POVERTY THE WORLD BANK 53313 REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise MARCH 2010 · Number 3 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 the sharpest port this process by continuing to liberalize South-South trade contraction ever and the deepest since the Great De- trade, focusing in particular on nontariff measures. pression of the 1930s. Between 2007Q4 and 2009Q2, world merchandise imports fell by a whopping 36 percent. Al- The U.S. Recession Could Hurt the South, though trade levels began a modest recovery in the 2009Q3, Particularly in Oil and Apparel Exports, and they are still far below precrisis highs. Latin America and the Caribbean . . . Rapidly industrializing countries, such as China in the 1990s and 2000s and the "Asian tigers" before it, have relied Dependence on the United States as a destination for devel- heavily on overseas import demand--especially in developed oping country exports varies considerably across countries countries--to fuel growth. But in light of the current need for and sectors. This point is important in light of the global trade global macroeconomic rebalancing, and in particular a durable collapse, since it suggests that impacts may differ consider- contraction of U.S. final consumption, concerns have emerged ably from one country to the next. about reliance on exports for recovery and growth. On a regional basis, low-income countries in Latin Amer- How dependent are developing countries' exports on de- ica and South Asia are the most dependent on high-income mand in developed countries? This note shows that much of countries' import demand. Mexico (an upper-middle-income the recent growth in developing countries' exports was country) and Central America rely heavily on U.S. final de- driven by demand in other developing countries. This means mand. The United States also plays a relatively important role that developing countries may continue to rely on South- in Sub-Saharan Africa's exports due to its close relationship South trade to recover from the crisis. In fact, countries like with Nigeria on oil and to preferences through AGOA (the China are leading the recovery through strong import de- African Growth and Opportunity Act that significantly en- mand. Over the medium term, the development of an "ex- hances U.S. market access for 39 Sub-Saharan African coun- port-led growth v2.0," in which South-South trade plays a tries). The European Union (EU), by contrast, is a relatively more important role, will be essential. Policy makers can sup- more important market for developing Europe and Central 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Asia, and the Middle East and North Africa based on geo- drops have been very strongly correlated across all major graphical and historical ties. Northern markets. More generally, the United States and the EU-25 each ab- This picture is gradually changing. Northern markets, par- sorbed about 20 percent of low-income countries' export ticularly the EU-25, are still important, but low- and middle- growth from 2000 to 2008. They absorbed 15 percent and income countries are increasingly a source of import demand 19 percent respectively of lower-middle-income countries' (figure 2). The BRIC countries (Brazil, Russia, India, and export growth over the same period. It is important to keep China) import share nearly doubled, from 9 percent to 17 these numbers in perspective, however. Of the 20 percent percent, over the 1996­2008 period. Other low- and mid- figure, nearly 10 percent comes from just one sector: petro- dle-income countries increased their share from 8 percent to leum products. Apparel accounts for an additional 4.3 per- 19 percent over the same timeframe. In relative terms, the cent, followed by other products (1.9 percent) and food (1.1 importance of the high-income countries as a direct source percent). Similar dynamics are present in the EU-25 data, of import demand is decreasing, from a total share of 88 per- with the exception of iron and steel imports (2.7 percent ver- cent in 1996 to 69 percent in 2008. This dynamic remains sus 0.4 percent in the United States). More generally, devel- true even though the numbers partly reflect derived demand oping country export growth has been impressive, although from the North channeled through international production with some sectoral differences according to income level (fig- networks. ure 1) (low-income, lower-middle income, and upper-middle Rapid GDP growth is behind a significant proportion of income). All three income groups have seen strong growth the growing import demand in low- and middle-income in exports of food products, and iron and steel. The same is countries, and particularly in the BRICs. A gravity model­ true for apparel in low-income countries, and for electronics based decomposition of trade growth shows that higher in middle-income countries. growth rates in low- and middle-income countries explain 51 percent of export growth in low-income Middle East and . . . But South-South Trade Is Partly Picking North Africa, 42 percent of export growth in low-income Up the Slack Europe and Central Asia, and 21 percent of export growth in low-income Sub-Saharan Africa (figure 3). All of these ef- Prior to the GFC, some proponents of the decoupling hy- fects exceed the combined contribution of GDP growth in pothesis argued that the risk of global contagion was rela- the United States and EU. tively low due to different business cycles in the North and As GDP fell simultaneously in the North and the South the major Southern economies. The idea was that a negative during the GFC, the overall effect on final import demand demand shock in the North could be ridden out thanks to could have been huge. However, this effect was greatly mit- demand in the South. igated--and international trade supported--by effective Recent experience has provided a reality check on these stimulus packages in the major Southern economies. China kinds of ideas. There is still great potential for demand shocks has led the way on this front. China's imports doubled be- in the North to propagate globally via the trade channel. This tween January and September 2009, whereas the United is particularly true for a shock like the GFC, where output States' increased by less than one third (figure 4). The return Figure 1. Exports Grew Fast across All Income Groups for Key Products State of growth in exports attributable to each product group, 1998­206; excludes petroleum products 30 food products apparel electronics 25 chemicals nonmetalic minerals transport equipment 20 textiles iron and steel other products percent wood and paper products machinery 15 10 5 0 low income lower middle income upper middle income Source: Authors' calculations based on UN-COMTRADE data. 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Figure 2. Developing Countries Account for an Increasing Share of tween the two is an important question for policy makers World Trade and researchers, but the evidence suggests that specialization World import shares, 1996­2008 does not dominate until countries are well into the high-in- 100 come group. China's import pattern prior to the crisis reflects the way 80 in which diversification is partly being driven by South-South trade: its share of capital equipment and consumption goods 60 imports from the low- and middle-income countries nearly percent tripled between 2000 and 2008. An example of what is hap- 40 pening on a micro level is that low-income countries are in- creasingly filling the apparel niche previously occupied by 20 middle-income countries; they are shifting away from raw textiles like cotton, towards simple manufactured clothing. 0 Higher middle-income country demand for petroleum, iron, 1996 1998 2000 2002 2004 2006 2008 and steel is also helping low-income countries diversify away year from their traditional reliance on food exports to Northern markets (figure 5). BRIC USA EU-25 Thus, not only are low-income countries succeeding in ex- other LMICs other HICs porting natural resources, but they are also moving into labor- Source: Authors' calculations based on UN-COMTRADE data. intensive manufacturing. One striking feature of the recent Note: BRIC = Brazil, Russia, India, China; LMICs = low- and middle- evolution of developing country exports is that the United income countries; HICs = high-income countries. States does not appear to be a central actor. Rather, income growth in middle-income countries appears to be a driving factor behind changes in the international pattern of special- ization. If internally generated productivity advances are to relatively rapid growth in Brazil, China, and India is clearly largely responsible for these income gains and a "growth an encouraging development for the trading system, and trend decoupling" by LMICs is at play (Canuto 2009), con- could exert a significant stabilizing influence on the interna- cerns about weak consumption growth in the United States tional economy. Middle-Income Countries Are Driving Export Diversification of Low-Income Countries Figure 3. Much of Export Growth in Low-Income Countries Is Driven by GDP Growth in BRICs and Other LMICs The GFC and trade collapse also need to be understood from Export growth in LICs due to GDP growth in a supply-side perspective. The world export share of low- and major import markets, 2000­08 middle-income countries has been increasing more or less in line with their import share. For low-income countries, the Latin America and Caribbean bulk of this growth has been concentrated in a small number East Asia and Pacific of labor- or resource-intensive sectors: petroleum products, food, and iron and steel. Together, these three sectors account South Asia for 76 percent of low-income countries' export growth be- Sub-Saharan Africa tween 1998 and 2006. Developing countries' exports have become more diver- Middle East and North Africa sified over time, driven in part by changing South-South Europe and Central Asia trade patterns. The export diversification index based on the 0 10 20 30 40 50 60 Herfindahl-Hirschman Index (HHI) of concentration shows percent an improvement of around 10 percent for low-income coun- tries between 1997 and 2007. In absolute terms, this change BRIC USA other HICs is equivalent to exports moving from being spread evenly other LMCs EU-25 across four products to seven products. There is a tension be- tween specialization--which is beneficial from a resource al- Source: Authors' calculations based on UN-COMTRADE data. Note: BRIC = Brazil, Russia, India, China; LMICs = low- and middle- location perspective--and diversification that can have income countries; HICs = high-income countries. development and stability benefits. The optimal trade-off be- 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Figure 4. China's Import Growth Is a Driver for Developing What will the new export-led growth look like? It will Countries' Recovery surely pay greater attention to South-South trade than in the Import growth from United States and China to past. This rebalancing is only natural in light of the BRICs' 150 developing and high-income countries rise, and their increasingly important role as a source of im- port demand. It also reflects the likely macroeconomic rebal- 100 ancing in the United States. However, this shift in demand patterns by no means signals a "sudden stop" to export-led 50 growth. It has been taking place gradually over at least the percent last decade, and will probably intensify in coming years.1 0 Policy makers can facilitate South-South export-led growth. Protection rates in the South are generally high com- ­50 pared with those in the North. For instance, low-income Jul. 2008­ Feb. 2009­ Jul. 2008­ Jan. 2009­ countries face an overall level of protection of nearly 15 per- ­100 Feb. 2009 Sep. 2009 Jan. 2009 Sep. 2009 cent when they export to upper-middle-income countries, United States China compared with 9 percent for high-income markets. South- South preferential tariff schemes--if fully implemented-- developing countries high-income countries would only be one part of the solution. Nontariff measures Source: Authors' calculations based on International Trade Commission for account for nearly two thirds of the protection rate faced by the U.S. and Chinese Customs data. low-income exporters to upper-middle-income markets. So Note: BRIC = Brazil, Russia, India, China; LMICs = low- and middle- from an export-led growth perspective, liberalizing nontariff income countries; HICs = high-income countries. measures should probably be a higher priority than extending tariff preferences. and other developed countries undermining the viability of export led development may be exaggerated. Note Moving toward Export-Led Growth v2.0 1. More reliance on South-South trade tends also to bring implications for the composition of foreign demand for de- China, the Asian tigers, and even post-war Japan pursued veloping countries. See Kaplinsky and Farooki (2010). broadly similar approaches to export-led growth. Outward orientation was key, even though the precise degree of open- About the Authors ness versus protection remains subject to debate. As the global economy stabilizes post-GFC, concerns have remained Otaviano Canuto is the Vice President and Head of the Poverty about limits to the extent to which other developing coun- Reduction and Economic Management (PREM) Network, tries can pursue the same export-led growth strategies as be- Mona Haddad is Sector Manager of the Trade Department fore. One such concern questions the ability of the United (PREM), and Gordon Hanson is Director of Center on Pacific States--where the GFC started--to remain a major import Economies in the School of International Relations and Pacific market for developing countries. But as this Note has argued, Studies at the University of California, San Diego. there remains plenty of scope for leveraging international in- tegration as an engine of growth. Over the coming years, a new type of export-led growth strategy is likely to emerge. 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Figure 5. Lower-Middle-Income Countries Offer Growing Diversification Opportunities for Developing Countries State of growth in exports attributable to each product group, 1998­206; excludes petroleum products food products wood and paper machinery petroleum apparel electronics chemicals nonmetallic minerals transport equipment textiles iron and steel other products LICs to LMICs destination LICs to HICs LMICs to LMICs LMICs to HICs ­10 0 10 20 30 40 50 60 percent Source: Authors' calculations based on UN-COMTRADE data. Note: LICs = low-income countries; LMICs = low- and middle-income countries; HICs = high-income countries. References Anderson, James E., and Eric van Wincoop. 2004. "Trade Costs." Journal of Kaplinsky, R., and M. Farooki. 2010. 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Consequences of the 2008 Crisis: International Linkages and American Hausmann, Ricardo, Jason Hwang, and Dani Rodrik. 2007. "What You Ex- Exposure." Working Paper No. 15358, NBER, Cambridge, MA. port Matters." Journal of Economic Growth 12 (1): 1­25. Imbs, Jean, and Romain Wacziarg. 2003. "Stages of Diversification." Ameri- can Economic Review 93 (1): 63­86. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. It is produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at www.worldbank.org/economicpremise.