New Dynamics of World Markets

Rapid technological progress is, as noted, changing the structure of industrial activity. Activities with higher 'technological intensity' - those with higher than average expenditures on R&D - are growing faster than other activities. While every activity uses new technologies, differences in innovative potential, speed of application of new innovations and different rates of demand expansion affect relative growth rates. Table 1 on page 9 showed that high technology activities grew faster in both production and trade than other manufacturing activities, and trade grew faster than production, indicating the increasing internationalisation of industry in all economies.

Not only are technology-intensive industrial activities more dynamic, they tend to offer greater potential for sustained learning and productivity increase, more spillover benefits to other activities and more scope for FDI in integrated production systems that offer enormous export possibilities. All production and export structures are not, in other words, equal in terms of promoting industrial growth and competitiveness.

Countries that wish to strengthen their export market positioning and diversify out of slow-growing activities to tap rapid technology transfer, promote technological deepening and exploit the growing fragmentation of production should shift their structures from simple to complex technologies. To some extent, the deepening of the industrial structure is a normal consequence of the development process, but the most successful and competitive countries have made deliberate efforts to accelerate the process through policy.,/p>

This does not mean that low technology and resource-based products should be neglected in competitiveness strategy. On the contrary, such products are the starting point for building industrial competitiveness in developing countries, and they continue to remain significant exports in mature industrial countries. In 2000, developed countries were the top 10 exporters in the world of resource-based manufactures and comprised 7 of the top 10 exporters of low technology products. Both groups also have technology-intensive products (see Box 2 [PDF 48KB | 2 pages]).

Technical change produces pockets of unexpected innovation even in mature and stable technologies. Biotechnology, for instance, is making food processing into a high technology industry. The 'bottom line' of competitiveness is to upgrade technologies in all activities, building new capabilities and finding new markets and market niches. At the same time, the dynamics of world markets suggest that it is necessary to promote structural change; nearly all countries that have maintained high rates of export growth have upgraded the technological composition of exports and production.

4.1 Export Structure by Technology

Figure 2 [PDF 28KB | 1 page] shows the evolution of different categories of manufactured exports between 1976 and 2000. RB products have lost shares since the early 1980s, LT since 1993 and MT since 1998. The only group to raise its market share steadily is HT. These trends suggest that the conclusion drawn earlier about the dynamism of technology-intensive products is well founded. Box 2 [PDF 48KB | 2 pages] discusses the technology composition of the 50 most dynamic products in world trade.

4.2 Export Performance in Different Regions

Here we focus on manufactured exports from different regions defined as follows:

• EA (East Asia) includes PRC and all countries in the Southeast Asian region apart from Japan, while EA2 excludes PRC where relevant.
• LAC (Latin America and the Caribbean) includes Mexico and LAC 2 excludes it.
• S. Asia includes Bangladesh, India, Pakistan, Sri Lanka and Nepal.
• MENA (Middle East and North Africa) includes Turkey but not Israel.
• SSA is Sub-Saharan Africa, including S. Africa.

Figure 3 [PDF 77KB | 1 page] shows world market shares for different regions for 1981 and 2000, separating PRC from the rest of East Asia and Mexico from the rest of Latin America. East Asia as a whole accounted for 18.4 per cent of world manufactured exports in 2000, up from 6.8 per cent in 1981; within it, EA2 raised its share from 5.8 per cent to 12 per cent and PRC from 1 per cent to 6.5 per cent. LAC as a whole lost world market share in 1981-90 (from 3.2 per cent to 2.4 per cent) then raised it over the next decade to 5.1 per cent. The initial fall was due to LAC2 (from 2.7 per cent to 1.9 per cent), with Mexico steady at a 0.5 per cent share. Over 1990-2000, LAC2 raised its share marginally while Mexico had a six-fold increase to reach 2.9 per cent. South Asia raised its share slightly from 0.6 to 1.1 per cent but, given its size, remains a peripheral player in export markets. MENA and SSA each lost around 0.2 points of global market share.

Let us now consider exports by technological category. Table 2 [PDF 29KB | 1 page] shows the world market share of regions by technology category. There is a dramatic growth of East Asian economies in HT and, to a lesser extent, MT products. This trend is not restricted to the more advanced countries of the region like Singapore and the Republic of Korea (henceforth Korea), as relatively less advanced countries such as Malaysia, Thailand and the Philippines have also seen a major rise in HT and MT exports.

This seems to go against received wisdom, with Newly Industrialised Countries (NIEs), rather than mature industrial economies, experiencing the most rapid growth in advanced technology products. There are, however, good explanations for these trends.

Some developing countries have built domestic capabilities in high technology, led by the mature Tiger economies of East Asia, Korea and Taipei,China. This accelerated development of capabilities was driven in the early stages by strong and pervasive industrial policy, with restrictions on inward FDI, protection of infant industries, allocation of credit, promotion of local R&D and specialised skills, and so on (Lall, 2001.a; UNIDO, 2002).

Several other countries without strong local capabilities have become major HT exporters by plugging into integrated production systems, starting by performing relatively simple assembly. Over time, many countries have upgraded their role, moving into greater local content, design and development, regional marketing and so on. Singapore, for instance, is one of the world's leaders in advanced electronics, with impressive design capabilities and growing local linkages. However, some countries, like the Philippines or Mexico, are still at the bottom of the value chain and remain vulnerable to relocation by TNCs to cheaper or more competent areas.

TNC systems have also spread in some MT products like automobiles. Unlike electronics, these systems tend to be in proximate countries because of transport costs. The three large Latin American economies, Argentina, Brazil and Mexico, are good examples of complex MT exports led by the auto industry. This value chain is unlikely to spread to many other developing regions because of its enormous scale economies and high skill requirements, but it does raise the competitive profile of the developing world in sophisticated products.

In the simple categories, rates of export growth are limited both by slow expansion of trade overall and maturing of the relocation process in labour-intensive activities like textiles and clothing. Within these products, it is difficult for developing countries to upgrade to the most advanced end of the value chain because of the very demanding skill, design and branding requirements. High fashion exports, for instance, remain the preserve of rich countries, as do differentiated food products.

Growth of developing world exports of some RB and LT products is held back by trade barriers, tariff escalation (higher tariffs being levied on imports of processed products than on the raw materials) and subsidies in industrialised countries.

Table 2 [PDF 29KB | 1 page] shows that East Asia dominates each category, particularly in high technology products. South Asia gains market share in all categories, particularly in resource-based and low technology products; however, it remains a small player in both by global standards. LAC's performance is weak if Mexico is excluded and only moderately good if it is included. PRC is making large market share gains in all categories, particularly in LT products - in this group it seems to be taking market share from other East Asian countries (Lall and Albaladejo, 2003).

Figure 4 [PDF 21KB | 1 page] shows the technology structure of exports in South Asia, East Asia and LAC in 1981 and 2000. There are striking differences between the regions. South Asia has a preponderance of LT exports and a very low share of HT products (barely higher than Africa); its export structure has remained relatively stagnant over the two decades. LAC reduces its dependence on RB products greatly, with significant rises in MT (mainly the automotive industry) and HT products (led by electronics in Mexico). East Asia also shifts significantly from RB and LT products to MT and HT products, ending the period with the most advanced export structure of all developing regions. Note that the most dynamic exporters in the developing world (East Asia, including PRC, and Mexico but not the rest of LAC) have rapidly upgraded from 'simple' (LT and RB) products to 'complex' (MT and HT) products. As noted, such structural upgrading is a characteristic of countries that are successful exporters for long periods.⁵

4.3 Sophistication of Manufactured Exports

We now consider the dynamics of world trade in terms of sophistication of manufactured exports. Box 3 [PDF 42KB | 2 pages] describes this new method of analysing the structure of manufactured exports, one which allows investigation at a more detailed level than permitted by the broad technology classifications used above. ⁶

The distribution and growth rates of world manufactured exports by sophistication are shown in Table 3 [PDF 22KB | 1 page]. The largest category of such exports is now sophistication level 4; it contains such important and fast-growing products as semiconductors, automatic data processing (ADP) equipment and accessories for ADP machines, which are being rapidly relocated in lower wage countries. The next largest category is sophistication level 1, but this grows relatively slowly and loses share over the decade. The smallest and slowest growing category is the last one, sophistication level 6.

The best product 'positioning' for growth are categories 4, 5 and 3 - high sophistication is not necessarily the route to rapid export expansion. This is in line with the finding that exports by developing countries are generally growing faster than those by industrialised countries. The distinction between the technological and sophistication classifications shows up clearly here: high technology products are the most rapidly growing segment of world trade but high sophistication products are not. The reason is that many high technology products are becoming 'less sophisticated' because they have labour-intensive processes that have led to their relocation in lower wage countries. However, they do not move to the bottom of the sophistication scale: relocation is not to the poorest countries but to those with relatively low wages in combination with skilled and disciplined labour, growing industrial capabilities, efficient infrastructure and stable, welcoming policy regimes. These economies are in the middle rather than low income range.

Figure 5 [PDF 77KB | 1 page] shows the distribution of manufactured exports by sophistication levels in the world as a whole and in three developing regions in 1990 and 2000. (The data for South Asia are for 1990 and 2001.) There are striking differences in the patterns. Some highlights are:

• In South Asia, exports are preponderantly in the low sophistication group, but there is a small fall in its share over time with a corresponding gain in the medium sophistication group. The gain is due largely to India; the rest of the region remains at the low end of the sophistication range.
• The structure of East Asian exports moves significantly towards the medium sophistication category, driven by semiconductor, automatic data processing machines and their parts and accessories in level 4. However, East Asian level 3 exports like electrical machinery and telecommunications apparatus are also very large, over 2.5 times larger than LAC in value. The share of highly sophisticated products in East Asian exports remains relatively small and falls slightly over time.
• LAC exports also move towards medium sophistication, but there is a less pronounced shift towards level 4 than in East Asia. LAC starts with and retains a higher share of sophisticated products than East Asia (mainly category 1 products like auto engines and components, aircraft and pharmaceuticals). In the medium category, its dynamic products include telecommunications, automobiles and electrical machinery (level 3); it also has significant values in category 4 exports but East Asian exports are nearly 10 times larger. However, a very large part of its level 3 and 4 exports comes from Mexico; the rest of LAC lags in high technology exports.

Table 4 [PDF 29KB | 1 page] shows world market shares of manufactured exports by sophistication for South Asia, East Asia and LAC in 1990 and 2000 and the annual rates of growth. South Asian shares are highest in level 6 products, with a very low presence in levels 1 to 4 and insignificant increases in market share in these. South Asia's slow growth rate in level 6 drags down its overall export expansion, overriding fairly healthy growth in levels 1, 3 and 4 (but this is from very small bases in each). East Asia has a significant global presence in all sophistication categories, with around one-third world market share in levels 4 and 6, and around one-fifth in level 5. The main drivers of its export expansion are levels 4 and 3, which contain the dynamic HT products that have been relocating to the developing world. Latin America's main market presence is in levels 6, 5 and 3, but with a more even spread than in East Asia. Its main drivers have again been levels 3 and 4, with strong support from level 5. Figure 6 illustrates the world market share (WMS) picture for these regions by three broad sophistication categories: high (levels 1 and 2), medium (levels 3 and 4) and low (levels 5 and 6).

4.4 In Sum

Industrial competitiveness is evolving rapidly. Technical change, changing patterns of demand, falling transport and communication costs, and policy liberalisation are changing the structure of production and trade. Globalisation of production is changing the geography of international competitiveness at a pace unimaginable, say, three decades ago. The dynamos of change are technology-based products, in particular electronic products related to information technology.

These products enjoy very high income elasticity of demand and have pervasive links through the industrial and technological system. While highly complex and technology-intensive in their design, development and core manufacturing processes, these products also have labour-intensive segments that make them prime candidates for relocation to lower wage countries. However, low wages per se are not the main determinants of their location. The TNCs that dominate their production have only integrated a small handful of developing countries into their global production systems, predominantly in East Asia and (after NAFTA) Mexico.

While high technology electronics products have led the export drive of the most competitive developing countries, they are certainly not the only element. Resource-based and low and medium technology products also figure prominently in their export growth. Thus East Asia dominates the export scene in the whole range of manufactured products, the result of a systemic ability to build new capabilities, attract export-oriented FDI, capture the spillover and learning benefits of export activity and sustain sensible macroeconomic policies. Note, however, that setting a market-friendly environment may not be enough to dynamise competitiveness - some other parts of the world have done the former without doing the latter. LAC is perhaps the most prominent example.

South Asia is a weak performer in the competitiveness stakes. Its world market shares remain small and its export structure is dominated by low technology and low sophistication products. As shown below, its economies have not tapped the mainsprings of export dynamism in a globalising world.

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