Letter IEDI n. 882–Development and exports of manufactured goods according to UNIDO
The United Nations Industrial Development Organization recently took up the discussion on the importance of expanding exports of manufactured goods, especially those more complex and technology-intensive, to promote development. The paper "Capturing incomes from global demand for manufacturing", part of the 2018 edition of its Industrial Development Report, is summarized in this Letter IEDI.
The study highlights the relationships between foreign demand for manufactured goods, industrialization, and long-term growth. It then assesses how the effects of volume, price and variety work when countries try to generate income from capturing a fraction of the global demand for manufactured goods and, also, how the changes in the export prices of these goods impact economic growth.
The gains of a country in its interactions with the global economy depend, to a large extent, on the relationship between the value of its manufacturing sales and the price of its imports, which reflects the external "purchasing power" of manufactured exports —that is, how much a country can import using the income generated by its manufacturing exports.
According to UNIDO, there is a strong positive correlation between the changes in the purchasing power of manufactured exports and the evolution of per capita income. Countries that improved their purchasing power more quickly between 2003 and 2014 saw their economies grow faster.
The effects of price or volume and the diversification of the export basket can improve the situation of a country. In some cases, a greater volume of exports (even at declining prices) is able to increase the external purchasing power of its manufactured exports. In other cases, it is the diversification and improvement in product quality that increase purchasing power.
That is, countries can raise export prices by diversifying the composition of their export baskets, selling more complex goods, and/or updating the technological content of product lines already present in their baskets. It is the combination of both factors that ensures a virtuous foreign insertion over time.
According to UNIDO, if countries consistently fail to upgrade their manufacturing export portfolios, they risk seeing their terms of trade deteriorate as a result of a process of commoditization, a term that describes the persistent decline in prices of a particular manufactured product due to standardization and increased competition in global markets.
Developing countries can combat the impact of commoditization by increasing the technological content and quality of exports (supply side) and by stimulating sales to destinations with higher income and more sophisticated demand (demand side). Countries that do not exploit these opportunities risk entering a downward spiral of declining terms of trade and competitiveness that neutralize the positive effects of industrial progress.
In this respect, the importance of trade agreements should be stressed. In an international trading environment increasingly driven by technical regulations and quality standards, compliance with regulatory standards in the target market can help raise the quality of products and domestic production procedures. Therefore, according to UNIDO, adherence to trade agreements is important not only to guarantee or maintain access to markets, but also to increase a country's competitiveness.
The study suggests some actions policy makers could take to promote export-oriented industrial development:
• Analyze potential destination markets for domestic exports and their potential feedback on national industrialization efforts.
• Expand export volumes via product diversification and modernization in existing markets.
• Consider the feedback of changes in domestic revenues on the domestic industrial base. Higher incomes may favor greater variety in domestic manufacturing.
• Use the forces of expertise and comparative advantage to drive diversification and structural change, and identify and act on the needs of existing skills and knowledge bases.
• Conduct an in-depth analysis of the strengths and weaknesses of the national manufacturing sector, its capabilities, connections to other sectors, and ways to reallocate factors of production from low to high-productivity activities.
• Recognize the interaction between industrial specialization and diversification beyond existing comparative advantages.