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Part I. Exporting Africa: an analysis
1.
Introduction
2. Trade theory: relevance and implications
for African export orientation
3. Some conceptual issues and methodology of
the study
4. The changing world economy: market
conditions and technological developments
5. Main findings of the study: a synthesis
6. Conclusions and policy implications
Bibliography
Background
The position of Africa in world trade
Industrialization and economic transformation
Research questions
Organization of this book
The economic crisis which has hit Africa in the past decade is raising questions about future prospects for the continent. Questions have been raised about the future position of Africa in world trade and whether Africa has any chance of developing a competitive industrial structure. This book is a modest attempt to address these questions. The stance taken is that there are lessons to be drawn from firms which have been exporting and are continuing to export manufactured products from Africa. A study of such firms can provide useful insights into the process by which they have been maintaining their position in the world market in spite of the general crisis conditions. Some exporting firms have been losing or changing their positions in world trade. Useful lessons can also be derived from the experience of these firms. This book brings insights from the experience of 55 exporting firms from six countries in Africa and draws out some policy implications regarding the prospects of restructuring for export orientation.
In the 1970s, and especially in the 1980s, many countries in Africa experienced economic crises of varying severity. Their economies have been characterized by weak growth in the productive sectors' with the initial spurt of industrial growth faltering, by poor export performance, reflected in the falling share of African exports in world trade and the unchanged export structure, and by increasing debt, a deteriorating economic and social infrastructure and increasing environmental degradation. This crisis has important implications for the prospects of transforming African economies, as envisaged by African governments (e.g. in the Lagos Plan of Action of 1980). The crisis has implications in two policy areas of particular relevance to the theme of this book: the previous import-substitution approach to industrialization as a means of economic transformation, and the position of Africa in world trade.
Debates on the causes of the crisis have centred on two categories of factors. The first category comprises exogenous factors such as bad weather, deteriorating terms of trade, fluctuating international interest rates and reduced inflows of foreign aid. The second category of explanations emphasizes endogenous factors such as inappropriate domestic policies, including incentive structures, and the mismanagement of public resources. The first line of argument, emphasizing exogenous factors, has largely been heard from governments in Africa and the UN Economic Commission for Africa (UNECA). Particular emphasis has been placed on the vulnerability of the performance of African economies to the vagaries of weather and to the unfavorable international environment, in particular to primary commodity prices, resource flows and debt conditions (UNECA, 1988).1 The second category of explanation, emphasizing the domestic policy inadequacies, has been argued by the Bretton Woods Institutions, as formulated in the Berg report (World Bank, 1981).²
One response to these crises has been the adoption of economic reforms. Most economic reforms have been implemented under the influence of multilateral financial institutions, notably the International Monetary Fund and the World Bank (IMF).³ According to these institutions, the rationale of these reforms is that Africa's slowness to respond to changing circumstances basically reflects domestic policy inadequacies, and it is these policy inadequacies that need to be addressed. In order to realize economic recovery, stabilization of the macro balance has been accorded high priority in policy-making. The conditions attached to external support have primarily been concerned with macroeconomic policy variables.
The nature and content of economic reforms carried out in various countries in Africa have varied in terms of coverage and emphasis. However, the main elements of economic reform have been liberalization of internal and external trade, greater reliance on market forces (i.e. price liberalization, devaluations and interest rate adjustments), tight monetary policies, mainly in the form of credit squeezes, and tight fiscal policy in the form of budget cuts and public sector reforms. These policies have primarily been designed to restore equilibrium, especially in the balance of payments and the fiscal and monetary variables. The policies followed in the structural adjustment programmes (SAPs) have succeeded in addressing the two policy areas which are relevant to the main theme of this book: improving the position of Africa in world trade and enhancing the role of industrialization in economic transformation.
The position of Africa in world trade
The current position of Africa in world trade is characterized by two main features: first, it has a small and declining share in world trade and second, its presence in world trade is largely confined to primary exports and the importation of non-primary products.
Africa's share in world trade is not only small, it has been declining. It varied from 4.1 to 4.9 per cent of world trade during 1960 65, fluctuated around 4.4 per cent during the 1970s and declined consistently to 2.3 per cent in 1987 (UNCTAD, 1993a).4 The share of Africa in world exports declined from 4.7 per cent in 1975 to 2.0 per cent in 1990. The share of Africa's least developed countries declined more drastically, from 0.6 per cent to 0.2 per cent over the same period (UNIDO, 1993).5 During 1980 87, while world exports were growing at 2.5 per cent per year, Africa's exports were declining at an annual rate of 7.4 per cent. The share of non-oil primary exports declined even more dramatically, from 7 per cent to 4 per cent, over the same period (Sharma, 1993).6 Manufactured exports, though small, have exhibited a similar trend. The share of manufactured exports from Sub-Saharan Africa (SSA) in world trade declined from 0.38 per cent in 1965 to 0.23 per cent in 1986 (Riddell, 1990).7 In relation to other developing countries, the share of Africa's manufactured exports declined from 5.2 per cent in 1975 to 2.6 per cent in 1985 and further to 2.5 per cent in 1990 (UNIDO, 1993). A preliminary study of the impact of the Single European Market has indicated that SSA countries lost their share mainly to other developing countries during 1987-91, in spite of preferential market access accorded to Africa through the Lomé Convention (UNCTAD, 1993b).8 These trends suggest that Africa has lagged in competitiveness relative to the rest of the world economy' indicating that productivity growth and technological learning and innovations in the export sector in Africa have been low relative to other regions. This problem of lack of competitiveness, in traditional and nontraditional exports, will need to be faced if Africa is to improve its position in world trade.
A major concern of structural adjustment programmes has been to shift the incentive structure in favour of tradables, with a view to improving the position of Africa in world trade. However, the response of African exports to the incentive structure built into the structural adjustment programmes has been disappointing in terms of the values of export earnings which have been attained and the lack of change in the export structure. Recent efforts to revive exports within the traditional setting have provided further evidence that exports cannot be an engine of growth if the export structure remains unchanged, because of the poor prospects of making breakthroughs in foreign exchange earning. Evaluating the impact of structural adjustment programmes in Sub-Saharan Africa, Husain (1994)9 has indicated that for 1985-90 the export volumes of nine major export commodities in countries which had undertaken adjustment programmes increased by 75 per cent as compared with the 1977-79 averages. Yet export earnings from these exports had fallen by 40 per cent over the same period, because of deteriorating barter terms of trade (Husain, 1994).
Africa's major exports have been primary agricultural and mineral products. The structure of exports has hardly changed in much of Sub-Saharan Africa in the past two or three decades. The share of primary commodities in total exports from Sub-Saharan Africa has declined marginally, from 92 per cent in 1965 to 86 per cent in 1987 (World Bank, 1989).10 For the low-income countries of Sub-Saharan Africa this share has even increased marginally, from 92 per cent in 1965 to 94 per cent in 1987 (World Bank, 1989). The export structure dominated by primary products is thus not changing to any significant extent.
The unchanging structure of exports may suggest that the export pessimism associated with traditional primary commodities has not been taken seriously in the design and implementation of development policies (before and after structural adjustment programmes). The first period of export pessimism was based either on declining terms of trade for primary products (Prebisch, 1954)11 or on the notion that the absorptive capacity of foreign markets was low (i.e. elasticity pessimism) as argued by Nurkse (1959)12. The future of most of these traditional commodity exports is rather bleak, considering the low income elasticities of demand associated with these products. Markets for many of these commodities are showing signs of saturation. A recent study has examined Africa s main primary exports13 and concluded that the path followed in Africa, of exporting mineral and agricultural resources, is a dead end because of their poor prospects in the world market (Brown and Tiffen, 1992).14 For instance, studies of the world cocoa market, in which exports from Africa comprise 55 per cent of traded volume, have shown that over a 20-year period (1960/65 to 1980/85), cocoa consumption increased by only 40 per cent, with negligible increases in the major consumer markets such as the EU (12 per cent) and US (19 per cent) over the same period (ITC, 1987).15 Consumption of robusta coffee (dominant in Africa) has stagnated at 12.5 million bags since the mid-1970s, while world exports of arabica coffee doubled between the 1960s and 1980s (Brown and Tiffen, 1992). For coffee from Africa, these trends are aggravated by problems of product quality, delays and unreliability.
The empirical evidence that is available on terms of trade in Sub-Saharan Africa seems to suggest that the export pessimism thesis continues to hold. A World Bank study, taking the year 1980 as the base, has indicated that the terms of trade index declined to 91 in 1985 and 84 in 1987 (World Bank, 1989). In a recent, more general survey of empirical studies on this subject, Killick (1992) has concluded that 'there is now wider acceptance than was formerly the case of the declining real commodity price thesis' (p. 3).16 If the importance of technological change is taken into consideration, this problem of export structures is even more serious, since the production of most traditional exports is associated with relatively limited technological dynamism.
Institutional/cognitive analysis can contribute towards understanding uneven patterns of economic performance and towards explaining path dependence (e.g. why some economies continue to stagnate). While learning is an incremental process filtered by the culture of a society, there is no guarantee that the stock of knowledge a society has accumulated will always enable it to confront new problems successfully. Societies that get stuck embody belief systems and institutions that fail to confront and solve new problems of societal complexity (North, 1994).17 The rationality assumption of neoclassical theory would suggest that 'political entrepreneurs' (as per the new political economy) in stagnating economies could turn around the bad performance of their economies by simply altering the rules of the game. In fact, the difficulty is in the nature of the political market and the underlying belief systems of the actors (North, 1994).
The institutional/cognitive approach to contemporary development problems implies that:
• an admixture of formal rules, informal norms and enforcement characteristics shape economic performance. While the rules may be changed overnight, informal norms take time to change. Even if a poor performer adopts the formal rules of a good performer, differences in performance may persist because of differences in informal norms and enforcement.
• the essence of development policy is the creation of policies that will create and enforce appropriate rules and norms. Both institutions and belief systems must change for successful reform to be realized.
• the key to long-run growth is adaptive rather than allocative efficiency. Adaptive efficiency results from the evolution of flexible institutional structures that can survive shocks and changes.
Africa's position in the new global trade relations will largely be determined by what action is taken in Africa in two directions: first, increasing the regional and international competitiveness of its production activities, and second, changing the structure of exports towards more dynamic, non-traditional products (in terms of their demand prospects and their potential to effect technological change). The need to effect change in the export structure will inevitably bring discussions of policy issues relating to export diversification, the transformation of production structures and industrialization back on the agenda.
Industrialization and economic transformation
The performance of Africa's industrial sector, in terms of growth and structural change, has been poor relative to other regions. Between 1980 and 1986, manufacturing value added (MVA) growth in SSA averaged 0.3 per cent, compared to 5.9 per cent in all developing countries and 7.7 per cent per annum in Southeast Asia (Riddell, 1990, pp. 10-15). The rate of growth of manufacturing value added in Africa has decelerated, from 5.1 per cent during 1975-85 to 3.5 per cent during 1985-90, while Southeast Asia enjoyed growth rates of 7.7 per cent and 8.8 per cent in the same periods (UNIDO, 1993). In terms of structural change, industry in SSA has remained more dominated by traditional and technologically simple consumer goods industries than industry in other regions.
In spite of the dismal performance of much of industry in Africa, debates during the 1980s on Africa's economic development in general and on economic recovery in particular have not given adequate attention to the role of industry (Riddell, 1990, p. 3). In some cases, industry has been identified as having been responsible for much of the waste of resources and a cure has been sought in diverting resources from industry to other sectors such as agriculture. The tendency to give less attention to industry is rather paradoxical for at least two reasons. First, the literature on economic development ascribes a high degree of dynamism to industry, a perception which has not been proved wrong. Second, industry has been instrumental to the generation and diffusion of technology, which is an important source of dynamism and competitiveness in any economy. The neglect of the role of industry amounts to the omission of a major source of technological dynamism in the development of SSA. What is needed now is to address the industrialization problem in the context of changed circumstances.
The approach taken in the economic reforms has influenced recent debates on industrialization in Africa. It is notable that in recent years discussions of industrial strategy in Africa have emphasized the importance of restructuring the supply side of the economy towards export orientation and to make it more competitive internationally. Such discussions have stressed the need to change the price structures which were associated with import substitution strategies by a return to the market.
Industrial restructuring is one component of the wider economic reforms adopted in many African countries. One implicit assumption of economic reforms and industrial restructuring is that enterprise-level inefficiencies are a reflection of distorted or inappropriate macroeconomic policies. It is suggested that if appropriate adjustments could be put in place at the macro level, enterprises would receive the right signals through the market. In response to these signals, enterprises would restructure appropriately. According to this approach, appropriate changes in policies (e.g. market prices, a realistic exchange rate, interest rates and competition) are expected to induce restructuring by favouring the expansion of efficient enterprises and the contraction of inefficient ones. This approach has been associated with the World Bank, especially in its earlier publications (World Bank, 1981). According to this approach, the reform and restructuring of industry is essentially a macroeconomic issue amounting to restructuring the supply side by putting in place appropriate macroeconomic and sectoral policies.18
One implication of the current shift towards export orientation in the industrialization debates has been to tilt the balance from import substitution strategies towards export-oriented industrialization. The debate between import substitution industrialization (ISI) and export-oriented industrialization (EOI) strategies is in many respects a debate between the structuralist and the neoclassical schools (Weiss, 1988).19 The structuralists have criticized the neoclassical school for failure to recognize the untenability of the static equilibrium and the pervasive market failures arising from various structural rigidities. In the structuralist tradition, the importance of various externalities and dynamic considerations is stressed. In their critique the neoclassical school has stressed the structural school's neglect of the role of prices and markets in resource allocation, while the radical perspective stresses the structuralists' inability to analyse the role of class formation in these countries and the constraints posed by the external economic environment. This debate between the contending schools has tended to be polarized.
One reflection of the polarity between these competing schools of thought on development is manifest in the way that the underlying assumption, that ISI and EOI are necessarily competitive alternatives, has often been carried too far. In recent years it has become increasingly evident that the rather strict separability between ISI and EOI which was assumed is questionable on both methodological and empirical grounds. In many respects, some of the propositions which were thought to apply exclusively to ISI or to EOI are increasingly appearing either to be applicable to both approaches or at least not to be confined exclusively to either one of them.
The propositions that export orientation is inevitably inimical to the establishment of domestic linkages and that a successful capitalist industrialization is not a viable option for developing countries have been put in question by the realities of industrialization in several developing countries of Southeast Asia. On the other hand, the rather common claim that EOI promotes faster growth in total factor productivity (TFP) has been questioned on methodological grounds, related to the problems of estimating TFP under conditions of restrictive trade environments, and on empirical grounds, since some country studies have suggested that the differences between EOI and ISI are probably more likely to be reflected in the direction of research and development (R&D) than in its level (Bhagwati and Srinivasan, 1975).20
The efficacy of market forces associated with these approaches is being subjected to serious reconsideration. It has now become evident that EOI can be preceded by and can even build on the achievements of ISI. Arguing that the success story of Korea is much more complex than the neoclassical paradigm would suggest, it has been revealed that Korea promoted labour-intensive import substitution as well as exports, and that most of the later exports resulted from early import substitution (World Bank, 1985).21 Selecting potential infant industries and giving them early encouragement to export can contribute to successful EOI and may became instrumental to technologically dynamic industrialization, as the experience of countries such as South Korea has shown (Westphal, 1981; Pack and Westphal, 1986; Jacobsson and Alam, 1994).22 In addition, some recent experiences in attempting to make the shift from ISI to EOI by relying mainly on market forces have not been very successful.
Taking into consideration these objections to the strict separability between import substitution and export orientation, this study proceeds on the premise that import substitution and export orientation are not necessarily competing alternatives but rather could converge and reinforce each other. If ISI is efficient it can form the basis of EOI, and EOI can be consistent with further development of efficient linkages and the acquisition of technological capabilities among domestic industries. The challenge is to blend ISI and EOI through a mix of policies which aim at maximizing the benefits from increased domestic demand and stimulating both substantial (and efficient) import substitution and increased export orientation on the basis of growing technological capabilities.
Export orientation and competition provide incentives for improving efficiency but this presupposes the ability to respond, i.e. it supposes capabilities in terms of skills and technological endowments. In fact the supply response of African industry to the kinds of incentives the structural adjustment programmes). have provided has been disappointing.
In this context, Lall et al. (1993)23 have rightly pointed out that the role of capability factors continues to be neglected in studies of African industrialization, while SAPs continue to be designed with an almost exclusive focus on incentive factors. The authors cited one study by the World Bank (1989) as an exception, for having observed that most industries in Africa remain isolated from world markets and new technologies and continue to operate at costs higher than world prices. The study suggests that acceleration of industrial capacity growth would be wasted unless the capacity to design, manage and use it was also improved (World Bank, 1989). In addition, the study calls for a shift from central planning to a market approach, from regulation to competition and from failed attempts to transplant technology to the systematic building up of capabilities (World Bank, 1989). The study by Lall et al. (1993) noted that although external shocks and inappropriate policies have influenced the performance of African industry, the widespread absence of competitiveness and technological dynamism is also explained by other constraints related to the lack of the capabilities needed to set up modern industry and operate it efficiently. Overall, little attention is given to the need for supportive policies which could complement market forces in ensuring technological dynamism. This suggests that the process of restructuring for export orientation has been only partially understood.
In the context of new technologies and rapidly changing world market conditions, the process of restructuring for export orientation is going to pose a challenge to developing countries, especially the less developed among them, most of which are found in Africa. The question which needs to be addressed is what constraints are likely to be encountered and what opportunities could emerge for these economies in this restructuring process.
One major consideration which will influence the way the industrialization problem is conceptualized relates to the changing character of innovations and technological change, and their role in international trade and competitiveness. The stance which this book takes recognizes that the Schumpeterian conceptualization of technological change, with its emphasis on learning and the accumulation of technological capabilities, can have considerable implications for the conceptualization of the industrialization problem in Africa. Industrialization, for the less industrialized countries in Africa, will have to take place under conditions of accelerating technical change and the pervasive application of new technologies. The main theme of this book is to demonstrate how some firms in Africa are coping with challenges from changing technological and world market conditions.
Some country studies have suggested that the problem of lack of competitiveness could be partly explained by more deep-seated structural and institutional problems in these countries and partly by the fact that, for geographical and infrastructural reasons, SSA firms were increasingly isolated from the dynamics of efficient change occurring elsewhere, notably as regards technical adaptation, advances in management techniques and developments in computer-aided manufacture and ancillary services (Riddell, 1990). Further protection tended to be the quick fix which in effect retarded the response. However, the performance of the industrial sector has exhibited considerable variations among countries within Africa and, within specific countries, inter-industry and inter-firm performance differences have been quite significant. For instance, although the export promotion efforts of the 1980s had little success, some firms which were originally oriented to the domestic market have switched significantly to the export market. It is quite possible that some of these firms are exporting on the basis of marginal cost pricing, with overhead costs covered by the higher returns from the domestic market (Riddell, 1990, pp. 36-7). It is also possible that some firms have maintained increased international competitiveness over time. There are a few firms whose production has always been export-oriented, with well over 50 per cent of their output destined for export markets. There may be useful lessons to be drawn from the experience of these firms. A major concern of this book is to try to understand the process by which exporting firms maintain international competitiveness. It may be necessary to form a better understanding of the problems of comparative inefficiency and the acquisition of capabilities at the enterprise level. Such understanding could be a useful guide to finding more effective kinds of policy intervention. If technological dynamism and international competitiveness are to be achieved, then these differences in themselves ought to raise further questions regarding the constraints and opportunities on the one hand and the policy implications at macro and micro level on the other.
The future of traditional exports is rather bleak, considering the low income elasticities of demand associated with these products. The fact that the production of most traditional exports is associated with relatively limited technological dynamism raises doubts about their relevance for technological development in developing countries. Restructuring on the supply side needs to address the question of developing more technologically dynamic export sectors in these countries.
The main objective of this study is to understand more deeply the process of supply side restructuring and to examine the opportunities and feasible options for developing technologically dynamic and internationally competitive export industries in Africa in the context of the rapidly changing technological and world market conditions. This book will examine the process of building up and maintaining the capabilities which are necessary for maintaining competitiveness in export markets. The study examines such capabilities at firm, industry and national levels in selected countries in Africa. Since it is firms and not nations which compete on international markets, the analysis will focus on the firm level, emphasizing the process through which firms create and augment those capabilities which are necessary for acquiring and maintaining regional and/or international competitiveness over time in the context of internal and external influences (e.g. from factor markets, product markets, government interventions and institutions and policy remedies for market failures). In spite of this emphasis, the interdependence between the different levels is recognized and will be retained in the analysis.
The focus of the study is on exporting manufacturing firms, identifying and analysing the processes by which these firms have been maintaining or losing their competitiveness in international and/or regional markets. This is done by studying the capabilities of selected exporting firms with a view to understanding the process by which the creation and development of these capabilities has been promoted or inhibited over time by factors either internal or external to the firms. In this context, three main questions are addressed:
1 What factors and processes have influenced the paths which various firms have followed in attaining or losing regional and/or international competitiveness?
2 How have exporting firms been coping (or failing to cope) with changing technological and market conditions?
3 What lessons and policy implications can be drawn from the manner in which exporting firms have been maintaining (or losing) competitiveness in export markets and how have they been coping (or failing to cope) with changing technological and market conditions?
Recent developments in trade theory could offer useful insights into the emerging relationship between international trade and industrialization. Chapter 2 examines trade theories with a view to examining how the changing conceptualization of the relationship between trade theory and trade policy relates to the industrialization process. Chapter 3 describes the methodology adopted in this study and Chapter 4 examines some technological developments and world market conditions which are likely to be important for Africa. Chapter 5 summarizes the major findings of the study and Chapter 6 draws conclusions and policy implication from the study. Chapters 7-12 are devoted to country case studies and Chapter 13 gives the survey questions used in these studies.
2. Trade theory: relevance and implications for African export orientation
Introduction
Conventional trade theory: essence and
relevance
Critics and extensions of conventional trade
theory
Trade theory and accumulation effects:
introducing new growth theories
Some implications of new trade theories for
Africa
Questions about the role of trade and trade policy in development represent one major factor in generalizations about macroeconomic policy and the choice of development strategy in developing countries (Colclough, 1991, p. 18a).1 In recent years, developments in trade theory and their implications for trade policy have led to changing views on the relative importance of factors influencing trade and trade patterns and on the role of trade in economic development. This chapter examines these developments with a view to drawing out some implications relevant to development efforts in Africa. The chapter begins by examining the core of conventional trade theory, its explanatory and predictive power, and proceeds to survey briefly some critics and extensions of the theory within the conventional framework, and developments from outside it. The chapter closes with some reflections on the relevance and implications of these developments for discussions regarding the options that may be open to Africa in its development efforts in two areas: improving its position in world trade and enhancing the role of industrialization in economic transformation in a changing world economy.
Conventional trade theory: essence and relevance
Classical theories of trade, notably the Ricardian type, have stressed international differences in technology and real wage levels. Their focus has been on factor productivity differences. Developments in trade theories within the neoclassical framework have shifted attention from such differences in factor productivity towards differences in factor endowments. The core of the conventional trade theory is the factor proportions theory of the Heckscher-Ohlin model and its extensions. The theory is based on general equilibrium models and the assumptions associated with them, including perfect competition, concave (or at least quasi-concave) and constant returns-to-scale production functions, and well-behaved and homo-thetic preference functions. Other theorems which are associated with the conventional theory are the factor equalization theorem, the Stolper-Samuelson theorem of gains accruing to the factors used in protected import-competing sectors and the Rybczynski theorem of the expansion (or contraction) of sectors which are intensive users of the abundant (or scarce) factor. As part of the general case for free markets, the case for free trade derives from the view that, as a production process, international trade is likely to be carried out more efficiently if it is left to the market mechanism.
Conventional trade theory has been questioned on methodological and empirical grounds. Critics who have emphasized the methodological problems of the conventional model are mainly associated with non-neoclassical formulations (e.g. evolutionary theory), while those who have questioned the empirical validity of the model have come from both within and outside the neoclassical framework.
The first empirical test of the Heckscher-Ohlin (H-O) model was administered by Leontief (1953).2 Using input-output analysis, Leontief found that the US was a net exporter of labour-intensive goods and a net importer of capital intensive goods. This was not thought to amount to nullification or serious questioning of the theory. Instead, the outcome was labeled 'the Leontief paradox, reflecting the strong faith economists had in the H-O theory and their reluctance to accept the results of the test. An extensive literature on international trade has been devoted to attempts to explain the Leontief paradox - attempts in fact to find reasons why the results of the test must mean something other than the nullification of the H-O model itself. However, more recently it has increasingly been admitted that the conventional trade theory is in several ways inadequate to explain what is actually happening in the real world (e.g. Helpman and Krugman, 1985; Porter, 1990).3
The explanatory and predictive power of the conventional trade theory has increasingly come under attack from both inside and outside the neoclassical framework of analysis. At least three factors have influenced views on the efficacy of the conventional theory: the changing character of international trade, the changing roles and relative competitive positions of countries in the world economy (e.g. the role of the US economy in world trade and competitiveness especially in relation to Japan) and changing views in the field of economics, especially as regards the analysis of industrial structure and competition (e.g. broadening the tool kit of economic analysis by borrowing from the field of industrial organization).
Patterns of trade have been changing in favour of North-North trade. This phenomenon, which Linder (1961)4 observed, has received more serious attention and extensions have been made in many respects. There has been a relatively steady growth in manufacturing exports, leading to high levels of trade between countries with similar factor endowments. Three quarters of all exports from the developed countries have their destination in other developed countries, which are supposed to be relatively similar in their relative factor endowments (Yoffie, 1993).5 The implication of these changes is that the explanation of the volume of trade on the basis of differences in factor endowments can be no more than partial. The composition of trade is also not adequately explained, since there is substantial two-way trade in goods of similar factor intensity, although it is largely true that countries' net exports seem to reflect a factor content which is consistent with underlying resources. These trends are likely to be reinforced by the on-going tendency to form larger trading blocs among developed countries (Ray, 1991).6
Increasing globalization has been particularly characterized by the growing role of transnational corporations (TNCs), facilitated by the explosive growth in international private financial flows. The number of TNCs has increased and the number of home bases has also increased. One consequence has been the increasing role of TNCs in exporting capital in the form of foreign direct investment (FDI). During the second half of the 1980s, FDI increased by 29 per cent annually, nearly three times the rate of growth of international trade. Further evidence from this area suggests that alliances are prevalent in global oligopolies, serving ubiquitously as vehicles for the transfer of technology between firms, achieving economies of scale, building technical standards and accessing markets, skills and resources (Yoffie, 1993). These developments have led to a new ranking of the factors creating interdependencies whereby FDI in manufacturing and services, rather than trade, is leading inter-nationalization and is influencing location and trade patterns. During the 1980s the pattern of internationalization and globalization was further facilitated by deregulation and the globalization of finance and by the enabling features and pressure from new technologies.
These developments cannot be adequately explained in the conventional theoretical framework.
Conventional trade theory associates trade with resource reallocation, which increases aggregate national income but leaves some factors with reduced real income. However, the realities as demonstrated by the EU and the US-Canada pacts suggest that little reallocation takes place and that trade may permit increased productivity of existing resources.
Finally, increased tensions in the international trade environment and rapid technological progress, which is reflected in new products, new processes and increased productivity, have led to a reassessment of the relevance and applicability of conventional trade theory (Haque, 1991).7 In addition, the experience of the most successful newly industrialized economies (NIEs) does not seem to conform to the traditional model of specialization. Japan, for instance, encouraged industries which are associated with high income elasticity of demand, rapid technological progress and rising labour productivity. They relied on protection, and government policy played a key role in targeting and fostering industry. They realized that the comparative cost doctrine is inherently static: clearly, comparative advantage has to be created and maintained by responding to the changing world environment in which technology is advancing and new productive capacities are being created. Success in international trade has much to do with the ability to anticipate and to be prepared to exploit trade opportunities in a dynamic context.