From Export Promotion to Import substitution:

Comparative Experience of China and Mexico

Mehdi Shafaeddin

Director: Global Vision

(Training & Consultancy)

Affiliated to the Institute of Economic Research,

University of Neuchatl, Switzerland

The QUESTIONS

• What is the experience of China and Mexico in export processing?

• Why is China more successful than Mexico

• Can the experience of China be replicated?In two papers

Outline

• The literature

• Performance of trade, MVA & GDP

• Performance of Processing Industries

• Conclusions:Prospects for the future

The literature

• Import Substitution and Export Promotion as Alternative Strategies

• The process of MS & Prebisch’s thinking• MS as prerequisite to EP• Common Argument: Emphasize on learning

– MS: Learning by doing– (outward-orientation )EP: Transfer of knowledge &

Tech.– Opening up: imitation; catch-up opportunities; innovation

• Differences– MS: need for Gov. intervention– EP: Hands off

Critiques of MS,EP

• Contribution to Learning: not much in either case• MS: often discouraged learning;

– Reasons; lack of efficient Gov. policies

– exceptions

• EP: did not appreciate internal conditions for learning:– Simply exporting is not sufficient

– Learning is not automatic

– Gov policies required

Literature (2):Productive Power (PP) and Learning• List: mental capita as main source of PP

– Role of socio-economic factors– Importance of gov. Policies in industrial learning and

education ;– external economies of learning

• Others :Arrow, Linder;Fellner: role of experience• Capability Building Theory

– Role of tech. capability in a broad sense– Market failure– Need for intervention

• Test of Impact of FDI: Experience of Costa Rica/ Ireland

Mexico &China :Similarities & differences

• Similarities:– Opening up to trade; FDI and processing

• Difference: performance: (table 1)– Growth of Xman.– Trade balance– FDI; national I– MVA;GDP (graph 1)– Trade in Parts (table 1.a

Table 1: Comparative economic Performance of china and Mexico (1965-2005)

  China Mexico

Growth rates 65-80 80-90 90-2000 2000-2005 2004 2005 60-80 80-90 90-2000 2000-2005 2004 2005

     

Manufacturing value Added 10.5 10.8 12.7 11.3 10.7 10  0.9 1.5 4.3 0.0 4.0 1.2

Gross Domestic Product 6.6 10.3 10.6 9.6 10.1 9.9 6.3 1.1 3.1 1.9 4.1 3.0

Gross Fixed Capital Formation 9.7 9.8 13.9 14.8 12.4 14.6 7.7 -2.7 4.1 1.8 7.5 7.6

Total Exports   12.8 14.5 23.7a 31   5.9 16.1 3.5.a 14.3  

(Xman-Mman)/Xman. Initial period/%)   -1.65 4.5 22.6 18.3   -67 -58 -13.1 -16  

Ratios 70/71 80/81 90/91 04/05     70/71 80/81 90/91 04/05    

MVA/GDP 34.4 39.5 32.8 44.1   23.1 22.1 20.7 17.9  

GFCF/GDP 24.5 27.5 26.5 38.4   19.0 25.6 18.3 19.5  

FDI/GDP 0.0 0.1 1.0 3.5   0.8 1.1 1.3 2.3  

Exports of Manufactures / Total      

MVA / Total World MVA   1.0 2.6 8.5   1.0 1.2 0.9?  

Table 1.a: Trade in Parts and Components: ManufacturedGood; China and Mexico

--------------------------------------------------------------------------------------1992/3 2003/4

China :Value($b)Exports 3.2 58.4Imports 9.8 44.6Balance -6.57 13.8Shares : Components/total X: 6.3 17.6Mexico:Value($b)Exports 6.8 26.3Imports 13.8 33.8Balance -7.5 -7.5Shares : Components/total X: 20.2 23.9Meomo : balance of man. trade ($b):China -5.8 125.2Mexico -17.8 -1.7

Performance of Maquila sector Mexico

1974 1985 2000 2006 Ratio

98/85

Ratio06/98

- Gross output ($b)

0.01 1.3 669 1139 341 2.6

- Local input:%

0.9 0.7 2.4 2.8 2.4 1.3

-VA:% 36.3 24.9 22.1 20.4 0.6 0.9

RV.% 37.2 25.6 24.5 23.2 0.93 1

Imported input:%

64.3 75.1 75.6 76.7 1.2 1

Performance of Maquila and non-aquila:1Performance of the maquiladora sector (1980-2006)

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Maquil exports/Non petrol exports Maquil exports/Maquil interm imports

A Maquil trade balance / Maquil exports*100

Performance of non-maquiladora export sector (1980-2006)

-350-340-330

-320-310-300-290-280

-270-260-250-240

-230-220-210-200-190

-180-170-160-150-140

-130-120-110-100

-90-80-70-60-50

-40-30-20-10

0

10203040

5060708090

100110120

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

B Rest of manufact. exports / Non-oil exports*100

C (Rest of manuf. exports-Rest of intermed. good imports) / Rest of manufact exports * 100

D Rest of manuf. exports / Rest of intermediate goods * 100

Processing trade of China: Evolution

year Value($10m) Ratios

Xp Mp RV Xp/Xm RV/Xp

1981 11 15 -3.7 5 -32

1990 254 188 67 55 26

2000 1377 926 451 62 33

2006 4164 2740 1423 58 34

Prospects for the Future

• What are the prospects for increasing value added in assembly operation of China and Mexico?

• Evolution of pattern of CA

• RCA indices:

– Rx= [Xij/Xj]: Xwi/Xw];

– Rm = [M ij / Mj ] [ M wj / Mw ];

– Cr= (Change in R)/R

China: RCA in X

• Choice of about 30 products=64% of X• RCA in almost all• 13 capital/tech. intensive; mostly elect.• 14 L intensive• Gain RCA (increase in Cr) in K/T, particularly

elect.• Loss in Cr in most L intensive• So good prospects for X; BUT?

How about production?

China: RCA & M:Components Assembly Operation or Production?• Choice pf products: 30: 67% of M• Intermediate/components:19; bulk of M• Comparative advantage in assembly in

all components: except automobile• Advantage in assembly increased in

most cases• However in 4 cases (of components)

adv. In production increased• How about finished good?

China: RCA & M: Finished products Production?

• Increase in adv. In production of:

– Telecommunication equipment– Specialized machinery– Textiles and leather machinery– Aircraft– Machine tools for working metals– Passenger cars

Mexico: RCA: X

• Choice of products : similar to China• Mexico exports higher no. of K/T intensive

products than china(18 out of 29)• Automotive &elect. 25 % of X• Gained adv. On components of auto. &data

processing• Lost adv. In X on 11 K/T intensive finished

goods• How about assembly operations?

Mexico: RCA: MProduction?

• Paperboard the only intermediate product (out of 13)with adv. in production; but adv. In assembly increased!

• Finished goods: advantage in production in: – Automotive– Data processingExamine these cases

Auto. &data processingProspects

Exports Imports R Rc R Rc

1.Office machines and auto.data processing :Finished products:751 0.63 0.45 0.44 0.42752 2.076 3.677 0.91 1.48Components:SITC 759 0.801 1.438 1.277 3.612

2.Automotive products:Finished products:781 1.518 0.991 0.672 5.366782 4.231 3.388 1.08 3.81783 1.58 20.34 0.25 0.19

Components784 1.7 1.1 2.32 3.66

Conclusions

China

Mexico

Question?