1. Terms of Trade Reversal? The Challenge to Development Strategy IKD Seminar 18 th January 2007

2. Terms of trade decline The prevailing post WW2 wisdom But, Singer/Prebisch: –Commodities are inputs into manufactures –Demand low for commodities as incomes rise –Demand for commodities falls as their price increases –Synthetic substitute for natural materials –Low innovation barriers to entry

3. And then one other “Singer insight”… Labour markets –Cost-plus pricing in high income countries –Reserve army of labour in low income economies So manufactures vs commodities really a surrogate for high income vs low income

4. Manufactures-commodities terms of trade

5. The drive to industrialisation Close association between incomes and industrialisation Manufactures are (relative to agriculture) income elastic and price inelastic Manufacturing embodies rents – agriculture does not Manufacturing can be labour intensive – primary commodities are very capital intensive

6. The Asian Drivers upset the applecart

7. Share of manufacturing value added Share of the world Share of developing countries 1985199819851998 East Asia China South Asia Latin America and Caribbean Sub-Saharan Africa Middle East, North Africa, Turkey 4.1 1.4 0.8 6.7 1.0 1.5 13.9 7.0 1.8 5.2 0.8 2.4 29.2 10.2 5.9 46.9 7.1 10.8 57.7 29.3 7.3 21.8 3.4 9.8

8. China’s growth is not unique..

10. But its not just the Asian Drivers

11. Market share of five largest retail chains (2000) AC Nielson, cited in Bell 2003

12. With what consequences? Growing productive capacity means heightened competition Growing concentration in buying power Manufacturing caught between a rock and a hard place

13. World Manufacturing Export Price, 1986-2000 IMF, World Economic Outlook Database

14. EU Imports from China 1 st Q 2005/1 st Q 2004China Market Share in EU-25 Imports Volumes %Price %1 Q 2004 %1 Q 2005 % T-shirts164-26717 Pullovers534-47638 Men’s trousers413-16635 Blouses186-24622 Women’s coats184-18610 Bras139-153049 Socks and pantyhose 63-223054 Linen and ramie yarns 5112745 Linen fabrics25711045 Source: Euratex data as reported by Nathan Associates

15. Caught between a rock and a hard place Percentage of sectors with negative price trends, 1988/9- 2000/2001 by technological intensity and country-grouping

16. Employment in China’s formal sector manufacturing Employment (‘000) Index of employment (1995=100) OECD 14*ChinaIndiaBrazil OECD 14*ChinaIndiaBrazil 199585,62398,0306,5009,438100 199783,00396,1206,9008,381979810689 199981,26681,0906,7007,420958310379 200180,53580,8306,4007,56594829880 200278,76183,0806,5007,556928510080 Source: Calculated from Carson, 2003

17. The picture is not so bleak for commodity producers

18. Actual and projected global share of China’s consumption of base metals Source: Macquarie Mining

20. Enormous demand potential Kgs/capitaGDP per capita ($US1995) AluminiumCopperSteel Japan 1955 1975 0.6 10.5 1.2 7.4 80 599 5,559 21,869 Korea 1975 1995 1.0 15.0 1.3 8.1 84 827 2,891 10,841 China 1990 1999 2002 2003 0.7 2.3 3.3 4.0 0.6 1.2 2.0 2.4 59 108 160 200 342 756 933 1,103

22. All this has implications for the producers of manufactures

23. And for the producers of commodities? Commodities price boom: –Dutch disease Zambian copper, tobacco, maize and cotton Armed conflict Corruption Managing surpluses: –LA and ownership Chile and copper Venezuela and oil

24. And for agriculture?

25. Appropriating rents in the coffee sector There are more varieties of coffee and with a greater variety of taste than they are of wine “Blue mountain coffee prices are not subject to the factors of supply and demand that affects other commodities. The price is fixed” (2001) Illy sells at $10/230gm compared to $1.50, and farmers get 30% more.

26. Escorial wool Maghreb sheep taken to New Zealand in 1828. Numbers are now severely limited by NZ farmers Resources put into marketing in 1990s “We have created ‘clean air’ between the generic ‘commoditised’ Merino wool” Escorial scarf retails at more than €600

27. And for income distribution Manufacturing is labour intensive Commodities are: –Capital intensive –Generally foreign owned –Kleptocracy –Armed conflict

28. Innovation is key to sustainable incomes

29. Avrge rate of profit 1 st round innovation 2 nd round innovation 3rd round innovation Innovation rent THE SCHUMPETERIAN INNOVATION SCHEMA Rate of profit Time

30. Endogenous rents Technology rents Human Resource rents Organisational rents Relational rents Design rents Marketing rents

31. Exogenous rents Resource rents Policy rents Infrastructural rents Financial intermediation rents

32. Production Design Value chains are increasingly global and dynamic Competitive pressures Marketing Services Competitive pressures

33. Our existing architecture is limited Competences and dynamic capabilities –But mostly within the firm Types of upgrading –Process upgrading –Product upgrading

34. An upgraded architecture on innovation Competences and dynamic capabilities are now a value chain challenge Wider perspective on upgrading –Process upgrading –Product upgrading –Functional upgrading –Chain upgrading

35. Implications for Development Strategies

36. Sectoral choice Sectoral choice? –Agriculture –Commodities –Manufactures –Services Or positioning within sectors? –Back to Schumpeter and rents

37. Policies to facilitate innovation –Macro policies –Cross sectoral policies and market failure –Sectoral and regional targeting

38. Income inequality and marginalisation Meeting the challenge in production Funding the challenge through production Don’t take politics out of this