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Terms of Trade Reversal? The Challenge to Development Strategy

Terms of Trade Reversal? The Challenge to Development Strategy. IKD Seminar 18 th January 2007. Terms of trade decline. The prevailing post WW2 wisdom But, Singer/Prebisch: Commodities are inputs into manufactures Demand low for commodities as incomes rise

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Terms of Trade Reversal? The Challenge to Development Strategy

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  1. Terms of Trade Reversal? The Challenge to Development Strategy IKD Seminar 18th January 2007

  2. Terms of trade decline • The prevailing post WW2 wisdom • But, Singer/Prebisch: • Commodities are inputs into manufactures • Demand low for commodities as incomes rise • Demand for commodities falls as their price increases • Synthetic substitute for natural materials • Low innovation barriers to entry

  3. And then one other “Singer insight”… • Labour markets • Cost-plus pricing in high income countries • Reserve army of labour in low income economies • So manufactures vs commodities really a surrogate for high income vs low income

  4. Manufactures-commodities terms of trade

  5. The drive to industrialisation • Close association between incomes and industrialisation • Manufactures are (relative to agriculture) income elastic and price inelastic • Manufacturing embodies rents – agriculture does not • Manufacturing can be labour intensive – primary commodities are very capital intensive

  6. The Asian Drivers upset the applecart

  7. Share of manufacturing value added

  8. China’s growth is not unique..

  9. But its not just the Asian Drivers

  10. Market share of five largest retail chains (2000) AC Nielson, cited in Bell 2003

  11. With what consequences? • Growing productive capacity means heightened competition • Growing concentration in buying power • Manufacturing caught between a rock and a hard place

  12. World Manufacturing Export Price, 1986-2000 IMF, World Economic Outlook Database

  13. EU Imports from China Source: Euratex data as reported by Nathan Associates

  14. Caught between a rock and a hard place Percentage of sectors with negative price trends, 1988/9-2000/2001 by technological intensity and country-grouping

  15. Employment in China’s formal sector manufacturing

  16. The picture is not so bleak for commodity producers

  17. Actual and projected global share of China’s consumption of base metals Source: Macquarie Mining

  18. Source: Macquarie Mining

  19. Enormous demand potential

  20. All this has implications for the producers of manufactures

  21. And for the producers of commodities? • Commodities price boom: • Dutch disease • Zambian copper, tobacco, maize and cotton • Armed conflict • Corruption • Managing surpluses: • LA and ownership • Chile and copper • Venezuela and oil

  22. And for agriculture?

  23. Appropriating rents in the coffee sector • There are more varieties of coffee and with a greater variety of taste than they are of wine • “Blue mountain coffee prices are not subject to the factors of supply and demand that affects other commodities. The price is fixed” (2001) • Illy sells at $10/230gm compared to $1.50, and farmers get 30% more.

  24. Escorial wool • Maghreb sheep taken to New Zealand in 1828. • Numbers are now severely limited by NZ farmers • Resources put into marketing in 1990s • “We have created ‘clean air’ between the generic ‘commoditised’ Merino wool” • Escorial scarf retails at more than €600

  25. And for income distribution • Manufacturing is labour intensive • Commodities are: • Capital intensive • Generally foreign owned • Kleptocracy • Armed conflict

  26. Innovation is key to sustainable incomes

  27. THE SCHUMPETERIAN INNOVATION SCHEMA 2nd round innovation 3rd round innovation 1st round innovation Rate of profit Avrge rate of profit Innovation rent Time

  28. Endogenous rents • Technology rents • Human Resource rents • Organisational rents • Relational rents • Design rents • Marketing rents

  29. Exogenous rents • Resource rents • Policy rents • Infrastructural rents • Financial intermediation rents

  30. Competitive pressures Value chains are increasingly global and dynamic Competitive pressures Services Services Design Production Marketing

  31. Our existing architecture is limited • Competences and dynamic capabilities • But mostly within the firm • Types of upgrading • Process upgrading • Product upgrading

  32. An upgraded architecture on innovation • Competences and dynamic capabilities are now a value chain challenge • Wider perspective on upgrading • Process upgrading • Product upgrading • Functional upgrading • Chain upgrading

  33. Implications for Development Strategies

  34. Sectoral choice • Sectoral choice? • Agriculture • Commodities • Manufactures • Services • Or positioning within sectors? • Back to Schumpeter and rents

  35. Policies to facilitate innovation • Macro policies • Cross sectoral policies and market failure • Sectoral and regional targeting

  36. Income inequality and marginalisation • Meeting the challenge in production • Funding the challenge through production • Don’t take politics out of this

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