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4. The changing world economy: market conditions and technological developments

Changing market conditions
The changing prospects of access to world markets
New technologies and the implications of changing technological conditions

The world economy is undergoing change in technological and market conditions which could influence the position of Africa and the role it may play in the world market. The challenge for Africa is to understand these changes as a basis for developing the ability to respond constructively and positively. This chapter addresses some of the technological and world market conditions that are likely to influence the ability of exporters to attain and maintain their position in the world markets.

Changing market conditions

The business environment in which exporting firms must be prepared to operate is characterized by unprecedented opportunities to tap new markets, while competition in traditional markets is increasing dramatically from both traditional adversaries and new entrants and because of the evaporation of barriers to previously protected markets. With competition arising from diverse and unexpected sources enterprises can no longer be confident about their market shares: they must constantly innovate to compete. In this new business environment the following key drivers have been gaining in importance: a focus on improving the productivity of knowledge and service workers (rather than industrial productivity), with productivity programmes shifting from culling costs to improving organizational performance and effectiveness; a focus on quality in both products and service, with quality programmes moving from manufacturing operations to knowledge and service operations and firms building a corporate culture around quality;1 the challenge of responsiveness, with a rising need to react rapidly to changing market conditions, competition and customer demands; the globalization of markets, operations and competition; an interest in out-sourcing certain aspects of production, distribution, sales service and support functions, resulting in a shift of enterprise focus to vertical and horizontal integration across organizations; partnering, to function on global markets by establishing alliances and joint ventures with other key players in both similar and disparate markets;2 and greater attention to social and environmental responsibility (Tapscott and Caston, 1993; Mytelka, 1991).3

Overall, the trend suggests that the changing market conditions now require firms to meet more refined and personalized customer tastes, as well as society's collective needs, as expressed through a wide range of democratic and associative mechanisms (OECD, 1992b).4 Interaction between producers and these more demanding and better informed customers is an essential factor for growth and competitiveness.

Changes in market conditions for such traditional products as textiles, clothing and footwear can be used here to make the point. The changes that have occurred in price and income elasticities of demand across products and income groups have produced a pattern of market segmentation (Mytelka, 1991). For instance, sportswear is increasingly worn in non-sport settings, leading to increasing price competition between sports specialty shops and general clothing retailers. In addition, the market has been highly influenced by developments in textile technologies (e.g. new manufacturing yarns and synthetic fibres such as Tactel, Gortex and Sympatex) and changes in fashion (CBI, 1991b).5

In the case of household and furnishing textiles, the traditional preference for white bed and bath linen has given way to an immense variety of colours, prints and patterns. The market has become more conscious of quality and variety, though trends are not as short-lived as those in apparel. Consumers are conscious of price, durability and fibre mixtures as well as design, colours, weight, ease of handling and product safety. The most important developments in bedroom linen have been the introduction of the fitted sheet, non-iron sheets and the eiderdown (also referred to as a duvet or quilt) together with quilt covers. In table linen the most important developments have been a decline in the daily use of tablecloths and an increase in attractive kitchen items. There is a trend away from very cheap tablecloths and towards higher-quality printed and embroidered cloths (CBI, 1991a).6

In the case of footwear, the European footwear importer supplies specifications, models and considerable assistance in technical know-how and quality control to the contract producer. The main suppliers are now the cheap and efficient sources in the Far East. New suppliers will have to offer the same level of competitiveness in terms of price, workmanship and timeliness (CBI, 1990).7 Markets are becoming more segmented, with quality and timely delivery becoming important factors in competitiveness. Globally spread production networks are developing, especially in sport shoes. African countries may only be able to enter such markets by tying themselves to major names such as Adidas and meeting their requirements for production at consistent high quality (UNIDO, 1992a).8

The changing prospects of access to world markets

Among the external constraints on the adjustment process, access to markets and to technology could be most difficult. Protectionism is on the rise. In fact, the two principal markets for developing country clothing exports, the US and KU, have steadily increased their degree of domestic protection, mainly in the form of orderly marketing arrangements (OMAs) and voluntary export restraints (VERs). The Multifibre Agreement (MFA) has contributed to limiting opportunities for new market entrants, in particular those from developing countries (Mytelka, 1991). As the MFA became more restrictive in the 1980s, some large firms in the NICs relocated production to make use of quotas available in the less developed countries. Negotiations to relax the restrictive clauses under the MFA have not yielded fruitful results so far. With the rising regional trading blocs in the developed countries there are indications that access prospects may not improve.

Patterns of trade have been changing in favour of North-North trade so much that many recent trade theories have focused on such trade. 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 went to other developed countries. By 1989 only one third of developing country trade went to other developing countries (Yoffie, 1993). There are several emerging trends which suggest that this pattern is likely to be reinforced.

There is a tendency to form larger trading groups of Northern countries, a development which is likely to bring benefits of guaranteed access to larger markets for members but with the likelihood that many poor non-members, including African exporters, will suffer from loss of access. At the same time, there is a risk that trade wars could undermine the global benefits from multilateral trade. US support for free world trade after World War II seems to have been motivated by foreign policy concerns and by the relative international competitiveness of the US economy at that time. As the foreign policy concerns have changed and the international competitiveness of the US has declined relative to Japan, support in the US for world free trade seems to be on the decline and interest in regionalism on the increase. Bhagwati (1991)9 sees the advocacy of managed trade, and aggressive unilateralism and regionalism, as threats to GATT principles. One factor reinforcing the tendency to unfair trade is the 'diminished giant syndrome', because of the relative decline of the US within the world economy. Britain was in a similar situation at the end of the nineteenth century, as compared to the US and Germany. The other factors are the increasing crisscrossing of foreign investments, flexible exchange rates, the outbreak of protectionism in the 1980s, the increased focus on non-tariff barriers, and developments in the realms of ideas and ideology (e.g. the recognition of the irreversible gains in efficiency and competitiveness arising from learning). Bhagwati has warned that the extension of GATT rules to other areas (e.g. trade in services) may be opening up a Pandora's box and may diminish the possibility of agreeing to a rules-oriented trading system.

These developments suggest a strong case for introducing safeguards and disciplines in GATT to protect the multilateral world trading system from possibilities of damage from regional agreements. Under these conditions, the challenge seems to be whether a continuous search for new markets and market niches can be launched and sustained over time. This will have implications for the development of marketing capabilities in-house and/or appropriate linkages.

EU trade policies are essentially discriminatory against imports from the South. Even under the GSP (General System of Preferences) and Lomé Convention arrangements, the relief offered is subject to unilateral termination by the EU on grounds of graduation'. The EU is advocating selectivity in the application of safeguards (i.e. temporary import barriers imposed in order to protect domestic industries at risk) and is demanding that the South provides protection for intellectual property owned by nationals or companies of its member states. The question of access is particularly important for exports of manufactures. Recent intensification of protectionism in the North has subjected the South's manufactured exports to discriminatory restrictions precisely in those areas where the South has a comparative advantage. These restrictions take several forms: explicit departures from GATT (e.g. the MFA concerning textiles and clothing), VERs and OMAs.

There are further indications that the prospects of uninhibited entry of industrial products from the South to the EU are limited. One such indication is in the development and direction of R&D support. Subsidizing R&D is the core of EU industrial policy in the 1990s, as industrial policy shifts from sectoral subsidies to functional subsidies. These are used to encourage and promote the innovative capacity of firms (UNIDO, 1992a). Many EU R&D programmes are designed to improve manufacturing in traditional fields in which EU industry might otherwise lose its competitive edge (textiles and clothing, steel, and new materials such as artificial fibres which bridge the traditional separation of textile and chemical industries).

Although the Lomé Convention continues to favour African products' access to the EU market, there are reasons not to be too optimistic about this favour. First, the experience of Asian countries has shown that as soon as developing countries' progress in industry begins to threaten EU industries, quotas are often revised to limit previously favourable market access. Some of Africa's preferential provisions have been diluted in the Uruguay Round of the GATT negotiations. Second, rules of origin are likely to complicate South-South cooperation between Africa and the more advanced developing countries. Africa's favourable position in terms of access to the EU market partly derives from MFA restrictions on Asian exporters. This may induce Asian producers to relocate to Africa, as has already been occurring in Mauritius and Nigeria, as the country case studies have shown. Rules of origin, however, are likely to limit this trend as soon as it grows to a scale which threatens EU industries. Third, although this is often denied, there are indications that the former socialist countries of Eastern Europe will compete with Africa in the European scene as regards trade relations and other economic cooperation arrangements. The long-term success of the Lomé Convention as it relates to Africa should be evaluated in the light of the extent to which it has helped Africa to improve international competitiveness and change the structure of trade. It seems that, seen in these terms, it is unlikely much progress has been made.

In the Uruguay Round negotiations, there is a notable absence of agreement on specific commitments in the area of market access (UNCTAD, 1993a). The weaker trading partners have an interest in clear international disciplines to provide security of market access and to shield them from bilateral pressure from major trading powers. But the main question here is whether the market access commitments will provide improved access to markets in products of interest to Africa. It is therefore not surprising that the phasing out of the MFA, which has for years operated as a discriminatory instrument against the export interests of many developing countries, and the integration of trade in textiles and clothing in the GATT have been among the most difficult negotiations in the Uruguay Round. The outcome of the negotiations is that these sectors are to be integrated into the GATT over a 10-year period, with each party free to select specific products to be integrated at each of the four phases. Although there is provision for special treatment for the least developed countries, no specific differential or more favourable treatment has been accorded to them in the integration process. Since more advanced developing countries have moved into more sophisticated products, leaving exports of the simpler textile and clothing products to newcomers, and since the EU has been able to increase its exports of these products to developing countries, it has been suggested that a more liberal MFA would not cause much harm to producers in the industrial world (Waelbroeck and Kol, 1987).10 The EU does not seem quite convinced that their industries in these areas are not threatened. This explains why the MFA is to be phased out over a 10-year period. Considering that the MFA was first introduced in 1974 as a temporary measure to allow time for the developed countries to adjust to the threat of competitive imports from developing countries, it has been quite long-lived. The EU is now supporting R&D investments in these industries, among others, hoping that at the end of the 10 years the threat will have been averted through technological developments.

The Uruguay Round agreement on safeguards provides for the preservation of the non-discrimination rule and the prohibition and elimination of 'grey area' measures (e.g. VERB, OMAs). There are also provisions for reducing arbitrariness in the application of anti-dumping duties. The agreement contains more defined rules and disciplines for subsidies and improved provisions on countervailing measures.

Multilateral disciplines have been extended in two areas: trade in services (OATS) and trade-related intellectual property rights (TRIPS). The GATS agreement establishes the unconditional most favoured nation (MFN) clause as the fundamental principle of agreement and provides for increased participation of developing countries in world trade in services. The TRIPS agreement involves an international upward harmonization of standards of intellectual property protection (IPP) for all countries, irrespective of their level of development. It includes the obligation to comply with the substantive provisions of the Stockholm Act of the Paris Convention.

The South Commission Report argues that applying the rules traditionally applied to trade in goods to trade in services could undermine the ability of the South to regulate and promote its services industries. Recent advances in information and communications technologies have added a new dimension to the role of services in the development process. The new producer or business services, such as the computerization of inventory control or quality control, have a profound impact on the competitiveness of a wide range of economic processes and products. In the longer term, the report argues, an excessive dependence on imported services could seriously weaken the development process to the extent that an underdeveloped domestic services sector would imply weak links between the producers and users of services. This situation is not conducive to innovation, the absorption and assimilation of new technological changes, or to benefiting from learning by doing. The thrust of this caution is supportable under African conditions, provided that lessons can be drawn from previous instances of the perpetual protection of inefficient infant activities, which never grew to maturity. Protection must be more selective and less pervasive than in the past and should be accompanied by promotional policies for the development of key service activities.

Knowledge is increasingly being privatized, and the South is being excluded. Many countries in the South find themselves increasingly unable to predict, let alone to regulate, technology flows (South Commission, 1990, p. 219).11 The report observed that considerable progress towards facilitating the South's access to technology was made in the 1970s, with the Code of Conduct and intellectual property. 50 that by the early 1980s only two important matters remained to be settled in UNCTAD's code of conduct: the clause governing restrictive practices and the provision concerning applicable law and dispute settlement. The report points out that before mutual concessions by North and South on these two points could be made, further negotiations were blocked by the North and the revision of the Paris Convention was stalled for several years. The North has since used the recent acceleration of technological advances to press for a reversal of earlier negotiations (p. 254). In spite of the threatened reversal of earlier achievements, the report suggests that what is required is an international framework to regulate the activities of TNCs in developing countries, starting with the introduction of a code of conduct for TNCs.

The negotiations in the Uruguay Round have moved in the direction of greater liberalization of investments (under trade-related investment measures (TRIMS) and greater protection of intellectual property rights. TRIMS has the effect of liberalizing investments by reducing requirements for the entry and operation of foreign firms, while TRIPS will enable investors in technology and innovating firms to capture profits from their innovations. It is feared that TRIPS is likely to reduce access to new technologies. However, since the acquisition of technology requires effort in the form of tangible and intangible investments' Africa will need to tilt the balance of the debate in favour of the design of policies which would facilitate the transfer of technology through various forms of learning, especially by African firms. The process by which firms in African countries build up and accumulate skills and acquire technological capabilities through inter-firm networks and cooperation arrangements needs to be understood better, especially in terms of the kinds of technological efforts and investments which African governments and firms need to make. Having made such technological efforts and investments in technology, obstacles to increasing international competitiveness may begin to emerge. These obstacles may or may not include those relating to the code of conduct. On that basis, the thrust of the negotiations would shift towards those practices which inhibit the process of technological learning and the accumulation of the capabilities which are required for international competitiveness.

There are indications that developing countries have made major concessions in terms of their freedom to act in trade in goods and services and of their technological and social development policies in relation to technological transfer and TRIPS (UNCTAD, 1993a). The agreement on a World Trade Organization (WTO) provides that all agreements emerging from the Uruguay Round are to be incorporated into a single legal instrument and accepted by all contracting parties. The experience of Africa and its relationship with other multilateral institutions suggests that there is a possibility that the WTO could be used to discipline the weaker players while being powerless to discipline stronger players in the game of trade. The coordination of WTO activities with those of the World Bank and IMP could also result in strong cross-institutional conditionality (Peng, 1993/4).12

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