WT/COMTD/W/15
16 August 1996
Committee on Trade and Development

Participation of developing countries in World Trade: Overview of major trends and underlying factors
Note by the Secretariat

Summary and conclusions

This paper provides an overview of major trends in the participation of developing countries in world trade over the past two decades, followed by a brief examination of some of the key factors that were associated with trends for different groups of developing countries - in particular, the sharply different trade performance of most developing countries in Asia (very positive) and that of a number of the poorest developing countries (very disappointing).

 Part I on “Major Trends in Developing Countries' Trade Performance” documents a number of key developments in world merchandise trade:See footnote 1

    *    The share of manufactures in world merchandise trade fluctuated in the range of 55-60 per cent between 1973 and 1985, then increased sharply, reaching 75 per cent by 1995.

    *    After peaking at 28 per cent in 1980 (mainly due to exports of fuels), the share of developing countries in world merchandise trade declined until the second half of the 1980s, after which it resumed growing as petroleum prices bottomed out and the developing countries continued to expand their share of world trade in manufactures.

    *    Since 1980, the share of developing countries in world exports of mining products (mainly fuels) has fallen by a quarter, while their share of world trade in manufactures has doubled from 10 to 20 per cent.

    *    As a group, the Asian developing countries have out-performed the other developing countries by a wide margin in terms of their share of world trade, their share of FDI flows to developing countries, and their ratio of trade-to-GDP.

    *    A comparison of 25 developing countries whose export growth between 1985 and 1994 exceeded the world average, and a group of 35 developing countries whose exports in 1994 were below the 1985 level, shows a high correlation between export performance and the share of manufactured goods in merchandise exports.

    *    A comparison of the export performance of the least developed countries (LLDCs) since 1980 with that of all developing countries confirms not only a strong correlation between export performance and the share of manufactures in exports, but a similar positive correlation between exports and both the share of investment in GDP and the share of manufactures in GDP. (This point and the preceding one are supported by the results of a recent World Bank study summarized in Box 1.)

Part II on “Factors Underlying the Varied Trade Performances of Developing Countries” begins with a brief review of selected key external factors that are generally believed to play a role in explaining the variation in trade performance across groups in the past two decades:

Access to foreign markets. While the average level of protection in the industrial countries is relatively low, there are serious barriers to entry in certain sectors of particular interest to developing countries - including agriculture, textiles, clothing and fish and fish products. Developing countries have also expressed concern about preference erosion, tariff escalation and the risks in being left out of the proliferating free trade areas and customs unions. While these considerations clearly are relevant to understanding the trade performance of developing countries as a group, they are less helpful in explaining why some developing countries have experienced a dynamic growth of exports while others have seen their exports stagnate or even decline; indeed, in some instances the countries with a poor export performance had better access to industrial country markets than those countries whose exports expanded rapidly.

Capital inflows. The data document the well-known trend for official development aid to represent a much smaller share, and private capital flows a much larger share, of capital flows to developing countries.See footnote 2 While the share of developing countries in total world FDI flows more than doubled from 15 per cent in 1986-90 to more than 35 per cent in 1994, the share going to the LLDCs remained stagnant at an insignificant 0.4 per cent. Indeed, ten developing countries received nearly 80 per cent of the FDI going to developing countries.

Other external factors. Due to their typically smaller size and less diversified economic structure, many developing counties are more strongly affected by, and more vulnerable to, changes in the international environment than the industrial countries. Over 1984-93, the IMF estimates that fluctuations in world interest rates on their outstanding debts, cyclical changes in industrial country demand for their exports, and declines in primary commodity prices, combined to reduce the average growth rate of those developing countries with the lowest growth performance by three-quarters of one percentage point. Mention should be made of one factor that straddles the external/domestic distinction, namely the debt burden of the LLDCs. There is an emerging consensus on the need to address the LLDCs' debt burden by new methods and approaches, and the IMF and the World Bank are considering a plan that would bring the level of debt down to a manageable level for LLDCs pursuing sound economic policies.

Next, the paper considers domestic factors that are commonly believed to play a role in explanations of differences across countries in the degree of participation in world trade:

Trade policies and participation in the WTO. For the most part, the countries which have experienced strong export growth have lower levels of import protection than countries with stagnant or declining exports. Looking at trade regimes more broadly, developing countries which are WTO members will benefit from the new rules and disciplines agreed to in the Uruguay Round, as regards both the security of their access to the markets of trading partners, and the transparency and predictability of their own trade regimes. Commitments in their goods and services schedules also help lock-in reforms in the trade regime, thereby adding to the credibility of the reforms in the eyes of foreign and domestic investors. However, for developing countries - and especially for the LLDCs - to take greater advantage of the benefits to be drawn from the multilateral trading system, there needs to be an expansion of their human resources and institutional infrastructure in the trade policy area.

Export concentration. In most of the least developed and other low-income countries, primary products - incorporating low levels of processing - continue to account for the bulk of both national production and exports. Given the changing structure of world trade described at the beginning of this paper, it is not surprising that most of the countries that have participated little or not at all in global integration are primary commodity-dependent countries with relatively small and highly inefficient manufacturing sectors. However, a recent World Bank study calls into question the conventional wisdom that “commodity dependence” is always bad for economic growth, concluding that “countries can be both commodity dependent and have high export and income growth”.See footnote 3

Macroeconomic policies. Countries which recorded above-average export growth and ability to attract FDI reported median inflation rates well below those in the less successful performers, along with considerably less real exchange rate volatility. The less successful groups, moreover, tended to have higher budget deficits, more volatile deficits, and deficits that declined at a slower rate (those in the poorest performing group actually expanded their deficits during the 1980s). The experience of different countries' reform efforts suggest that stable macroeconomic policies, structural reforms, and outward-oriented trade and investment regimes go a long way to provide economic stability and thereby lower the risk premium attached to investment in LLDCs - a precondition to attracting foreign investors. In those countries which have persisted in economic reforms, the positive results are becoming apparent.

Other domestic factors. Inadequate and inefficient road/rail/air transport facilities, storage facilities and telecommunications have also acted to limit the supply-side response of developing countries, with the problems being especially serious in the LLDCs. At the institutional level, many developing countries, particularly LLDCs, lack a transparent legal and regulatory framework, including company and bankruptcy laws and investment codes. In most LLDCs, the private sector is constrained not only by shortages of capital, but also of entrepreneurial, managerial, technical and marketing skills. Efforts to enhance export performance will require not only technical assistance aimed at strengthening the institutional infrastructure for trade and trade policy, but also initiatives aimed at enhancing the outward orientation of the private sector. Enterprise-oriented technical cooperation programmes can underpin efforts to improve international marketing and business development.

Interaction among external and domestic factors. In reality, the many external and domestic factors that determine a country's export performance - and more generally the pace of its integration into the global economy  - do not operate independently. There is a complex interaction, both positive and negative; a factor in one category can interact with others in the category, and developments in external factors can improve or worsen the effects of domestic factors and vice versa.

I.    Major trends in developing countries' Trade Performance

The changing structure of world trade

Over the past two decades developments in the three broad product categories of world merchandise trade have differed sharply. While the value of exports of mining products (mainly fuels) and agricultural products rose between four and five times, those of manufactured goods increased nine times (Chart 1.A). Most of these differences in long term developments can be attributed to volume rather than price changes. On a volume basis, manufactured exports more than tripled, in contrast to gains of 70 per cent and 25 per cent, respectively, for agricultural products and mining products (Chart 2.A). Nominal prices for mining products as a group in 1994 stood about 3½ times above their level in 1973, while those of manufactures and agricultural products were up 2.8 and 2.2 times, respectively (Chart 2.B).See footnote 4

After fluctuating in the range of 55 to 60 per cent between 1973 and 1985, the share of manufactures in merchandise trade had increased sharply to around 78 per cent by 1995 (Chart 1.B). The remaining 22 per cent is divided about equally between agriculture and mining. Agricultural products experienced a slow but steady erosion of their share over the two decades, from more than 20 per cent of world trade in 1973 to somewhat more than 11 per cent in 1995. The share of mining products - heavily influenced by oil prices - peaked in 1980 and dropped sharply thereafter. In 1995, the share of mining products in world merchandise trade was around 11 per cent, compared with 17 per cent in 1973 and 28 per cent in 1980.

Trade performance of the aggregate of developing countries

Taking into account the very large share of primary products in developing countries' exports in the 1970s (more than three-quarters), it is not surprising that the share of developing countries (as a group) in world merchandise trade peaked in the same year as the share of mining products did, namely 1980 (Table 1). Following the historical peak share of 28 per cent that year, the share of the developing countries in world merchandise trade declined in line with oil prices over the first half of the 1980s. Once oil prices bottomed out in 1986, the share of the developing countries started to rise again, largely due to their growing share of world trade in manufactured goods.

Table 1
Share of developing countries in world merchandise exports, 1973-1995
(Percentage based on value figures)

Note:    (1) In this table, China is not included in developing country group.

    (2) 1995 figures are provisional.

As is evident from Table 2, the product composition of developing countries' merchandise exports has changed dramatically in the past decade; particularly as regards manufactures (close to a doubling of the share to nearly two-thirds) and mining products (a decline in the share of more than half to less than one-quarter). The strong gains in manufactures brought the share of developing countries in world exports of manufactures to 20 per cent last year, double the 1980 share and nearly triple the 1973 share.

Table 2
Product structure of developing countries merchandise exports, 1973-95
(Percentage based on value figures)

    aBreak in time series can affect comparison between 1985 and 1990.

    bIncluding unspecified products.

Note:           (1) In this table, China is not included in developing country group.

        (2) 1995 figures are provisional.

Trade performance of developing countries by region

Trends in their respective shares in world merchandise trade over the past decade varied among the regions. While the developing countries in each of the major regions recorded export growth, as can be seen from Chart 3, the developing countries in Asia increased their market share dramatically, while Latin America's share stagnated and those of Africa and the Middle East declined. As a result, the shares of Africa and the Middle East in world merchandise trade are now below that of China.

There is a relatively close link between this trade performance and the share of manufactures in the merchandise exports of the respective regions. Figures in Table 3 for developing Asia (excluding China), China, and the group of "other developing countries" reveal a highly different product structure of merchandise exports. While manufactures account for more than 80 per cent of total merchandise exports for China and other developing countries in Asia, the corresponding share for the group of "other developing countries" is less than half that figure. Developing Asia and China have high shares not only in manufactures but also in many of the fastest growing product categories, such as office and telecom equipment, clothing and other consumer goods (such as footwear and toys). In 1994, the group of "other developing countries" exported more mining products than manufactured goods, and the share of agricultural products in their exports was also noticeably higher than for developing Asia and China.

Table 3
Global trade and the product structure of selected developing areas, 1985-94

    *Excluding China.

Another factor which distinguishes developing Asia and China on one hand, and all other developing countries combined on the other, is their respective participation in the globalization process. Data on the evolution of trade-to-GDP ratios, and on inflows of foreign direct investment (FDI), are useful, albeit rough, indicators of the extent of integration into the global economy. As regards the ratio of trade in goods and services to GDP, the contrast between developing Asia (including China) and other developing countries is evident in Chart 4. For the Asian developing countries a dramatic doubling in their trade-to-GDP ratio can be observed for the 1974 to 1994 period; if China is excluded from developing Asia, the trade-to-GDP ratio is significantly higher; however, the trend increase in the ratio is very similar. The "other developing countries" as a group, in contrast, have trade-to-GDP ratios in 1994 which are - despite the recovery since 1986 - not much different from the 1974 levels.See footnote 5

Along with a more favourable trade performance over the past decade, the developing countries in Asia also recorded a much stronger investment performance. Most South East Asian countries reported ratios of domestic fixed investment to GDP of around 30 per cent during the 1985-1994 period, while those of Latin America and Africa fluctuated around 20 per cent. At the same time, the former countries were more open and attractive to foreign direct investment. As is evident from Chart 5, developing Asia and China attracted most of the FDI flows to developing countries. Inflows into China alone are estimated to be roughly equivalent to the FDI inflows to Latin America, while Africa and the Middle East attracted only very small shares of the FDI flows to developing countries.

A closer look at the strong and weak trade performances

In order to examine trade performances on a more disaggregated level, two partially overlapping comparisons are developed briefly below (a third comparison is given in Box 1 on page 14). The first involves comparing a group of countries that recorded above average export growth during 1985-94, with a group of countries that recorded negative export growth over that same period (see Annex for the composition of the two groups).

Among the 25 countries that recorded above average growth of merchandise exports during 1985-94, 15 reported "steady" above average growth (that is, for both the sub-periods 1985-90 and 1990-94). A large majority of these steady strong performers - 12 out of 15 countries - export mainly manufactures (the share of manufactures in their respective merchandise exports ranged from 70 to 97 per cent in 1994). Half of the remaining ten strong (but not "steady" exporters) also export principally manufactured goods. As regards the 35 countries whose exports in 1994 were below the 1985 level, only four export principally manufactures. A review of those four traders reveals that very particular factors explain their presence among the poor performers.See footnote 6

Although the comparison between the poor and strong performers indicates a correlation between the share of manufactures in total merchandise exports and the growth of total merchandise exports, there are at least two important examples where strong export growth coincided with a moderate share of manufactures in total merchandise trade. In the case of Viet Nam, the high and steady export growth (from a very low level of exports in 1985) is linked not only to the rapid rise in exports of manufactures, but also to the development of oil fields which led to significant exports of crude oil, and to strong exports of food (mainly rice). The rise in exports of crude oil and manufactured goods can be partly attributed to a sharp rise in FDI inflows, especially in the 1990's.

Chile is another country with a strong export performance and a very low share of manufactures (traditionally defined) in total exports (17 per cent). The success of Chile is linked to the successful diversification into "new" (sometimes highly processed) agricultural products and an above average performance for its largest single export product, namely copper. Even though all copper exporters benefited from the fact that copper prices increased faster than the prices of other commodities, Chile increased its share in global copper output from 16 per cent in 1985 to 26 per cent in 1993 (while at the same time, the share of copper in Chile's total merchandise exports declined from 47 to 38 per cent). Other dynamic exports included fish, shell fish, fruits, wine and wood pulp. Important elements in the export expansion of both copper and agricultural products were the wide ranging liberalization and privatization programs and the associated inflow of FDI, which gives Chile one of the largest stocks of FDI per capita in Latin America.

Much of the concern about “marginalization” centres on the group of least developed countries (LLDCs). The source of this concern is readily apparent from the figures in Table 4, as is the motivation behind the search for lessons in the experience of East Asian economies. Low trade-to-GDP ratios, low investment and small shares of manufacturing in GDP and exports, are common traits of the “typical” LLDC.See footnote 7 It should be added that Bangladesh - by far the largest country among the LLDCs - is a partial exception. With a high share of manufactures in its total merchandise exports (83 per cent in 1994), it figured among those traders which expanded their exports faster than world trade through 1985-94.

The wide range of experience among developing countries is also examined in a recent World Bank report, using some of the same variables mentioned above (such as the share of manufactures in exports).See footnote 8 Box 1 reproduces the principal conclusions of that analysis, the latter two of which anticipate points made later in this paper.

Table 4
Comparison of trade performance and other selected indicators for different groups of developing countries, 1980-94

aDeveloping country figures include China.

bWTO Secretariat estimates. The six traders are Chinese Taipei, Hong Kong, Republic of Korea, Malaysia, Singapore and Thailand. Hong Kong re-exports are excluded.

Source:    UNCTAD, Handbook of International Trade and Development Statistics, 1994; and The Least Developed Countries, 1996 Report, Annex II, Basic Data on the Least Developed Countries.

Commercial Services

It appears that the share of developing countries in world exports and imports of commercial services increased between 1987 and 1994 (however, the share remains somewhat below the share of developing countries in world merchandise trade).See footnote 9 This is entirely due to the performance of the Asian developing countries, as other regions reported a stagnating or declining share in world services trade. As regards the three major categories of commercial services - transport, travel and other business services - the available data suggest that the developing countries as a group have increased their market shares in all three categories since 1987.

II. Factors underlying the varied Trade performances of Developing Countries

For ease of exposition, this part is divided into "external factors" and "domestic factors". The discussion is limited to certain key factors in each category (any attempt at a complete listing would be well beyond the scope of this overview paper). A third section briefly highlights the fact that factors in one category often interact in important ways, both with one another and with factors in the other category.

(1)    External factors

Access to foreign markets    

Although the average level of tariff protection on non-agricultural imports into the industrial countries is relatively low - once the Uruguay Round reductions are fully implemented they will average 3.8 per cent - import barriers represent a serious obstacle in specific sectors.See footnote 10 Agriculture has been highly protected and exports frequently subsidized, and special provisions permitting discriminatory quotas on textiles and clothing, in place since the beginning of the 1960s, were expanded with the introduction of the Multifibre Arrangement (MFA) in 1974. In the area of manufactures more generally, there was a proliferation of so-called "grey area" measures (VERs, OMAs and so forth) from the late 1960s until the beginning of the Uruguay Round, with an above-average incidence on labour-intensive exports from developing countries.See footnote 11 More recently, anti-dumping actions and countervailing duties have increasingly been used to restrict imports.See footnote 12

There are post-Uruguay Round tariff peaks for some products of critical interest to developing countries, including textiles, clothing, and fish and fish products. As a result, the average reduction in tariffs for industrial country imports from developing countries other than the LLDCs (37 per cent) is lower than the average reduction in applied tariffs for imports from all countries (40 per cent), while the average reduction on imports from LLDCs was even smaller (25 per cent). On the other hand, it should be noted that the below-average reductions in tariffs on textiles and clothing do not take into account the increase in market access that will result from the phase-out of MFA-related restrictions. At the same time, an important feature of the tariff commitments made by the developed countries in the Uruguay Round is a substantial increase in bound duty-free treatment. Once the agreed tariff reductions have been fully implemented, the proportion of merchandise imports entering duty-free will increase from just over 10 to almost 40 per cent for the United States, from almost 24 to almost 38 per cent for the European Union, and from 35 to 71 per cent for Japan.

While the MFA was a major distortion of world trade which affected many developing countries' participation in world trade in textiles and clothing, individual countries have been affected in very different ways by the MFA, depending on their comparative advantage in these products. On the one hand, there are the exporters of textiles and clothing which currently have a strong comparative advantage and whose market access has been tightly restricted, and which therefore will benefit from the Uruguay Round agreement to abolish MFA-related restrictions.See footnote 13 On the other hand, two groups of exporters may suffer transitional adjustment costs as a result of its abolition. These are, first, those countries with large quotas based on a previous comparative advantage that has been eroded by rising real wages and/or the emergence of even lower-cost suppliers among the new-comers (in those cases in which existing quotas are not fully utilized, much of the transitional adjustment to the reduced competitiveness presumably has already occurred); and second, those that may have been induced by MFA restrictions on other suppliers to enter the production of textiles and clothing without possessing a true comparative advantage in the production of these goods.

Developing countries, in particular the LLDCs, are concerned about the erosion of the margins of preference they enjoyed under the GSP and Lomé Convention. The tariff reductions agreed to in the Tokyo Round (an average cut of one-third in industrial country tariffs on manufactures) reduced preference margins, which in turn are being further reduced as the tariff reductions agreed to in the Uruguay Round (a further 40 per cent reduction) are implemented.See footnote 14 The impact of preference erosion, of course, depends in part on the rate of utilization of the preferences. As studies by the UNCTAD and others have pointed out, the utilization of existing preferential arrangements -  and thus their trade promoting effects - have been limited for various reasons.

Half of the European Union's imports from Africa are petroleum and other fuels that enter under MFN rates bound at zero, and three-quarters of the imports of industrial products enter duty free or under very low MFN tariffs.See footnote 15 In the case of GSP, there are limits on product coverage and limits on the extent of duty free entry. Restrictive rules of origin and an implicit lack of permanence are characteristics of virtually all preference schemes. At the same time, the impact of the Uruguay Round on Lomé Convention preference margins on agricultural products such as sugar, cut flowers, vegetables and fruits, and beef, may also be relatively limited. Moreover, for agricultural products the initial level of preferences granted was higher and rules of origin are less of a problem than for manufactured products, so that the rate of utilization of preferences granted for agricultural products is generally higher than for manufactured products.

The bias in the structure of many developing countries' exports towards unprocessed products has often been related to the structure of tariffs and other trade barriers in major markets, in particular their tendency to increase or "escalate" with the level of a product's processing. Substantial reductions in tariff escalation in developed country markets was a major objective of developing countries in the Uruguay Round, and this goal was to a degree achieved. In Canada, there will now be little or no tariff escalation affecting paper, rubber, zinc, and tin. In the European Union, the same holds true for paper and tin, while the absolute level of escalation for tobacco products has been greatly reduced. The extent of tariff escalation for U.S. imports will be eliminated or greatly reduced for several products, including paper, jute, nickel, lead, and tobacco. Nevertheless, tariff escalation continues to be a feature of developed country tariff structures whose reduction or elimination will no doubt remain an important developing country goal.See footnote 16

The LLDCs in particular have also been concerned by the growing importance of free trade areas and customs unions in recent years, which now cover virtually all their major export markets, including Europe and North America. Since most of the major regional trading arrangements do not include LLDCs, they are concerned that these arrangements will result in a loss of preferences vis-à-vis third countries and, more generally, increase their degree of marginalization. While the LLDCs and other third countries might benefit from the trade-creating effects of the regional arrangements - and from the stimulus to growth and thus import demand in the member countries - they might incur costs as a consequence of the trade-diverting effects (and perhaps also investment diversion). While the importance of the trade-diverting effects is difficult to assess, there are reasons to think that actual diversion effects on overall LLDC exports will be limited. Most LLDC exports do not directly compete with members' mutual trade, even if there might be some exceptions such as clothing for Bangladesh and various agricultural products. The tariff reductions and bindings agreed to in the Uruguay Round agreement will ensure that the degree of discrimination against third countries is reduced.See footnote 17

An additional concern that has been raised by developing countries over past decades has been the implications of anti-competitive practices by private enterprises in restricting the market access of developing countries to industrialized countries. For example, a recent UNCTAD Report drew attention to the need to ensure that trade obligations and concerns are not frustrated by private anti-competitive practices and that there is a convergence in the objectives and the application of national competition policies to prohibit cartel and collusive tendering as "most national competition policies still do not apply to restrictive business practices which solely attract foreign markets.See footnote 18

Keeping the “market access” factor in perspective

The aspects of market access described above are relevant to any explanation of the export performance of developing countries as a group over the past two decades. On the other hand, they are less helpful in explaining why many developing countries have been much less successful than others in expanding their exports over that period. In some industrial country markets, such as that of the United States, nearly all developing countries have confronted essentially the same import barriers. In others, such as the European Union, many of the countries in Africa or among the LLDCs with a below average export record actually had more liberal market access for a wide range of products - for example via Lomé Convention preferences - than did the countries which recorded above average expansions of exports.

Capital inflows

Although not directly related to exports in the first instance, the growing constraints on foreign aid and the difficulties in attracting increased foreign private financing and investment are affecting the growth prospects of countries lagging behind in global integration.

The figures in Table 5 document the well-known trend for official development aid to represent a much smaller share, and private capital inflows a much larger share, of capital flows to developing countries (export credits are also down sharply from the 1989 level). In just eight years, there has been nearly a complete reversal of the respective shares of official development finance and private capital inflows.

Recent capital flows into developing Asia and Latin America have been largely private direct investment and portfolio flows to private sector borrowers rather than official flows and commercial bank lending to public sector borrowers; in Africa, in contrast, aggregate net capital inflows are still largely official flows.See footnote 19 With limited access to private capital, official development assistance continues to be by far the leading source of external financing for the poorest countries. For the 1988-94 period, flows of official development assistance represented 98 per cent of the net financial flows to the LLDCs.See footnote 20

Table 5
Capital flows into developing countries from OECD countries,1986-94
(Billions of U.S. dollars, and percentage shares in parentheses)

    1Provisional.

    2The concept of Official Development Finance embraces the resource receipts measure of Official Development Assistance (ODA) together with non-concessional disbursements for development purposes from multilateral institutions and other official bilateral flows for development purposes (including refinancing loans) which have too low a grant element to qualify as ODA.

Source: OECD (1996a).

World foreign direct investment flows (FDI), measured in current dollars, declined in the early 1980s after the cyclical peak in 1979-80. By 1984-85, annual FDI flows had recovered to the previous peak level. Thereafter, a sharp rise in FDI flows could be observed in the second half of the 1980s, and in 1989-90 the flows were about four times larger than the average FDI flows of 1980-85. This record level of FDI flows was not maintained, and markedly lower FDI flows were reported for the years 1991 to 1993. Averaging global FDI outflows and inflows, it is estimated that in 1994, FDI flows were roughly at the same nominal level as in the previous peak 1989-90. Preliminary data for 1995, indicate a new surge in FDI flows with an increase exceeding 40 per cent.See footnote 21

For analytical purposes it is worthwhile to relate global FDI flows to other global indicators which experience similar cyclical and price factors. The available data for the three times series - global FDI, world merchandise trade and gross fixed investment of OECD countries - indicate that global FDI flows did not grow faster than world merchandise trade or OECD fixed investment during the 1980-85 period, but expanded considerably faster in the second half of the 1980s. For the 1990-94 period, FDI flows lagged behind both gross fixed investment and world merchandise trade. In 1995, FDI flows again expanded significantly faster than world merchandise trade (40 per cent versus 19 per cent).

The share of the developing countries in world FDI inflows, which decreased between the first half of the 1980s and the second half of the 1980s, increased from 15 to about 35 per cent between 1990 and 1994. China played a major role in this increase, but other developing countries, in particular in Asia and Latin America, have also benefited from a sharp increase in FDI. At the same time, FDI flows to the developing countries are highly concentrated. In 1994, China accounted for about 40 per cent of all FDI inflows into the developing countries and another nine countries for another 40 per cent.See footnote 22

A noteworthy development is that a large part of this increase can be attributed to a sharp rise in FDI outflows from Hong Kong. Estimates, based on partner statistics, indicate that Hong Kong FDI outflows rose from $2.2 billion in 1990 to $21 billion in 1994, accounting for more than two-thirds of all developing countries' outflows.

Most of the OECD FDI outflows go to other developed countries. As can be seen from the FDI stock data, 75 to 80 per cent of the outward stock of OECD countries is in other OECD countries. This high ratio is not surprising as the share of intra-OECD exports in total OECD exports in 1994 was also nearly 75 per cent. Both trade and investment data reflect the strong integration within the OECD area.

The composition of capital inflows has also differed dramatically across regions. While FDI comprised over 40 per cent of net capital flows to Asia during 1989-94, the majority of flows into Latin American countries have been portfolio investment, with FDI accounting for little more than a quarter of capital flows to that region.See footnote 23 Anticipating the discussion of "domestic factors" in the next section, it is evident that in some Latin American countries, high real interest rates attracted large portfolio investments and contributed to the rise in FDI inflows. In the aftermath of the Mexican Peso crisis, the importance of more stable, longer-term oriented capital inflows in the form of FDI became apparent again. The benefits of FDI inflows linked to a policy of broadly-based economic liberalization and privatization programmes are perhaps less spectacular in the short-run, but improve the longer-term growth perspective. Portfolio flows have also been a major factor in the Middle East and Europe, including in Egypt and Turkey, while FDI into that region has been minimal. In Africa, the dominant type of inflow is official flows.

Once again anticipating the discussion of "domestic factors", according to the World Bank East and South Asia are expected to continue to grow at a slightly reduced but still relatively rapid pace due to, among other things, increasing intra-regional trade, strong domestic demand and large inflows of foreign capital.See footnote 24 In Latin America and the Caribbean, growth will be sluggish as macroeconomic adjustments in Mexico and Brazil continue to work themselves out. Similarly, the recent boom in FDI inflows to Europe and Central Asia are forecast to consolidate the positive growth performance in these transition economies, although conditions remain difficult in several Central Asian and Caucasus republics. Prospects for the LLDCs are less sanguine, particularly for those in Africa. The forecast for world commodity prices is for continued decline, albeit a gradual one, following the rebound in 1994-95. This points to further terms of trade declines for these countries and further weakening of their growth prospects and ability to attract foreign investment.

More generally, Africa's poor performance in attracting capital flows can be explained by the region's difficulties in improving economic policies, its lower overall economic performance, its persistent debt problems and - as a crucial economy-wide reflection of these factors, worth bearing in mind in devising new approaches - the greater uncertainty facing investors, domestic as well as foreign. According to the IMF, "some African countries - the CFA franc zone countries, Kenya and Uganda, for example - have recently attracted private capital flows, as policy reform efforts have gathered strength and structural adjustment measures have helped to maintain gains in competitiveness resulting from more appropriate exchange rate policies".See footnote 25

Other external factors

As the world economy becomes increasingly integrated, external influences have an ever-greater impact on countries' own domestic economies. Due to their typically smaller size and less diversified economic structure, many developing countries are more strongly affected by, and more vulnerable to, changes in the international environment than the industrial countries. Indeed, over the past several decades developing economies have experienced to varying degrees the impacts of, among other things, fluctuations in world interest rates on their outstanding debts, and cyclical changes in industrial country demand for their exports. Over 1984-93, the IMF estimates that these effects, together with the previously mentioned relative decline in primary commodity prices, combined to reduce the average growth rate of those developing countries with the lowest growth performance by three-quarters of one percentage point.See footnote 26

Finally, mention should be made of a factor that straddles the external/domestic distinction, namely the debt burden of the LLDCs. The level of the LLDCs' stock of external debt is estimated to have been $126.7 billion in 1993, while the ratio of the total debt to GNP was 70 per cent in the same year.See footnote 27 The situation is even worse for African LLDCs, where the external debt amounted to $96.7 billion in 1993, with a ratio of total debt to GNP of 130 per cent.

There is an emerging consensus on the need to address the LLDCs’ debt burden by new methods and approaches. In particular, an IMF-World Bank debt initiative under consideration recognizes the need to bring the levels of LLDC debt to a point of sustainability. The plan entails the participation of other international financial institutions, and the Paris Club of official creditors, and other bilateral creditors to reduce to sustainable levels the external debt burden of a number of countries pursuing sound economic policies.See footnote 28

(2)    Domestic factors

There is little doubt that for many of the developing countries whose export performance in the past decade has been disappointing, the primary problem is an inadequate domestic supply response rather than a lack of export opportunities. In the past decade, about one-third of the countries in the LLDC group have been afflicted by acute civil strife and political instability which have severely retarded development efforts.See footnote 29 The economies of the LLDCs have been hampered by a number of structural factors, including macroeconomic imbalance, lack of human and physical capital, poorly developed infrastructure, and poorly functioning institutions.See footnote 30

Trade policies and participation in the WTO

Domestic protection is one of the main sources of distortions between domestic and international prices, which cause countries to use their scarce resources less efficiently. Very high levels of protection in particular can seriously impair both export performance and domestic growth. Protection reduces the profitability of exporting relative to serving the domestic market ("a tax on imports is a tax on exports"), blunts incentives to adopt world-class standards of product quality and production efficiency, and, particularly when the size of the domestic market is not in itself a sufficient attraction, can negatively affect the country's attractiveness to foreign investors.See footnote 31 There are still large differences between developing countries in the extent of liberalization undertaken and the levels of existing protection. Tariffs in South Asia, averaging around 45 per cent in the early 1990s remain very high, with substantial peaks and restrictions in consumer goods. African countries, in general, have been more successful in reducing quantitative restrictions than tariffs which are still in the 25-30 per cent range, showing little change from the second half of the 1980s. In contrast, average tariffs in East Asia (excluding China) are in the 10-20 per cent range and non-tariff measures have been cut back although many such measures remain. Protection in Latin America has also been dramatically reduced with average applied tariffs now in the 10-20 per cent range and few remaining non-tariff measures.

The disciplines accepted by all WTO developing countries in the Uruguay Round increased significantly through their tariff bindings, acceptance of all the Multilateral Trade Agreements, including more intensified disciplines covering domestic policy measures such as subsidization, and new multilateral commitments in the areas of services and intellectual property rights.See footnote 32 Commitments in their goods and services schedules also help lock-in reforms in the trade regime, thereby adding to the credibility of the reforms in the eyes of foreign and domestic investors.See footnote 33 At the same time, provisions in various agreements grant differential and more favourable treatment (principally longer implementation periods) to developing countries, and in some cases to countries in transition to a market economy.

As a result, the developing countries, and in particular the LLDCs, are faced with the challenge of organizing themselves to effectively participate in the multilateral trading system. Among the prerequisites for a more effective integration into the international trading system, and thus into the global economy, are the need (i) to seize the trading opportunities arising from the rules, concessions and commitments by trading partners; (ii) to effectively exercise their trading rights in export markets; (iii) to fully implement their trade obligations, turning them into a way of enhancing the stability and transparency of their trade regimes, and to devise and execute development policies within the framework of these obligations, and (iv) to define and pursue their trade and development interests in trade negotiations, ensuring that their concerns are fully reflected in the future international trade agenda. Many developing countries - and especially the LLDCs - have found themselves poorly equipped in terms of institutional infrastructure and human and financial resources available to meet these challenges. A major effort is required on their part with respect to institution building and the upgrading and specialization of human resources and improved forms of information collection and management.See footnote 34

With respect to the administration of their trade regimes and to their participation in WTO work and activities, the developing countries need to expand their human resources and institutional infrastructure. International organizations as well as donor governments are presently assisting developing countries and countries in transition to more actively participate in the international trading system. These organizations and donors should collaborate to coordinate and focus their assistance on institution building, training and information management, keeping in mind the potential for improvements in these areas to play an important role in helping the LLDCs to reverse the trend toward marginalization.

Export concentration

In most of the least developed and other low-income countries, primary products - incorporating low levels of processing - continue to account for the bulk of both national production and exports. Given the changing structure of world trade described at the beginning of this paper, it is not surprising that most of the countries that have participated little or not at all in global integration are primary commodity-dependent countries with relatively small and highly inefficient manufacturing sectors. As a result, these countries are especially vulnerable to external (or domestic) shocks and are generally viewed as having limited growth prospects.

In their assessment of the future trends of African economies, Goldin et al. (1993) note that,

Agriculture remains the foundation of Africa's economic development, and its weakness underlies the poor overall performance. Over the last 20 years the growth in agricultural production trailed behind population growth by almost a percentage point per year. The result was increasing dependence on food imports and declining food exports (down an average of 3 per cent per year) and a loss of up to 50 per cent of Africa's market shares abroad. Despite this, dependence on agricultural exports has grown: more than 75 per cent of the export revenue for 14 Sub-Saharan nations comes from agriculture, and six countries rely on agriculture for over 90 per cent of their export earnings.

Moreover, it should be added that Sub-Saharan countries have generally failed to diversify into non-traditional commodities, such as horticultural products, fruits, and vegetables, whereas OECD countries' imports of such products have increased much faster than imports of traditional unprocessed products.See footnote 35

That being said, it is also true that a recent World Bank study calls into question the conventional wisdom that "commodity dependence" is always bad for economic growth.See footnote 36 The authors conclude,

... that problems often associated with commodity-dependence do not arise because of commodity-dependence per-se and that they can be alleviated through appropriate policies. ... In other words, ... countries can be both commodity dependent and have high export and income growth.

An examination of the components of successful commodity sectors in various countries strongly suggests that it is the initiatives and innovative actions of the private sector that make these commodity sectors dynamic and vibrant. Such successful cases are found in the coffee sector in Uganda, the gold mines in Ghana, and the cut-flower industry in Colombia. Transfers of foreign capital and technology that have played important roles in developing new commodity and processing industries in a number of countries are best achieved when the private sector takes the initiative.

... important roles for governments to play .... include eliminating price controls and state monopolies, promoting research and development, developing infrastructure in transportation and communication, enticing foreign capital and technology transfers, and establishing a legal system for the use of innovative financial instruments (p. 40).

Macroeconomic policies

Countries which recorded above average export growth and ability to attract FDI reported median inflation rates of 7-11 percentage points below those in the less successful performers in the 1984-93 period. They also reported real exchange rate volatility only a quarter that in the less successful group. The less successful groups, moreover, tended to have higher budget deficits, to have more volatile deficits over time, and to shrink their deficits at a slower rate (those in the poorest performing group actually expanded their deficits during the 1980s).See footnote 37

Table 6
Developing countries: budgetary and economic indicators in Africa and Developing Asia
(Annual averages, in per cent of GDP, unless otherwise noted)

    aFigures for developing Asia include China.

Source: IMF (1996a).

Macroeconomic instability is not the only way large fiscal deficits adversely affect the pace of a country's integration into the global economy. In particular, when they are externally financed, fiscal deficits tend to appreciate the real exchange rate via inflows of capital (the same effect occurs via inflation when the deficits are financed by domestic monetary expansions). A real appreciation in turn affects trade by favouring the non-traded sector over the traded sector, deterring exporters and foreign investors, and encouraging capital flight at the first hint of a devaluation. Equally, if not more seriously, in many instances, persistent fiscal imbalances are the underlying cause of low rates of national saving and investment.

Between 1983-89 and 1990-95, the average fiscal deficit for the Africa region widened, while for the developing countries as a group it declined. As the IMF (1996, p.64) notes:

While some of [the African] countries have managed to make modest progress in reducing fiscal deficits, in part because of external debt rescheduling agreements in the late 1980s and early 1990s, ... most of the adjustment has been in the form of lower capital expenditure ... for Africa as a whole, the ratio of current government expenditure to GDP increased by over 2 percentage points in the 1990-1995 period, while the ratio of capital expenditure to GDP was marginally lower than in the mid-1980s. The average fiscal deficit declined in 1995 to just under 4 per cent of GDP, but for most African countries the fiscal situation remains fragile, with many countries still heavily dependent on grants to finance large fiscal imbalances.

Infrastructure. The experience of different countries' reform efforts suggest that stable macroeconomic policies, structural reforms, and outward-oriented trade and investment regimes go a long way to provide economic stability and thereby lower the risk premium attached to investment in LLDCs - a precondition to attracting foreign investors.See footnote 38 In those countries which have persisted in economic reforms, the positive results are beginning to become apparent. In particular, reforms designed to strengthen the financial sector appear to be an essential first step. Particularly for the LLDCs, financial market regulation and supervision can pave the way for subsequent liberalization of capital movements, which are necessary to promote growth and improve resource allocation.See footnote 39 Then, a reform program aiming towards full capital account convertibility can begin with the liberalization of trade-related investment and FDI flows, allowing LLDCs to achieve many of the benefits of foreign capital while minimizing the risks of capital flow reversals or similar problems.

The largely successful adjustment program undertaken by Uganda since 1986 provides a case in point. Faced with an infrastructure devastated by civil war, an enormous and growing debt burden, a fixed and overvalued exchange rate, and declining coffee prices (virtually its only remaining export), Uganda enacted the Economic Recovery Program and has since staged an impressive turnaround in growth, savings and investment, and inflation.See footnote 40 The components of the program included fiscal stabilization through tax reform, tight monetary and credit policies to increasingly shift domestic credit towards the private sector, and financial reforms such as the creation of a government securities market and the strengthening of banks and central bank operations to improve the monetary policy transmission mechanism. Foreign exchange and price liberalization took place in steps, the public sector has been downsized and many former state-owned enterprises are being privatized. While the reforms continue and the gains are being consolidated, the benefits to Uganda from political and economic stability,  as well as enhanced credibility amongst the international investment community, are readily apparent.

Most LLDCs have implemented financial sector reforms as part of broader policy-reform programmes. As UNCTAD (1996a, p. XII) notes,

Financial liberalization in [LLDCs] has mainly comprised the reduction or removal of allocative controls over interest rates and lending, the introduction of market-based techniques of monetary control and the easing of entry restrictions on private capital.... The impact [of these reforms] on the efficiency of resource allocation has been limited, however, largely because of problems relating to macroeconomic instability.... Large government budget deficits in several [LLDCs] have forced nominal interest rates to very high levels and crowded the private sector out of credit markets.

In some LLDCs, financial markets are still dominated by government banks which do not behave as efficient, commercially oriented, financial intermediaries. Effective institutional solutions to these problems have not yet been devised in most LLDCs.

Other domestic factors

Inadequate and inefficient road/rail/air transport facilities, storage facilities and telecommunications have also acted to limit the supply-side response of developing countries, with the problems being especially serious in the LLDCs. To take one important example, high transport costs are a serious impediment to African exports.See footnote 41 Recent analysis suggests that, in some instances, freight costs outweigh the impact of tariffs. Freight costs for African exports to the United States generally are considerably higher than on similar goods originating in other countries, and there can be little doubt that these charges reduce incentives for new investment in export-oriented production, for example, in the further processing for export of groundnuts and copra.See footnote 42

Institutions.  At the institutional level, many developing countries, particularly LLDCs, lack a transparent legal and regulatory frameworks, including company and bankruptcy laws and investment codes. Moreover, UNCTAD (1996, p. III) notes that,

... the private-enterprise sector, which is the key agent of development, is not well developed in most LLDCs and its growth is constrained by shortages of capital and of entrepreneurial, managerial, technical and marketing skills. Technological capacities in many industries in LLDCs are rudimentary, which together with the low levels of educational attainment of the workforce, is a major impediment to raising productivity.

Despite export opportunities, many small and medium-sized export enterprises - especially in the LLDCs -are critically constrained by the lack of pre- and post-shipment credit facilities and, by the lack of business information and market intelligence.

Trade promotion. Efforts to enhance export performance will require not only technical assistance aimed at strengthening the institutional infrastructure for trade and trade policy, but also initiatives aimed at enhancing the outward orientation of the private sector. Enterprise-oriented technical cooperation programmes can underpin efforts to improve international marketing and business development, especially in the LLDCs, by focusing on product and market development, trade finance, export quality management, export packaging, and training in international purchasing and supply management. Under the right conditions, the pay-off to such efforts can be even higher when special attention is given to the needs of small and medium size enterprises, again especially in the LLDCs.

(3)    Interaction among the external and domestic factors

In reality, the many external and domestic factors that determine a country's export performance -and more generally the pace of its integration into the global economy - do not operate independently. There is a complex interaction, both positive and negative; a factor in one category can interact with others in the category, and developments in external factors can improve or worsen the effects of domestic factors and vice versa.

To take just one example from a virtually unlimited list of positive and negative interactions, inflows of FDI, by bringing resources which are in short supply in the host country - including capital, technology, and such intangible resources as organizational, managerial and marketing skills - can assist national efforts to restructure the economy and make it more competitive. As a financial inflow, it can help with balance-of-payments problems and/or make possible increased imports of capital equipment. It also can improve market access for the host country's exports of goods and services, through the multinational corporation's (MNCs) intra-firm exports (that is, exports from host-country affiliates to either the parent firm or affiliates in other countries) and arm's length exports to international markets serviced by the MNC.

REFERENCES