Is Trade Still a Viable Path to Development? World Development Report 2020

Is Trade Still a Viable Path to Development? World Development Report 2020

Timothy Taylor 14/11/2019 4

Many of the world's development success stories in recent decades followed a broadly similar pattern. The countries became more involved with the world economy, often by exporting manufactured goods produced by low-wage workers. The rise in exports brought economic growth and income to their economics, but perhaps just as important, it also helped to foster a range of managerial, financial and technological skills. In this way, exporting was a fundamental step on the path to economic development.

The World Development Report 2020, subtitled "Trading for Development in the Age of Global Value Chains," asks whether that step is still available for countries trying to develop their economies.

International trade expanded rapidly after 1990, powered by the rise of global value chains (GVCs). This expansion enabled an unprecedented convergence: poor countries grew faster and began to catch up with richer countries. Poverty fell sharply. These gains were driven by the fragmentation of production across countries and the growth of connections between firms. Parts and components began crisscrossing the globe as firms looked for efficiencies wherever they could find them. Productivity and incomes rose in countries that became integral to GVCs—Bangladesh, China, and Vietnam, among others. The steepest declines in poverty occurred in precisely those countries.

Today, however, it can no longer be taken for granted that trade will remain a force for prosperity. Since the global financial crisis of 2008, the growth of trade has been sluggish, and the expansion of GVCs has slowed. The last decade has seen nothing like the transformative events of the 1990s—the integration of China and Eastern Europe into the global economy and major trade agreements such as the Uruguay Round and the North American Free Trade Agreement (NAFTA).

At the same time, two potentially serious threats have emerged to the successful model of labor-intensive, trade-led growth. First, the arrival of labor-saving technologies such as automation and 3D printing could draw production closer to the consumer and reduce the demand for labor at home and abroad. Second, trade conflict among large countries could lead to a retrenchment or a segmentation of GVCs.

What does all this mean for developing countries seeking to link to GVCs, acquire new technologies, and grow? Is there still a path to development through GVCs?

World Bank reports often have a certain kind of can-do spirit. When you ask "is there still a path to development?" the answer is pretty much always an appropriate qualified "yes." Thus, a substantial amount of the report offers useful evidence that developing countries (or regions of countries) which have become part of global value chains have indeed experienced substantial benefits. Moreover, the report argues that development countries which pursue domestic economic reforms and open trade, along with social and environmental protections,  can still benefit. There is the expected call for more and better-designed international trade agreements.Here, I want to focus on the theme  "Technological Change" and trade as discussed in Chapter 6 of the report.

Information and communications technology is making it much easier to coordinate production chains and suppliers across countries.

High-speed Internet enables firms in developing countries to link to GVCs [global value chains]. The introduction of fast Internet in Africa and China has spurred employment and export growth, as recent studies of the economic effects of the rollout have shown. In Africa, the gradual arrival of submarine Internet cables led to faster job growth (including for low-skilled workers) in locations that benefited from better access to fast Internet relative to those that did not, with little or no job displacement across space. Increased firm entry, productivity, and exporting are among the drivers of the higher net job creation in these locations. Similarly, in China provinces experiencing an increase in the number of Internet users per capita also witnessed faster export growth, with more firms competing in international markets and a higher share of provincial output sold abroad. These examples attest to the potential of ICTs [information and communication technologies] to help countries become part of international supply chains. They also show that the uneven provision of ICT infrastructure can aggravate spatial inequalities ...

In many developing countries, the costs of dealing with customs as goods cross the border and are transported within countries is high. Digital technologies can help here, too.

Digital technologies can improve customs performance by automating document processing and making it possible to create a single window for streamlining the administrative procedures for international trade transactions. In Costa Rica, a one-stop online customs system increased both exports and imports. Similarly, in Colombia computerizing import procedures increased imports, reduced corruption cases, bolstered tariff revenues, and accelerated the growth of firms most exposed to the new procedures. ...

Some robotics and artificial intelligence applications might further reduce logistics costs, the time to transport, and the uncertainty of delivery times. At ports, autonomous vehicles might unload, stack, and reload containers faster and with fewer errors. Blockchain shipping solutions may lower transit times and speed up payments. The Internet of Things has the potential to increase the efficiency of delivery services by tracking shipments in real time, while improved and expanded navigation systems may help route trucks based on current road and traffic conditions. Although the empirical evidence on these impacts is limited, it is estimated that new logistics technologies could reduce shipping and customs processing times by 16 to 28 percent ... 

In addition, developing countries face large intranational trade costs, which determine the extent to which producers and consumers in remote locations are affected by changes in trade policy and international prices. For example, the effect of distance on trade costs within Ethiopia or Nigeria is four to five times larger than in the United States. Intermediaries capture most of the surplus from falling world prices, especially in more distant locations. Therefore, consumers in remote locations see only a small part of the gains from falling international trade barriers. Despite recent advances in the provision of ICT infrastructure, the scope for further expanding access to high-speed Internet in developing countries remains huge. .... For many goods traded in GVCs, a day’s delay is equal to imposing a tariff in excess of 1 percent.

Computerized translation between languages reduces a barrier to trade, too.

Machine learning also reduces the linguistic barriers to trade and GVC participation. One application of machine learning—machine translation—has improved in recent years. For example, the best score at the Workshop on Machine Translation for English to German rose from 15.7 to 28.3, according to a widely used comparison metric, the BLEU score. The introduction of machine translation from English to Spanish by eBay has significantly boosted international trade between the United States and Latin America on this platform, increasing exports by 17.5 percent. These effects reflect a reduction in translation-related search costs and show that artificial intelligence has already begun to boost trade in North and South America.

There have been concerns that in a world economy full of automation, robots, 3D printing, and other technology, that developing countries may face a risk of "premature deindustrialization"--that is, they won't be able to use their natural comparative advantage of cheap labor to enter global value chains in manufactured goods. But at least so far, robots and automation seem to be boosting international trade between high-income countries and emerging markets, rather than leading to "reshoring" of previous imported products and a reduction in trade.

Despite the concerns about the effects of automatization, the evidence that reshoring will result is very limited. ... Thus far, the rising adoption of industrial robots and 3D printing seems to have promoted North–South trade. Greater robot intensity in production has led to more imports sourced from lower-income countries in the same broad industry—and to an even stronger increase in gross exports (which embody imported inputs) to those countries. The surge in imports from the South has been concentrated in intermediate goods such as parts and components. The positive impact of automation on imports, particularly on imports of intermediates, attests to the importance of examining the effects of robotization on trade through a GVC framework. More-traditional trade models would predict the increase in exports by the North but fail to foresee the surge in imports from the South in the same industry. Rather than reducing North–South trade, robotization seems to have been boosting it, although it is uncertain whether this trend is likely to continue.

The rise of information technology, and its effects on reducing transportation costs have caused a wave of not-previously-traded products to become part of international trade. In many cases, these are intermediate and unfinished goods where it now makes economic sense to ship them across national borders. In other cases, they are brand-new goods--even services or digital goods.

Since the 1990s, many new types of products have entered global trade, primarily intermediate goods, further demonstrating the increasing fragmentation of production and the emergence of entirely new  products. Indeed, the trade in new products has grown dramatically. In 2017, 65 percent of trade was in categories that either did not exist in 1992 or were modified to better reflect changes in trade. Trade in intermediate goods (parts and components and semifinished goods) expanded, and entirely new products entered global trade. For example, trade in IT products tripled over the past two decades, as trade in digitizable goods such as CDs, books, and newspapers steadfastly declined from 2.7 percent of the total goods trade in 2000 to 0.8 percent in 2018. Technological developments are likely to continue to produce product churning. Because of technological progress, more goods and services are likely to become tradable over time. For example, platforms such as Upwork and Mechanical Turk make it easier for businesses to outsource tasks to workers who can perform them virtually. And new goods and services are likely to be developed, including ones not even imaginable today, thereby boosting the incentives to trade.

One potential source of productivity for developing countries is that international trade raises the rewards for organizing into larger firms and increasing the scale of production:

In part because of high trade costs, firms in low-income countries tend to operate on a small scale and are less likely to export or import. A typical modal manufacturing firm in the United States has workers, and larger firms tend to be more productive and pay higher wages and are more likely to export and import. By contrast, a modal firm in most developing countries has one worker, the owner. Among firms that do hire additional workers, most hire fewer than 10. In India, Indonesia, and Nigeria, firms with fewer than 10 workers account for more than 99 percent of the total.

But behind all these legitimate reasons for overall enthusiasm, some potential problems lurk. It's interesting and useful to discuss the ways that technology is likely to increase global trade, and how it can still serve as a pathway to higher growth for developing countries. However, technology typically brings a mixture of winners and losers, both within and across countries. Some of the international trade success stories from developing economies will happen as potential competitors are crowded out. For a hint of these negative possibilities, ere are a couple of paragraphs from near the end of the chapter. I have inserted boldface type for the various qualifications, the "maybes" and the "likelys" and the tradeoffs. As is so often true when thinking about the effects of new technology, reading the passage without emphasizing these qualifications is a soothing and positive experience; reading it while emphasizing these qualifications is worrisome. Both reactions are valid!

Although predicting the future is a treacherous exercise, new technologies will likely reduce trade costs and make it easier to participate in global markets. Such outcomes may offer developing countries new opportunities to link into GVCs. However, the attendant intensification of competition may make it more challenging for countries to succeed. Platform firms, for example, are making it easier to connect, but their reputation mechanisms for verifying supplier quality tend to foster concentration and make it harder for entrants to grow. They are creating new challenges for regulators both because they wield market power and because their interactions with agents in different parts of the value chain may create potential conflicts of interest and enhance the scope for anticompetitive conduct.

Automation anxiety is not warranted for all developing countries. Although some countries are likely to lose manufacturing employment because of greater competition in output markets, countries that are part of GVCs and supplying inputs to other countries that are automating may see an increase in the demand for their goods, and consumers everywhere will enjoy lower prices. The primary challenge arising from new production technologies is to ensure that the benefits are shared and that losers are compensated both across and within countries. Among the countries adopting these technologies, labor market disruptions are likely to be significant, skill premiums are likely to rise, and labor’s share of income may decline further.

A version of this article first appeared on Conversable Economist

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  • Richard Zhuk

    Trade will always be a viable path to development.

  • Jamie Harvey

    No consensus seems to emerge.

  • Paul Mcchrystal

    Countries with no access to the sea trade less.

  • Dirk Kuiper

    I guess countries that grow more and are richer may have greater participation in trade for reasons other than trade policy.

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Timothy Taylor

Global Economy Guru

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   

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