LDCS at the crossroads: status quo or sustainable development?

1. LDCS at the crossroads: status quo or sustainable development? Jaime de Melo FERDI WTO Public Forum, September 24: 14:00-16:00, Room SC2

2. Outline • The Marginalisation of LDCs (especially Services trade) • LDCs Export Diversification measures are « normal » • Countries becomerich by producing the goodsthat the rich consume? • Determinants of export diversification • The lowsurvival rate of LDC exports • Determinants of Survival rates • LDCs Under 21stunbundling of production (Trade-Investment-Services nexus) • Transport costs are a major bottleneck for LDC exports (not access in importing country markets) • The Burden of being LL •  LL LDCsNegotiating efforts should go to improving on Article V (transit) and Trade Facilitation • Conclusions • Annex1 : Elements of successful export strategies • Annex 2: The Limits of Trade Preferences for development (TPFD)

3. The Marginalisation of LDCs (I) (50 LDCs:10 middle-income, 12 small islands, 16 LL) Long-termdecline in export share of goods and services of LDCswasarrestedaroundearly 90s …but barelyso if top 5 oilexportersexcluded. Source: Carrère and Guillaumont (2011)

4. The Marginalisation of LDCs (II) Share of Exports of Services stagnatesat 0.5% and has not rebounded … backbone services (logistics, banking, transport) are essential for exporting, especially of manufactures …and, on average, LL countries (22 of which 16 LDCs) have significantly more restrictive telecommunications and air-transport policies Source: CarrèreGuillaumont (2011), Borchert et al. (2012)

5. …LDCs export concentration indices are evenlydistributedacrosspredicted concentration curve …Diversification ismostly by extendingexistingproducts to new markets. …and economieswith more diversified exports have higher long-termgrowth via reducedvolatility in output More diversified Source: Cadot, Carrère and Strauss- Kahn (2011), Brenton and Newfarmer (2009)

6. IndustrialEmploymentShares and Growth IndustrialEmploymentShares and Growth « Countries becomerich by producing the goodsthatrich countries consume » ? Note: Each point in the chart corresponds to a 5-year subperiod during 1960–2004 for a specific country. The growth rates control for initial income levels and country and period fixed effects. Source: Rodrik (2009)

7. Determinants (correlates) of export diversification • Determinants (correlates) of export diversification for LDCs (and other countries) • Better infrastructure , exports more diversified • Lessremote exports more diversified • Increase in years of schooling exports more diversified • Larger population exports more diversified • No additional impact of preferences on export diversification (seepreferencesfrom QUAD nextslides)

8. ..LDCs: lowsurvival rates of new exports (yearlydeath rates of exports started in year t HS-4 level) Survival rates are muchlower for LDC group 50% of exports die by year 1 for LDCs (47 countries) 25% of exports die by year 1 for LMI (excludingthose in LDC category) 75% of exports die by year 4 for LDCs (47 countries) Africa’s export growth 3.4 percentagehigherwithKorea’ssurvival rate over 1975-2003 Source: de Melo and Ugarte (2011), Besedes and Prusa (2010)

9. Determinants (correlates) of Export Survival Rates • Typicallyhigh-entry/high-exit rates intoexporting (big hits; lots of churning); Large transactions: longer the duration. • Instability/volatility of RER shortenssurvival • Search and information costsshortensurvival • Entry/exit are high (low) whereaverage transaction size are low (high). • High tradecosts (DB indicator) leadfirms to enter marketswithsmall transaction costs. Bettercontractenforcementlonger duration Source: Newfarmer et al. (2009), Freund and Pierola (2010)

10. LDCsunder 21st Century Trade (Trade-Investment-Services nexus) withRegionalUnbundling of Production • ICT Revolution (coordination costs) : domesticsupplychains regionalsupplychains (joinratherthanbuilddomesticsupplychain)  industrialisation canbefaster—but lessmeaningful. • 21st. Century industrialisation= Separation of stages of production …Nowpoor country growth surpasses rich-country growth • For LDCs in (Asia/Europe/America) factorychain (e.g. Bgdsh, Lao join the supplychain (regionalsupplychainssubsistbecauseopportunitycost of time has not fallen) • …what about thoseLDCsthat are far away: 12 smallIslands, and 30 in SSA?? • Reduce transport/transaction costsenough to move into the value-chain or occupy the « traditional » labor-intensive products (T&A) left for grabs by the Asians Source: Baldwin (2011)

11. Transport costs are hugeburden for LDCs(not policies in most destination markets-seeannex 2) • Data on time to travel to destination for 20’ container. • 1 dayless in travel time for 20’ container from SSA equivalent to 2 percentage point decrease in all importing country tariffs. • Transit time delays are due to institutionalfeatures (road quality, border delays), not geography. • … attributable to policiestowards services (air-transport, telecom). Borchert et al. (2012) Source: Freund and Rocha (2012)

12. The Burden of BeingLandlocked (I) • Price for shipping 20’ container to Rotterdam • : Mediancost for LL is 46% higherthanmedian for coastal country. • Distance explainsonly 10% of change in transport costsbetween LL and coastal. • Poor road infrastructure explains 40% of transport costs for coastal and 60% for LL Source: AFD Annual report (2010)

13. The Burden of BeingLandlocked (II) • Data for 160 countries… • Very few SSA countries in the first three quartiles of Ease of Trading index • …and No LL African country in the first three quartiles per container costs • Range of container costsveryhigh for SSA countries • Ease of trading index …because of highnumber of LL LDCs, negotiation efforts by LDCsshould go towardsmodifying article V of GATT to guaranteereasonablyunimpeded transit Source: AFD Annual report (2010)

14. Conclusions • Marginalisation of LDCs in Services not arrested • LDCs are heterogeneous and not overlyspecialised • …diversification isassociatedwithbetter performance (causality?) • Good export performance associatedwithhighsurvival rates of new exports • Transport costs are hugebottleneck for export growth (and diversification) • …especially for LL countries • LDCsshould put diplomatic efforts on improvements in GATT article V on marketaccess • And keep in mind the elements of successful export strategies (seeannex 1) and that TPFD have largelyfailed in OECD markets

15. Annex 1:Elements of Successful Export Strategies • A substantial reduction in barriers to trade (tariffs, NTBs, BTB measures) is associated with an increase in the growth rate (and in the investment share in GDP). • A sustained real exchange rate depreciation, i.e. a competitive currency that is subsequently maintained is a key ingredient to sustained export surges . • A positive causal relationship flows from openness to income levels and from trade liberalization to medium-term growth. • Export spells are likely to last longer when carried out with physically closer partners and a preferential trading relation is associated with longer export spells. • Unbundling of production (offshoring): Headquarter economies (Korea) and factory economies (Thailand—light pick-up trucks). Trade in parts can take place with backbone (transport-telecom-finance) services

16. Annex 2:The Limits of Trade Preferences for Development (TPFD) • The future of Trade Preferences for Development (TPFD) • Only 16% of world tradereceivespreferentialtreatment and only 2% getspreferentialmarginsabove 10% • TPFD is "givingawaywith one hand (preferences) and takingawaywithanother (restrictive RoO)" • LDCs’ agenda should drop quest for maintaining preferential access in OECD markets (see next slides) • …but look for preferential access to BRICs where emphasis should be on negotiating for simple Rules of Origin (RoO) such as those in ASEAN that promote ‘factory Asia’

17. QUAD Preferencesnowlargelyirrelevant (I) 17 Export shares of 50 LDCs QUAD sharefellfrom 57% in 2004 to 47% whileChina’sshare up from 17% to 23% and preferentialmargins are nownegligibleso Trade Preferences for Development (TPFD) from QUAD for LDCs have lost relevance.

18. DFQF access in the EU isthere…(II) 18 Preferentialmargin in EU-27: Unadjusted :4.1% Adjusted: 3.1% total of 9427 HS8 lines, 1.36% (1.24%) of lines have an MFN (ACP) tariff higher than 50% Source: Carrère and de Melo (2010)

19. …and almostthere in the US, though net preferentialmarginisnegative…(III) 19 Preferentialmargin in US: Unadjusted : 0.86% Adjusted: -0.29% Note : total of 5113 HS6 lines, 0.25% of lines have an MFN tariff higher than 50%. Source: Carrère and de Melo (2010)

20. References • Africa Development Bank (2010) Africa Development Report: Ports, Logistics and Trade in Africa, Oxford University Press • Baldwin, R. “Trade and Industrialisation After Globalisation’s 2nd. Unbundling: How building and Joining a Supply Chain are Different and why it Matters”, #NBER 17716 • Besedes and Prusa (2010) “The Role of Extensive and Intensive Margins in Export Growth” Journal of Development Economics, • Borchert, Gootiiz, Grover, Mattoo 2012. “Landlocked or Policy Locked: How Services Trade Protection Deepens Economic Isolation” Policy Research Working Paper 5942 Washington: World Bank. • Brenton, P., C. Saborowski and E. Von Uexull (2011) "What Explains the Low Survival Rate of Developing Country Export Flows", World Bank Economic Review, • Cadot, O., C. Carrère, and V. Strauss-Kahn (2011) « Export Diversification: WhatisBehind the Hump? » , Review of Economics and Statistics • Carrère, C. and J. de Melo (2010) “The Doha Round and Market Access for LDCs: Scenarios for the EU and US”, Journal of World Trade, • Carrère, C. and P. Guillaumont (2011) « Trade Marginalisation and its Reversal: Has there Been a Gain fromPreferences », mimeo. • Freund, C. and Rocha (2012) “What Constrains Africa’s exports?”, World Bank Economic Review, • Freund, C. and D. Pierola (2010) Global Patterns in Exporter Entry and Exit”, Mimeo • Melo, Jaime de, and CristianUgarte, 2012. “Nigeria: Time to Take the Lead on Regional and Global Trade Integration in West Africa” April. Mimeo. • Newfarmer, W. Shaw eds. (2009) Breaking into New Markets, The World Bank • Rodrik, D. (2009) “The Real Exchange Rate and Economic Growth” Brookings Papers on Economic Activity, Spring