The World Bank MARCH PREMnotes 2010 NUMBER 148 90185 TRADE Export-led Growth v2.0 Otaviano Canuto, Mona Haddad, and Gordon Hanson The U.S. recession could hurt the South, particularly in oil and apparel exports, and Latin America and the Caribbean... But South-South trade is partly picking up the slack. Middle-income countries are driving export diversification of low-income countries. Developing countries may be moving toward a new version of export-led growth. The Global Financial Crisis (GFC) has led to role, will be essential. Policy makers can sup- the sharpest trade contraction ever and the port this process by continuing to liberalize deepest since the Great Depression of the South-South trade, focusing in particular on 1930s. Between 2007Q4 and 2009Q2, world nontariff measures. merchandise imports fell by a whopping 36 percent. Although trade levels began a mod- The U.S. recession could hurt est recovery in the 2009Q3, they are still far the South, particularly in oil below pre-crisis highs. and apparel exports, and Latin Rapidly industrializing countries, such America and the Caribbean… as China in the 1990s and 2000s and the Dependence on the United States as a desti- “Asian tigers” before it, have relied heavily nation for developing country exports varies on overseas import demand—especially in considerably across countries and sectors. developed countries—to fuel growth. But in This point is important in light of the global light of the current need for global macro- trade collapse, since it suggests that impacts economic rebalancing, and in particular a may differ considerably from one country to the next. durable contraction of U.S. final consump- On a regional basis, low-income coun- tion, concerns have emerged about reliance tries in Latin America and South Asia are the on exports for recovery and growth. most dependent on high-income countries’ How dependent are developing coun- import demand. Mexico—an upper-middle- tries’ exports on demand in developed income country—and Central America rely countries? This note shows that much of heavily on U.S. final demand. The United the recent growth in developing countries’ States also plays a relatively important role exports was driven by demand in other in Sub-Saharan Africa’s exports due to its developing countries. This means that de- close relationship with Nigeria on oil and veloping countries may continue to rely on to preferences through AGOA (the African South-South trade to recover from the crisis. Growth and Opportunity Act that signifi- In fact, countries like China are leading the cantly enhances U.S. market access for 39 recovery through strong import demand. Sub-Saharan African countries). The Euro- Over the medium term, the development pean Union (EU), by contrast, is a relatively of an “export-led growth v2.0,” in which more important market for developing Eu- South-South trade plays a more important rope and Central Asia, and the Middle East FROM THE POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK and North Africa based on geographical and growth in exports of food products, and historical ties. iron and steel. The same is true for apparel More generally, the United States and in low-income countries, and for electronics the EU-25 each absorbed about 20 percent in middle-income countries. of low-income countries’ export growth from 2000 to 2008. They absorbed 15 percent … But South-South trade is and 19 percent respectively of lower-middle- partly picking up the slack income countries’ export growth over the Prior to the GFC, some proponents of the same period. It is important to keep these decoupling hypothesis argued that the risk of global contagion was relatively low due to numbers in perspective, however. Of the different business cycles in the North and 20 percent figure, nearly 10 percent comes the major Southern economies. The idea was from just one sector: petroleum products. that a negative demand shock in the North Apparel accounts for an additional 4.3 could be ridden out thanks to demand in percent, followed by other products (1.9 the South. percent) and food (1.1 percent). Similar Recent experience has provided a reality dynamics are present in the EU-25 data, check on these kinds of ideas. There is still with the exception of iron and steel imports great potential for demand shocks in the (2.7 percent versus 0.4 percent in the United North to propagate globally via the trade States). More generally, developing country channel. This is particularly true for a shock export growth has been impressive, although like the GFC, where output drops have been with some sectoral differences according to very strongly correlated across all major income level (figure 1) (low-income, lower- Northern markets. middle income, and upper-middle income). This picture is gradually changing. All three income groups have seen strong Northern markets, particularly the EU-25, Figure 1: Exports grew fast across all income groups for key products Share of growth in exports attributable to each product group, 1998-2006; excludes petroleum products 30 Food products Apparel Electronics 25 Chemicals Non-metallic minerals Transport equipment Textiles Iron & steel Other products 20 Wood & paper products Machinery Percent 15 10 5 0 Low income Lower-middle Upper-middle income income Source: Authors’ calculations based on UN-COMTRADE data. 2 PREMNOTE FEBRUARY 2010 Figure 2: Developing countries account for an increasing share of world trade World import shares (1996–2008) 100 BRICs 80 Other LMICs Percent 60 USA 40 Other HICs 20 EU 25 0 1996 1998 2000 2002 2004 2006 2008 Year Source: Authors’ calculations based on UN-COMTRADE data. Note: LMICs=low and middle income countries; HICs=high-income countries. are still important, but low- and middle- Rapid GDP growth is behind a signifi- income countries are increasingly a source of cant proportion of the growing import de- import demand (figure 2). The BRIC coun- mand in low- and middle-income countries, tries (Brazil, Russia, India, and China) import and particularly in the BRICs. A gravity share nearly doubled, from 9 percent to 17 model–based decomposition of trade growth percent, over the 1996–2008 period. Other shows that higher growth rates in low- and low- and middle-income countries increased middle-income countries explain 51 percent their share from 8 percent to 19 percent over of export growth in low-income Middle East the same timeframe. In relative terms, the and North Africa, 42 percent of export importance of the high-income countries as growth in low-income Europe and Central a direct source of import demand is decreas- Asia, and 21 percent of export growth in ing, from a total share of 88 percent in 1996 low-income Sub-Saharan Africa (figure 3). to 69 percent in 2008. This dynamic remains All of these effects exceed the combined true even though the numbers partly reflect contribution of GDP growth in the United derived demand from the North channeled States and EU. through international production networks. Figure 3: Much of export growth in low-income countries is driven by GDP growth in BRICs and other LMICs Export growth in LICs due to GDP growth in major import markets, 2000–08 Latin America & Caribbean BRICs East Asia & Pacific Other LMICs South Asia USA Sub-Saharan Africa EU25 Middle East & North Africa Other HICs Europe & Central Asia 0 10 20 30 40 50 60 Percent Source: Authors’ calculations based on UN-COMTRADE data. Note: BRIC=Brazil, Russia, India, China; LMICs=low and middle income countries; HICs=high-income countries. FEBRUARY 2010 PREMNOTE 3 Figure 4: China’s import growth is a driver for developing countries’ recovery Import growth from United States and China to developing and high-income countries 150 Developing countries 100 High-income countries Percent 50 0 –50 United States China –100 Jul. 08–Feb. 09 Feb. 09–Sep. 09 Jul. 08–Jan. 09 Jan. 09–Sep. 09 Source: Authors’ calculations based on International Trade Commission for the US and Chinese Customs data. Note: LMICs=low and middle income countries; HICs=high-income countries. As GDP fell simultaneously in the North 76 percent of low-income countries’ export and the South during the GFC, the overall growth between 1998 and 2006. effect on final import demand could have Developing countries’ exports have been huge. However, this effect was greatly become more diversified over time, driven mitigated—and international trade sup- in part by changing South-South trade pat- ported—by effective stimulus packages in terns. The export diversification index based the major Southern economies. China has on the Herfindahl-Hirschman Index (HHI) led the way on this front. China’s imports of concentration shows an improvement of doubled between January and September around 10 percent for low-income countries 2009, whereas the United States’ increased between 1997 and 2007. In absolute terms, by less than one third (figure 4). The return this change is equivalent to exports moving to relatively rapid growth in Brazil, China, from being spread evenly across four prod- and India is clearly an encouraging devel- ucts to seven products. There is a tension opment for the trading system, and could between specialization—which is beneficial exert a significant stabilizing influence on from a resource allocation perspective—and the international economy. diversification that can have development and stability benefits. The optimal trade-off Middle-income countries are between the two is an important question driving export diversification for policy makers and researchers, but the of low-income countries evidence suggests that specialization does The GFC and trade collapse also need to be not dominate until countries are well into understood from a supply-side perspective. the high-income group. The world export share of low- and middle- China’s import pattern prior to the crisis income countries has been increasing more reflects the way in which diversification is or less in line with their import share. For partly being driven by South-South trade: its low-income countries, the bulk of this growth share of capital equipment and consumption has been concentrated in a small number of labor- or resource-intensive sectors: pe- goods imports from the low- and middle- troleum products, food, and iron and steel. income countries nearly tripled between Together, these three sectors account for 2000 and 2008. An example of what is hap- 4 PREMNOTE FEBRUARY 2010 Figure 5: Lower-middle-income countries offer growing diversification opportunities for developing countries Export growth by sector and destination, 2000–2008 Other products 60 Transport equipment Electronics 50 Machinery Iron & steel 40 Non-metallic minerals 30 Apparel Percent Wood & paper 20 Textiles Chemicals 10 Petroleum Food products 0 LICs to LICs to LMICs to LMICs to –10 LMICs HICs LMICs HICs Source: Authors’ calculations based on UN-COMTRADE data. Note: LICs=low-income countries; LMICs=low and middle income countries; HICs=high-income countries. pening on a micro level is that low-income undermining the viability of export led de- countries are increasingly filling the apparel velopment may be exaggerated. niche previously occupied by middle-income countries; they are shifting away from raw Moving toward export- textiles like cotton, towards simple manu- led growth v2.0 factured clothing. Higher middle-income China, the Asian tigers, and even post-war Japan pursued broadly similar approaches country demand for petroleum, iron, and to export-led growth. Outward orientation steel is also helping low-income countries was key, even though the precise degree of diversify away from their traditional reli- openness versus protection remains subject ance on food exports to Northern markets to debate. As the global economy stabilizes (figure 5). post-GFC, concerns have remained about Thus, not only are low-income countries limits to the extent to which other develop- succeeding in exporting natural resources, ing countries can pursue the same export- but they are also moving into labor-intensive led growth strategies as before. One such manufacturing. One striking feature of the concern questions the ability of the United recent evolution of developing country States—where the GFC started—to remain exports is that the United States does not a major import market for developing appear to be a central actor. Rather, income countries. But as this Note has argued, there growth in middle-income countries appears remains plenty of scope for leveraging inter- to be a driving factor behind changes in the national integration as an engine of growth. Over the coming years, a new type of export- international pattern of specialization. If led growth strategy is likely to emerge. internally generated productivity advances What will the new export-led growth are largely responsible for these income look like? It will surely pay greater attention gains and a “growth trend decoupling” by to South-South trade than in the past. This LMICs is at play (Canuto, 2009), concerns rebalancing is only natural in light of the about weak consumption growth in the BRICs’ rise, and their increasingly impor- United States and other developed countries tant role as a source of import demand. It FEBRUARY 2010 PREMNOTE 5 also reflects the likely macroeconomic rebal- Feenstra, Robert C. 2004. Advanced International ancing in the United States. However, this Trade. Princeton, NJ: Princeton University Press. shift in demand patterns by no means sig- Feenstra, Robert C., and Gordon H. Hanson. nals a “sudden stop” to export-led growth. It 2003. “Global Production and Inequality: has been taking place gradually over at least A Survey of Trade and Wages.” In E. Kwan the last decade, and will probably intensify Choi and James Harrigan, eds., Handbook of in coming years.1 International Trade. Blackwell, pp. 146–185. Policy makers can facilitate South-South Hausmann, Ricardo, Jason Hwang, and Dani export-led growth. Protection rates in the Rodrik. 2007. “What You Export Matters.” Journal of Economic Growth 12(1): 1–25. South are generally high compared with Imbs, Jean, and Romain Wacziarg. 2003. “Stages those in the North. For instance, low-income of Diversification.” American Economic Review countries face an overall level of protection 93(1): 63–86. of nearly 15 percent when they export to Kaplinsky, R., and M. Farooki. 2010. “What Are upper-middle-income countries, compared the Implications for Global Value Chains with 9 percent for high-income markets. when the Market Shifts from the North to the South?” Policy Research Working Paper 5205. South-South preferential tariff schemes—if World Bank, Washington, DC. fully implemented—would only be one part Leamer, Edward E. 1984. Sources of Comparative of the solution. Nontariff measures account Advantage. Cambridge, MA: MIT Press. for nearly two thirds of the protection rate Rodrik, Dani. 2006. “What’s So Special about faced by low-income exporters to upper- China’s Exports?” China & World Economy middle-income markets. So from an export- 14(5): 1–19. led growth perspective, liberalizing nontariff ———. 2009. “Growth after the Crisis.” Mimeo, Harvard University. measures should probably be a higher prior- Rose, Andrew K., and Mark M. Spiegel. 2009. ity than extending tariff preferences. “Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and Note American Exposure.” NBER Working Paper 1. More reliance on South-South trade tends No. 15358. NBER, Cambridge, MA. also to bring implications for the composition of foreign demand for developing countries. See About the Authors Kaplinsky and Farooki (2010). Otaviano Canuto is the Vice President and Head of the Poverty Reduction and Economic Management References (PREM) Network, Mona Haddad is Sector Manager Anderson, James E., and Eric van Wincoop. 2004. of the Trade Department (PREM), and Gordon Han- “Trade Costs.” Journal of Economic Literature son is Director of Center on Pacific Economies in the 42(3): 691–751. School of International Relations and Pacific Studies Canuto, O. 2009. “Decoupling, Reverse Coupling at the University of California, San Diego. and All That Jazz.” http://blogs.worldbank. org/growth, 09/01/2009. World Bank, Wash- ington, DC. This note series is intended to summarize good practices and key policy findings on PREM-related topics. The views expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank. PREMnotes are widely distributed to Bank staff and are also available on the PREM Web site (http://www.worldbank.org/prem). 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