4.0 . 0 Incremental Shares, 1978-1990 "LDC/AX 'XLDC/ P AMLDC/alI 6MLDC/AC Iron and Steel 47.1 11.5 42.0 6.6 Chemicals 36.9 7.8 28.0 4.1 Other Semimanufactures 50.9 6.0 54.8 7.3 Engineering Products 64.4 29.1 48.2 10.8 Textiles 52.7 9.4 51.8 7.2 Clothing 46.6 5.0 72.9 28.1 Other Consumer Goods 44.6 3.7 55.6 6.6 Manufactured Goods, total 59.3 18.0 45.4 8.9 Source: Table 7 Notes: X = exports to non-partner countries; M = imports from non-partner countries. ICLDC =exports to developing countries. XPDC -Production;C=ConsumptnLDC i P - Production; C = Consumption. - 41 - engixjeering products, textiles, and other consumer goods by the industrial countries. Further interest attaches to the changing share of exports to the developing countries in the production, and that of imports from the developing countries in the consumption, of manufactured goods in the industrial countries. For this purpose, we have estimated prospective changes in the consumption of manufactured goods in the industrial countries in the seven commodity group breakdown. In turn, production estimates for 1990 have been derived by adjusting the consumption forecasts for the projected trade flows. The consumption of manufactured goods has been projected by utiliz- *ing information provided in Landsberg, et. al./ and, subsequently, Houthakker 2/ 3/ and Taylor- for the United States, Deaton/- for the United Kingdom, and Berner4 for the European Common Market, as well as the projections made by Leontief et. al. for the industrial country. groups under consideration. An income elasticity of 0.8 has been assumed'for.-clothing and 0.9 for other consumer goods. Among intermediate products, an income elasticity of 0.6 has been postulated for textiles, reflecting the shift towards higher- quality clothing. The same elasticity has been assumed for iron and steel that are being replaced in several uses by lower-weight materials, some of which belong to the chemical and others in the other semimanufactures categories. 1/ Landsberg, Hans H., Leonard L. Fischman and Joseph L. Fisher, Resources in America's Future, Baltimore, Md., the Johns Hopkins Press, 1963, pp. 556-58, 561-63. 2/ Houthakker, H. S. and Lester D. Taylor, Consumer Demand in the United States: Analysis and Projections, Cambridge, Mass., Harvard University Press, 1970, pp. 174-75. 3/ Deaton, Angus S., Models and Projections of Demand in Postwar Britain, London, Chapman and Hill, 1975. 4/ Berner, Richard B., "A General Equilibrium Model of International Discrim- ination" Ph.D. dissertation submitted to the University of Pennsylvania, 1976. - 42 - Taking account of increased demand at higher income levels, an income elast- icity of 1.2 has been postulated for chemicals while an elasticity of 1.0 has been assumed for other semimanufactures. Engineering products include durable consumer goods as well as investment goods. With increased congestion and bigh petroleum prices, the sales of passenger cars are expected to rise at a relatively slow rate. The introduction of new products is likely to lead, however, to rapid increases in the demand for household appliances and other durable consumer goods. Finally, with increases in capital-labor ratios, the demand for machinery can be expected to rise at a rate exceeding that of the gross domestic product. All in all, we have calculated with an income elasticity of 1.2 for engineering products. These estimates correspond to an average income elasticity of demand of 0.9 for manufactured goods, resulting in average annual increases of 3.6 percent in the consumption of manufactured goods between 1976 and 1990. Adjusting for projected values of exports and imports, estimates show manu- facturing production to rise by 3.9 percent a year during this period.-/ The difference between the production and the consumption estimates is explained by the increase in the industrial countries' export surplus in manufactured goods from 5.0 percent of their manufacturing production in 1978 to 8.2 percent in 1990. The bulk of. this increase would occur in trade with the developing countries, with the relevant ratios being 3.7 percent and 6.2 percent. The projected growth rate of manufacturing production equals that of GDP in the industrial countries for the 1978-90 period. By comparison, manu- 1/- It should be emphasized that the consumption as well as the production estimates are expressed in terms of gross values rather than value added. - 43 - facturing production increased at an average annual rate of 2.2 percent and GDP grew 2.5 percent a year, i.e., a ratio of 0.9, between 1973 and 1978 1/ while the ratio was l.1 in the 1963-73 period.- Table 7 indi.cates the increased share of the developing countries as markets for the manufacturing production of:the industrial countries. While exports to the developing countries amounted to 5.1 percent of manufacturing output in 1978, this share is projected to reach 9.8 percent in 1990, with an incremental share of 18.0 percent. Incremental shares are the highest for engineering products (29.1 percent) and vary between 4 percent and 12 percent for the remaining product groups. In the same period, the share of imports originating in the develop- ing countries in the industrial-countries' consumption of manufactured products is projected to rise from 1.5 percent in 1978 to 4.0 percent in 1990, with an incremental share of 8.9 percent. Incremental shares are by far the highest for clothing (28.1 percent). Nevertheless, clothing production in the industrial countries would increase at an average annual rate of 2.3 percent between 1978 and 1990. For thd same period, the projected increase is 2.2 percent a year for the production of textiles, where the incremental share of the developing countries (7.2 percent) would be below the overall average. Conclusion The projections reported in this paper assume the continuation of existing policies in the industrial countries, including the maintenance of 1/ United Nations, Yearbook of National Accounts Statistics, 1978 and national statistics. - 44 - the Multifiber Arrangement. They further assume that the newly-industrial- izing countries would upgrade and diversify their manufactured exports and that countries at lower levels of industrial development would take their place in exporting unskilled-labor intensive products. This scenario represents the application of the stages approach to comparative advantage, with changes in export patterns occurring in the process of industrial development. It als'o points to the interdependence of the industrial and the developing countries through trade in manufactured goods, with benefits accruing to both groups of countriep. To begin with, the data for 1978 and the estimates for 1990 indi- cate the increasing importance of the developing countries as markets for the manufactured exports of the industrial countries. Excluding trade between the United States and Canada and within the European free trade area in manufactured goods, 47 percent of the manufactured exports of the industrial countries was sold in developing country markets in 1978. This share is expected to reach 55 percent in 1980, with the developing countries accounting for 59 percent of the increment in exports during this period. The developing countries would assume increased importance in the total (domestic and foreign) sales of the industrial countries also. While only 5.1 percent of the industrial countries' manufacturing output was sold in the developing countries in 1978, this share is projected to double by 1980, with exports to the developing countries accounting for 18 percent of the increment in output between 1978 and 1990. The incremental share of the developing countries would be particularly high, nearly three-tenths, for engineering production in the industrial countries. - 45- In turn, the share of the developing countries in the imports of manufactured goods would increase from 25 percent in 1978 to 37 percent in 1990, with an incremental share of 45 percent. In the same-period, the ratio of imports from the developing countries to the consumption of manufactured goods in the industrial countries would rise from 1.5 percent to 4.0 percent, with the incremental ratio being 8.7 percent. Although import growth rates (12.5 percent a year) are expected to exceed the rate of-growth of exports (9.7 percent), the increased export surplus of-the industrial countries in their trade in manufactured,goods with the developing countries would contribute to the.growth of their manufacturing output. To the extent that manufactured goods tend to be more skill-intensive than agriculture and services, this.trade would make a positive contribution. to economic growth in the industrial countries. The industrial-countries stand to obtain further gains.as a.result of resource allocation according to comparative advantage, involving.the. exchange of commodities embodying.physical.and human capita], and.in particular research intensive products,for products that have higher unskilled-labor intensity. Furthermore, international specialization permits exploiting econ- omies of scale in the industrial countries and the growth of imports from the developing countries tends to limit price increases for the consumer. The developing countries, too, enjoy gains from improved resource allocation and the exploitation of-economies of scale through trade in manu- factured goods with the industrial countries. They have the further benefit of procuring sophisticated machinery and transport equipment in a world of rapidly changing technology. And, the industrial countries provide markets - 46 - for the skill-intensive products the newly-industrializing developing countries are increasingly able to manufacture as well as for the incipient manufactured exports of countries at lower levels of industrial development. At the same time, as we have seen, none of the industries of the industrial countries would experience a decline in output under the projections for the period 1978-90. Thus, production would rise at a rate of over 2 per- cent a year even in the case of textiles and clothing, the future prospects of which have been of particular concern to the governments of the industrial countries. These considerations indicate the common interests of the industrial and the developing countries in a liberal trade environment that permits the rapid expansion of their mutual trade. Trade liberalization by the industrial countries could proceed over a ten-year horizon without involving excessively large adjustment costs.,even though it would lead to more rapid increases in imports than projected in the present study under the continuation of existing policies. More rapid increases in the'manufactured imports of the industrial countries from the developing countries, in turn, would permit the latter to increase their purchases of manufactured goods,with benefits to all concerned. The newly-industrializing countries, too, would need to reduce their trade barriers in order to improve economic efficiency and to admit imports from countries at lower levels of industrial development. Efficiency consider- ations call for moderate levels of protection in the latter group of countries also, so as to avoid high-cost import substitution and discrimination against the exportation of manufactured goods. j HG3881.5 .W57 W67 no.396 c.2 Balassa, Bela A. Structural change in trade in manufactured goods between