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LDCS AT THE CROSSROADS: STATUS QUO OR SUSTAINABLE DEVELOPMENT? Jaime de Melo FERDI WTO Public Forum, September 24: 14:00-16:00, Room SC2

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Outline 2 The Marginalisation of LDCs (especially Services trade) LDCs Export Diversification measures are normal Countries become rich by producing the goods that the rich consume? Determinants of export diversification The low survival rate of LDC exports Determinants of Survival rates LDCs Under 21 st unbundling 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 LDCs Negotiating 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)

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The Marginalisation of LDCs (I) (50 LDCs:10 middle-income, 12 small islands, 16 LL) 3 Source: Carrre and Guillaumont (2011) Long-term decline in export share of goods and services of LDCs was arrested around early 90s but barely so if top 5 oil exporters excluded.

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

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LDCs export concentration indices are evenly distributed across predicted concentration curve 5 Figure 8. Concentration and GDP per capita, 1988-2006 average) Source: Cadot, Carrre and Strauss- Kahn (2011), Brenton and Newfarmer (2009) More diversified Diversification is mostly by extending existing products to new markets. and economies with more diversified exports have higher long-term growth via reduced volatility in output

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Industrial Employment Shares and Growth 6 Note: Each point in the chart corresponds to a 5-year subperiod during 19602004 for a specific country. The growth rates control for initial income levels and country and period fixed effects. Source: Rodrik (2009) Countries become rich by producing the goods that rich countries consume ? Industrial Employment Shares and Growth

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Determinants (correlates) of export diversification 7 Determinants (correlates) of export diversification for LDCs (and other countries) Better infrastructure, exports more diversified Less remote exports more diversified Increase in years of schooling exports more diversified Larger population exports more diversified No additional impact of preferences on export diversification (see preferences from QUAD next slides)

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..LDCs: low survival rates of new exports (yearly death rates of exports started in year t HS-4 level) 8 Source: de Melo and Ugarte (2011), Besedes and Prusa (2010) 50% of exports die by year 1 for LDCs (47 countries) 25% of exports die by year 1 for LMI (excluding those in LDC category) 75% of exports die by year 4 for LDCs (47 countries) Survival rates are much lower for LDC group Africas export growth 3.4 percentage higher with Koreas survival rate over 1975-2003

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Determinants (correlates) of Export Survival Rates 9 Source: Newfarmer et al. (2009), Freund and Pierola (2010) Typically high-entry/high-exit rates into exporting (big hits; lots of churning); Large transactions: longer the duration. Instability/volatility of RER shortens survival Search and information costs shorten survival Entry/exit are high (low) where average transaction size are low (high). High trade costs (DB indicator) lead firms to enter markets with small transaction costs. Better contract enforcement longer duration

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LDCs under 21st Century Trade (Trade-Investment- Services nexus) withRegional Unbundling of Production 10 ICT Revolution (coordination costs ) : domestic supply chains regional supply chains (join rather than build domestic supply chain) industrialisation can be fasterbut less meaningful. 21st. Century industrialisation= Separation of stages of production Now poor country growth surpasses rich-country growth For LDCs in (Asia/Europe/America) factory chain (e.g. Bgdsh, Lao join the supply chain (regional supply chains subsist because opportunity cost of time has not fallen) what about those LDCs that are far away: 12 small Islands, and 30 in SSA?? Reduce transport/transaction costs enough to move into the value- chain or occupy the traditional labor-intensive products (T&A) left for grabs by the Asians Source: Baldwin (2011)

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Transport costs are huge burden for LDCs (not policies in most destination markets-see annex 2) 11 Data on time to travel to destination for 20 container. 1 day less 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 institutional features (road quality, border delays), not geography. attributable to policies towards services (air-transport, telecom). Borchert et al. (2012) Source: Freund and Rocha (2012)

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The Burden of Being Landlocked (I) 12 Price for shipping 20 container to Rotterdam : Median cost for LL is 46% higher than median for coastal country. Distance explains only 10% of change in transport costs between LL and coastal. Poor road infrastructure explains 40% of transport costs for coastal and 60% for LL Source: AFD Annual report (2010)

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13 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 costs very high for SSA countries Ease of trading index The Burden of Being Landlocked (II) because of high number of LL LDCs, negotiation efforts by LDCs should go towards modifying article V of GATT to guarantee reasonably unimpeded transit Source: AFD Annual report (2010)

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Conclusions 14 Marginalisation of LDCs in Services not arrested LDCs are heterogeneous and not overly specialised diversification is associated with better performance (causality?) Good export performance associated with high survival rates of new exports Transport costs are huge bottleneck for export growth (and diversification) especially for LL countries LDCs should put diplomatic efforts on improvements in GATT article V on market access And keep in mind the elements of successful export strategies (see annex 1) and that TPFD have largely failed in OECD markets

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Annex 1: Elements of Successful Export Strategies 15 1.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). 2.A sustained real exchange rate depreciation, i.e. a competitive currency that is subsequently maintained is a key ingredient to sustained export surges. 3.A positive causal relationship flows from openness to income levels and from trade liberalization to medium-term growth. 4.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. 5.Unbundling of production (offshoring): Headquarter economies (Korea) and factory economies (Thailandlight pick-up trucks). Trade in parts can take place with backbone (transport-telecom-finance) services

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Annex 2: The Limits of Trade Preferences for Development (TPFD) 16 The future of Trade Preferences for Development (TPFD) Only 16% of world trade receives preferential treatment and only 2% gets preferential margins above 10% TPFD is "giving away with one hand (preferences) and taking away with another (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

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17 QUAD Preferences now largely irrelevant (I) 17 Export shares of 50 LDCs QUAD share fell from 57% in 2004 to 47% while Chinas share up from 17% to 23% and preferential margins are now negligible so Trade Preferences for Development (TPFD) from QUAD for LDCs have lost relevance.

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18 DFQF access in the EU is there(II) total of 9427 HS8 lines, 1.36% (1.24%) of lines have an MFN (ACP) tariff higher than 50% 18 Preferential margin in EU-27: Unadjusted :4.1% Adjusted: 3.1% Source: Carrre and de Melo (2010)

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19 and almost there in the US, though net preferential margin is negative(III) Note : total of 5113 HS6 lines, 0.25% of lines have an MFN tariff higher than 50%. 19 Preferential margin in US: Unadjusted : 0.86% Adjusted: -0.29% Source: Carrre and de Melo (2010)

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References 20 Africa Development Bank (2010) Africa Development Report: Ports, Logistics and Trade in Africa, Oxford University Press Baldwin, R. Trade and Industrialisation After Globalisations 2 nd. 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. Carrre, and V. Strauss-Kahn (2011) Export Diversification: What is Behind the Hump? , Review of Economics and Statistics Carrre, C. and J. de Melo (2010) The Doha Round and Market Access for LDCs: Scenarios for the EU and US, Journal of World Trade, Carrre, C. and P. Guillaumont (2011) Trade Marginalisation and its Reversal: Has there Been a Gain from Preferences , mimeo. Freund, C. and Rocha (2012) What Constrains Africas exports?, World Bank Economic Review, Freund, C. and D. Pierola (2010) Global Patterns in Exporter Entry and Exit, Mimeo Melo, Jaime de, and Cristian Ugarte, 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