WT/COMTD/W/15
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positive correlation between exports andboth theshare ofinvestment inGDP andthe
share ofmanufactures inGDP. (This point andthepreceding onearesupported by
theresults ofarecent World Bank study summarized inBox1.)
3. PartIIon"Factors Underlying theVaried Trade Performances ofDeveloping Countries" begins
withabrief review ofselected keyexternal factors thataregenerally believed toplayaroleinexplaining
thevariation intrade performance across groups inthepasttwodecades:
4. Access toforeign markets .While theaverage level ofprotection intheindustrial countries
isrelatively low, there areserious barriers toentry incertain sectors ofparticular interest todeveloping
countries -including agriculture, textiles, clothing andfishandfishproducts. Developing countries
have alsoexpressed concern about preference erosion, tariff escalation andtherisks inbeing leftout
oftheproliferating freetrade areas andcustoms unions. While these considerations clearly arerelevant
tounderstanding thetrade performance ofdeveloping countries asagroup, they arelesshelpful in
explaining whysome developing countries have experienced adynamic growth ofexports while others
have seen their exports stagnate oreven decline; indeed, insome instances thecountries with apoor
export performance hadbetter access toindustrial country markets thanthose countries whose exports
expanded rapidly.
5. Capital inflows .Thedata document thewell-known trend forofficial development aidto
represent amuch smaller share, andprivate capital flows amuch larger share, ofcapital flows to
developing countries.2While theshare ofdeveloping countries intotal world FDIflows more than
doubled from 15percentin1986-90 tomore than 35percentin1994, theshare going totheLLDCs
remained stagnant ataninsignificant 0.4percent. Indeed, tendeveloping countries received nearly
80percent oftheFDI going todeveloping countries.
6. Otherexternalfactors.Duetotheirtypicallysmallersizeandlessdiversifiedeconomicstructure,
many developing counties aremore strongly affected by,andmore vulnerable to,changes inthe
internationalenvironmentthantheindustrialcountries.Over1984-93,theIMFestimatesthatfluctuations
inworld interest rates ontheir outstanding debts, cyclical changes inindustrial country demand for
their exports, anddeclines inprimary commodity prices, combined toreduce theaverage growth rate
ofthose developing countries with thelowest growth performance bythree-quarters ofonepercentage
point. Mention should bemade ofonefactor thatstraddles theexternal/domestic distinction, namely
thedebt burden oftheLLDCs. There isanemerging consensus ontheneed toaddress theLLDCs '
debt burden bynewmethods andapproaches, andtheIMF andtheWorld Bank areconsidering aplan
thatwould bring thelevel ofdebt down toamanageable level forLLDCs pursuing sound economic
policies.
7. Next, thepaper considers domestic factors thatarecommonly believed toplay arole in
explanations ofdifferences across countries inthedegree ofparticipation inworld trade:
8. Trade policies andparticipation intheWTO. Forthemost part, thecountries which have
experienced strong export growth have lower levels ofimport protection than countries with stagnant
ordeclining exports. Looking attrade regimes more broadly, developing countries which areWTO
members willbenefit from thenewrules anddisciplines agreed tointheUruguay Round, asregards
boththesecurity oftheir access tothemarkets oftrading partners, andthetransparency andpredictability
oftheirowntraderegimes.Commitmentsintheirgoodsandservicesschedulesalsohelplock-inreforms
inthetrade regime, thereby adding tothecredibility ofthereforms intheeyes offoreign anddomestic
2Nevertheless, theratio ofofficial development aidtogross fixed investment fortheLLDCs asagroup isabout two-thirds
(UNCTAD 1996a).WT/COMTD/W/15
Page 3
investors. However, fordeveloping countries -andespecially fortheLLDCs -totakegreater advantage
ofthebenefits tobedrawn from themultilateral trading system, there needs tobeanexpansion of
their human resources andinstitutional infrastructure inthetrade policy area.
9. Export concentration. Inmost oftheleast developed andother low-income countries, primary
products -incorporating lowlevels ofprocessing -continue toaccount forthebulk ofboth national
production andexports. Given thechanging structure ofworld trade described atthebeginning of
thispaper, itisnotsurprising thatmost ofthecountries thathave participated little ornotatallin
globalintegrationareprimarycommodity-dependentcountrieswithrelativelysmallandhighlyinefficient
manufacturingsectors.However,arecentWorldBankstudycallsintoquestiontheconventionalwisdom
that"commodity dependence" isalways badforeconomic growth, concluding that"countries canbe
both commodity dependent andhave high export andincome growth".3
10. Macroeconomic policies. Countries which recorded above-average export growth andability
toattract FDIreported median inflation rates wellbelow those inthelesssuccessful performers, along
with considerably lessrealexchange ratevolatility. Thelesssuccessful groups, moreover, tended
tohave higher budget deficits, more volatile deficits, anddeficits thatdeclined ataslower rate(those
inthepoorest performing group actually expanded their deficits during the1980s). Theexperience
ofdifferent countries 'reform efforts suggest thatstable macroeconomic policies, structural reforms,
andoutward-oriented trade andinvestment regimes goalong waytoprovide economic stability and
thereby lower theriskpremium attached toinvestment inLLDCs -aprecondition toattracting foreign
investors.Inthosecountrieswhichhavepersistedineconomicreforms,thepositiveresultsarebecoming
apparent.
11. Other domestic factors .Inadequate andinefficient road/rail/air transport facilities, storage
facilitiesandtelecommunicationshavealsoactedtolimitthesupply-sideresponseofdevelopingcountries,
with theproblems being especially serious intheLLDCs. Attheinstitutional level, many developing
countries, particularly LLDCs, lackatransparent legal andregulatory framework, including company
andbankruptcy laws andinvestment codes. Inmost LLDCs, theprivate sector isconstrained notonly
byshortages ofcapital, butalsoofentrepreneurial, managerial, technical andmarketing skills. Efforts
toenhance export performance willrequire notonly technical assistance aimed atstrengthening the
institutional infrastructure fortrade andtrade policy, butalsoinitiatives aimed atenhancing theoutward
orientation oftheprivate sector. Enterprise-oriented technical cooperation programmes canunderpin
efforts toimprove international marketing andbusiness development.
12. Interaction among external anddomestic factors. Inreality, themany external anddomestic
factors thatdetermine acountry 'sexport performance -andmore generally thepace ofitsintegration
intotheglobal economy -donotoperate independently. There isacomplex interaction, both positive
andnegative; afactor inonecategory caninteract with others inthecategory, anddevelopments in
external factors canimprove orworsen theeffects ofdomestic factors andvice versa.
I. MAJOR TRENDS INDEVELOPING COUNTRIES 'TRADE PERFORMANCE
The changing structure ofworld trade
13. Over thepast twodecades developments inthethree broad product categories ofworld
merchandise trade have differed sharply. While thevalue ofexports ofmining products (mainly fuels)
andagricultural products rosebetween fourandfivetimes, those ofmanufactured goods increased
3Yabuki and Akiyama (1996).WT/COMTD/W/15
Page 6
16. Asisevident from Table 2,theproduct composition ofdeveloping countries 'merchandise
exports haschanged dramatically inthepastdecade; particularly asregards manufactures (close to
adoubling oftheshare tonearly two-thirds) andmining products (adecline intheshare ofmore than
halftolessthanone-quarter).Thestronggainsinmanufacturesbroughttheshareofdevelopingcountries
inworld exports ofmanufactures to20percentlastyear, double the1980 share andnearly triple the
1973 share.
Table 2-Product structure ofdeveloping countries merchandise exports, 1973-95
(Percentage based onvalue figures)
1973 1980 1985 1990a1995p
Agricultural products 30 15 17½ 14½ 14
Mining products 47½ 65 47 34 22½
Fuels 39½ 61 43½ 29½ 19
Manufactures 22 19 34½ 50½ 62½
Total merchandiseb100 100 100 100 100
aBreak intime series canaffect comparison between 1985 and1990.
bIncluding unspecified products.
Note: (1)Inthistable, China isnotincluded indeveloping country group.
(2)1995 figures areprovisional.
Trade performance ofdeveloping countries byregion
17. Trends intheir respective shares inworld merchandise trade over thepastdecade varied among
theregions. While thedeveloping countries ineach ofthemajor regions recorded export growth,
ascanbeseenfrom Chart 3,thedeveloping countries inAsia increased their market share dramatically,
while Latin America 'sshare stagnated andthose ofAfrica andtheMiddle East declined. Asaresult,
theshares ofAfrica andtheMiddle East inworld merchandise trade arenow below thatofChina.
18. There isarelatively close linkbetween thistrade performance andtheshare ofmanufactures
inthemerchandise exports oftherespective regions. Figures inTable 3fordeveloping Asia (excluding
China), China, andthegroup of"other developing countries" reveal ahighly different product structure
ofmerchandise exports. While manufactures account formore than 80percentoftotal merchandise
exports forChina andother developing countries inAsia, thecorresponding share forthegroup of
"other developing countries" islessthanhalfthatfigure. Developing Asia andChina have high shares
notonly inmanufactures butalsoinmany ofthefastest growing product categories, such asoffice
andtelecom equipment, clothing andother consumer goods (such asfootwear andtoys). In1994,
thegroup of"other developing countries" exported more mining products than manufactured goods,
andtheshare ofagricultural products intheir exports wasalsonoticeably higher than fordeveloping
Asia andChina.WT/COMTD/W/15
Page 7
WT/COMTD/W/15
Page 8
Table 3-Global trade andtheproduct structure ofselected developing areas, 1985-94
World
exports:
annual
growth
rate
1985-94Product structure ofexports
in1994
Developing
Asia* ChinaOther
developing
countries
Manufactures 5.8 81.2 82.0 38.3
ofwhich:
-Office andtelecom
equipment12.3 26.2 8.2 3.2
-Clothing 7.6 8.3 18.7 4.5
-Other consumer goods 6.7 10.7 24.2 4.0
Agricultural products 1.8 10.4 12.2 18.4
Mining products -2.6 7.3 5.3 42.1
Fuels -8.1 5.8 3.4 36.6
Total merchandise 2.8 100.0 100.0 100.0
*Excluding China.
19. Another factor which distinguishes developing Asia andChina ononehand, andallother
developing countries combined ontheother, istheir respective participation intheglobalization process.
Data ontheevolution oftrade-to-GDP ratios, andoninflows offoreign direct investment (FDI), are
useful, albeit rough, indicators oftheextent ofintegration intotheglobal economy. Asregards the
ratio oftrade ingoods andservices toGDP, thecontrast between developing Asia (including China)
andother developing countries isevident inChart 4.FortheAsian developing countries adramatic
doubling intheir trade-to-GDP ratio canbeobserved forthe1974 to1994 period; ifChina isexcluded
from developing Asia, thetrade-to-GDP ratio issignificantly higher; however, thetrend increase in
theratio isvery similar. The"other developing countries" asagroup, incontrast, have trade-to-GDP
ratios in1994 which are-despite therecovery since 1986 -notmuch different from the1974 levels.5
5The sharp riseofimports toGDP inthe"other developing countries" intheperiod 1974 to1981 waslinked totheterms
oftrade gains oftheoilexporting countries. The sharp contraction inimports from 1982 onwards isthecombined result
ofthedecline ofoil(and other primary commodity) prices and thedebt crisis.WT/COMTD/W/15
Page 9
20. Along with amore favourable trade performance over thepastdecade, thedeveloping countries
inAsiaalsorecordedamuchstrongerinvestmentperformance.MostSouthEastAsiancountriesreported
ratios ofdomestic fixed investment toGDP ofaround 30percentduring the1985-1994 period, while
those ofLatin America andAfrica fluctuated around 20percent. Atthesame time, theformer countries
were more open andattractive toforeign direct investment. Asisevident from Chart 5,developing
Asia andChina attracted most oftheFDI flows todeveloping countries. Inflows intoChina alone
areestimated toberoughly equivalent totheFDIinflows toLatin America, while Africa andtheMiddle
East attracted only very small shares oftheFDI flows todeveloping countries.
Acloser look atthestrong andweak trade performances
21. Inorder toexamine trade performances onamore disaggregated level, twopartially overlapping
comparisons aredeveloped briefly below (athird comparison isgiven inBox1onpage 14). Thefirst
involves comparing agroup ofcountries thatrecorded above average export growth during 1985-94,
with agroup ofcountries thatrecorded negative export growth over thatsame period (seeAnnex for
thecomposition ofthetwogroups).
22. Among the25countries thatrecorded above average growth ofmerchandise exports during
1985-94, 15reported "steady" above average growth (that is,forboth thesub-periods 1985-90 and
1990-94). Alarge majority ofthese steady strong performers -12outof15countries -export mainly
manufactures (theshare ofmanufactures intheir respective merchandise exports ranged from 70to
97percentin1994).Halfoftheremainingtenstrong(butnot"steady"exporters)alsoexportprincipally
manufactured goods. Asregards the35countries whose exports in1994 were below the1985 level,WT/COMTD/W/15
Page 10
only fourexport principally manufactures. Areview ofthose fourtraders reveals thatvery particular
factors explain their presence among thepoor performers.6
23. Althoughthecomparisonbetweenthepoorandstrongperformersindicatesacorrelationbetween
theshare ofmanufactures intotal merchandise exports andthegrowth oftotal merchandise exports,
there areatleast twoimportant examples where strong export growth coincided with amoderate share
ofmanufactures intotal merchandise trade. InthecaseofVietNam, thehigh andsteady export growth
(from avery lowlevel ofexports in1985) islinked notonly totherapid riseinexports ofmanufactures,
butalsotothedevelopment ofoilfields which ledtosignificant exports ofcrude oil,andtostrong
exports offood (mainly rice). Theriseinexports ofcrude oilandmanufactured goods canbepartly
attributed toasharp riseinFDI inflows, especially inthe1990 's.
6Those factors are: (a)thehigh share ofmanufactures inthecase ofNiger isduesolely touranium which isclassified
under chemicals (not atypical labour intensive manufactured product); (b)inthecase oftheDominican Republic, thepoor
performance innational exports ismore than offset bythesharp rise inexports ofmanufacturers from processing zones
(which theDominican Republic excludes from statistics onnational exports); ifexports from processing zones areincluded,
theDominican Republic would rank among those exporters with steady above average growth; (c)inthecase ofBarbados,
merchandise exports areofdeclining importance duetotheshift totheservices (tourism) industry (inthe1990s, Barbados
exported four times more services than merchandise); and(d)inHaiti 'scase, civil strife combined with apartial trade embargo
produced acollapse ofmerchandise exports.WT/COMTD/W/15
Page 11
24. Chile isanother country withastrong export performance andavery lowshare ofmanufactures
(traditionally defined) intotal exports (17percent). Thesuccess ofChile islinked tothesuccessful
diversification into"new" (sometimes highly processed) agricultural products andanabove average
performance foritslargest single export product, namely copper. Even though allcopper exporters
benefited from thefactthatcopper prices increased faster than theprices ofother commodities, Chile
increased itsshare inglobal copper output from 16percentin1985 to26percentin1993 (while at
thesame time, theshare ofcopper inChile 'stotal merchandise exports declined from 47to38per
cent). Other dynamic exports included fish, shell fish, fruits, wine andwood pulp. Important elements
intheexport expansion ofboth copper andagricultural products were thewide ranging liberalization
andprivatization programs andtheassociated inflow ofFDI, which gives Chile oneofthelargest stocks
ofFDI percapita inLatin America.
25. Much oftheconcern about "marginalization "centres onthegroup ofleast developed countries
(LLDCs). Thesource ofthisconcern isreadily apparent from thefigures inTable 4,asisthemotivation
behind thesearch forlessons intheexperience ofEast Asian economies. Low trade-to-GDP ratios,
lowinvestmentandsmallsharesofmanufacturinginGDPandexports,arecommontraitsofthe"typical"
LLDC.7Itshould beadded thatBangladesh -byfarthelargest country among theLLDCs -isapartial
exception. With ahigh share ofmanufactures initstotal merchandise exports (83percentin1994),
itfigured among those traders which expanded their exports faster than world trade through 1985-94.
26. Thewide range ofexperience among developing countries isalsoexamined inarecent World
Bank report, using some ofthesame variables mentioned above (such astheshare ofmanufactures
inexports).8Box 1reproduces theprincipal conclusions ofthatanalysis, thelatter twoofwhich
anticipate points made later inthispaper.
7Many oftheLLDCs areinAfrica. Commenting onthedisappointing economic growth inAfrica, Sachs (1996) observes
"Africa 'sgrowth rates arenothuge mysteries. The evidence oncross-country growth suggests that Africa 'schronically
low growth canbeexplained bystandard economic variables linked toidentifiable (and remediable) policies. Remedies
thathave worked inEast Asia canalso work, with suitable modification, inAfrica. Where they have been tried -inMauritius,
tosome extent inBotswana and(very recently) Uganda -theresult hasbeen growth atEast Asian rates ...Fortunately,
thegeographical [15of53countries arelandlocked] andresource conditions play only amodest role inAfrica 'sgrowth
shortfall. The lion'sshare canbeattributed tothelack ofopenness, lack ofmarket incentives andlack ofnational saving.".
8World Bank (1996).WT/COMTD/W/15
Page 12
Table 4-Comparison oftrade performance andother selected indicators fordifferent groups
ofdeveloping countries, 1980-94
Alldeveloping
countriesLeast
developed
countriesSixEast Asian
Tradersb
Merchandise exports: value
Annual percentage change
1980-90
1990-943.2
8.71.4
1.311.5
12.0
Merchandise exports: volume
Annual percentage change
1980-90
1990-943.7
9.00.6
3.89.8
10.6
Merchandise exports
Percapita ($)
1994 260 28 2,700
Merchandise exports
Share inGDP (%)
1993 24 9 --
Exports ofmanufactures
Share inmerchandise exports (%)
1992 59 21 85
Manufacturing output
Share inGDP (%)
1980
199021
2311
9--
--
Gross fixed investment
Share inGDP (%)
1980
199026
2616
15--
--
aDeveloping country figures include China.
bWTO Secretariat estimates. The sixtraders areChinese Taipei, Hong Kong, Republic ofKorea, Malaysia, Singapore and
Thailand. Hong Kong re-exports areexcluded.
Source: UNCTAD,HandbookofInternationalTradeandDevelopmentStatistics,1994; andTheLeastDevelopedCountries,
1996 Report, Annex II,Basic Data ontheLeast Developed Countries.WT/COMTD/W/15
Page 14
ofdeveloping countries inworld merchandise trade).9This isentirely duetotheperformance ofthe
Asian developing countries, asother regions reported astagnating ordeclining share inworld services
trade. Asregards thethree major categories ofcommercial services -transport, travel andother
business services -theavailable datasuggest thatthedeveloping countries asagroup have increased
their market shares inallthree categories since 1987.
II. FACTORS UNDERLYING THE VARIED TRADE PERFORMANCES OF
DEVELOPING COUNTRIES
28. Forease ofexposition, thispart isdivided into"external factors" and"domestic factors".
Thediscussion islimited tocertain keyfactors ineach category (anyattempt atacomplete listing would
bewellbeyond thescope ofthisoverview paper). Athird section briefly highlights thefactthatfactors
inonecategory often interact inimportant ways, both with oneanother andwith factors intheother
category.
(1) EXTERNAL FACTORS
Access toforeign markets
29. Although theaverage level oftariff protection onnon-agricultural imports intotheindustrial
countries isrelatively low-once theUruguay Round reductions arefully implemented theywillaverage
3.8percent-import barriers represent aserious obstacle inspecific sectors.10Agriculture hasbeen
highly protected andexports frequently subsidized, andspecial provisions permitting discriminatory
quotas ontextiles andclothing, inplace since thebeginning ofthe1960s, were expanded with the
introduction oftheMultifibre Arrangement (MFA) in1974. Intheareaofmanufactures more generally,
there wasaproliferation ofso-called "grey area" measures (VERs, OMAs andsoforth) from thelate
1960s until thebeginning oftheUruguay Round, with anabove-average incidence onlabour-intensive
exports from developing countries.11More recently, anti-dumping actions andcountervailing duties
have increasingly been used torestrict imports.12
30. There arepost-Uruguay Round tariff peaks forsome products ofcritical interest todeveloping
countries, including textiles, clothing, andfishandfishproducts. Asaresult, theaverage reduction
intariffs forindustrial country imports from developing countries other thantheLLDCs (37percent)
islower thantheaverage reduction inapplied tariffs forimports from allcountries (40percent), while
9Problems with theavailable data ontrade incommercial services -including incomplete coverage, andfrequent revisions
indefinitions and coverage -preclude adetailed analysis byregion orcountry, especially oftrends over time.
10See, forexample, GATT 1994, inparticular Tables II.2 andII.3 onpre- andpost-Uruguay Round tariff levels. In
themid-1960s, theOECD countries 'average tariff onimports ofmanufactures from developing countries was 17percent.
Today, developing countries asagroup face OECD tariffs ofunder 4percent when account istaken oftariff preferences.
SeeWorld Bank (1996).
11SeeGATT (1993).
12The number ofantidumping actions reported totheGATT Secretariat hasfluctuated widely over thelastdecade, with
asteady risesince 1990. However, theimpact ofanti-dumping cannot bejudged only from thenumber ofcases inwhich
duties areactually imposed. Often thethreat ofaformal antidumping duty andtheresulting loss ofcustomers because of
theuncertainty created bytheinvestigation process hasinduced threatened exporters toreduce their exports ortoincrease
their prices.WT/COMTD/W/15
Page 15
theaverage reduction onimports from LLDCs waseven smaller (25percent). Ontheother hand,
itshould benoted thatthebelow-average reductions intariffs ontextiles andclothing donottakeinto
account theincrease inmarket access thatwillresult from thephase-out ofMFA-related restrictions.
Atthesame time, animportant feature ofthetariff commitments made bythedeveloped countries
intheUruguay Round isasubstantial increase inbound duty-free treatment. Once theagreed tariff
reductions have been fully implemented, theproportion ofmerchandise imports entering duty-free will
increase from justover 10toalmost 40percentfortheUnited States, from almost 24toalmost 38per
cent fortheEuropean Union, andfrom 35to71percent forJapan.
31. WhiletheMFAwasamajordistortionofworldtradewhichaffectedmanydevelopingcountries'
participation inworld trade intextiles andclothing, individual countries have been affected invery
different ways bytheMFA, depending ontheir comparative advantage inthese products. Ontheone
hand,therearetheexportersoftextilesandclothingwhichcurrentlyhaveastrongcomparativeadvantage
andwhose market access hasbeen tightly restricted, andwhich therefore willbenefit from theUruguay
Round agreement toabolish MFA-related restrictions.13Ontheother hand, twogroups ofexporters
may suffer transitional adjustment costs asaresult ofitsabolition. These are,first, those countries
with large quotas based onaprevious comparative advantage thathasbeen eroded byrising realwages
and/or theemergence ofeven lower-cost suppliers among thenew-comers (inthose cases inwhich
existing quotas arenotfully utilized, much ofthetransitional adjustment tothereduced competitiveness
presumably hasalready occurred); andsecond, those thatmayhave been induced byMFA restrictions
onother suppliers toenter theproduction oftextiles andclothing without possessing atruecomparative
advantage intheproduction ofthese goods.
32. Developing countries, inparticular theLLDCs, areconcerned about theerosion ofthemargins
ofpreference they enjoyed under theGSP andLomé Convention. Thetariff reductions agreed toin
theTokyo Round (anaverage cutofone-third inindustrial country tariffs onmanufactures) reduced
preference margins, which inturnarebeing further reduced asthetariff reductions agreed tointhe
Uruguay Round (afurther 40percentreduction) areimplemented.14Theimpact ofpreference erosion,
ofcourse, depends inpartontherateofutilization ofthepreferences. Asstudies bytheUNCTAD
andothers have pointed out,theutilization ofexisting preferential arrangements -andthustheir trade
promoting effects -have been limited forvarious reasons.
33. Half oftheEuropean Union 'simports from Africa arepetroleum andother fuels thatenter
under MFN rates bound atzero, andthree-quarters oftheimports ofindustrial products enter duty
freeorunder very lowMFN tariffs.15Inthecase ofGSP, there arelimits onproduct coverage and
limits ontheextent ofduty freeentry. Restrictive rules oforigin andanimplicit lackofpermanence
arecharacteristics ofvirtually allpreference schemes. Atthesame time, theimpact oftheUruguay
Round onLomé Convention preference margins onagricultural products such assugar, cutflowers,
13Asiswell-known, theintegration process resulting inaphase-out ofMFA restrictions issubject toaten-year transition
period, with much oftheliberalization occurring inthefinal twosteps (on1January 2002 and1January 2005). Moreover,
there have been criticisms ofthedegree ofliberalization thus far(see theJuly 1996 submission byPakistan totheGeneral
Council, onbehalf oftendeveloping countries; G/L/92).
14Onatrade-weighted basis, theUruguay Round resulted inanestimated overall lossofpreference margins forallLLDC
products covered bypreferences ofabout 8percentage points forCanada, 3points intheEUand Japan, and2points in
theUnited States. SeeUNCTAD (1996).
15When theMFN tariff islow, exporters may find itcheaper topaytheMFN duty than tocomplete thepaperwork, related
torules oforigin, required toqualify forthepreferential tariff.WT/COMTD/W/15
Page 16
vegetables andfruits, andbeef, may alsoberelatively limited. Moreover, foragricultural products
theinitial level ofpreferences granted washigher andrules oforigin arelessofaproblem than for
manufactured products, sothattherateofutilization ofpreferences granted foragricultural products
isgenerally higher than formanufactured products.
34. Thebiasinthestructure ofmany developing countries 'exports towards unprocessed products
hasoften been related tothestructure oftariffs andother trade barriers inmajor markets, inparticular
their tendency toincrease or"escalate" with thelevel ofaproduct 'sprocessing. Substantial reductions
intariff escalation indeveloped country markets wasamajor objective ofdeveloping countries inthe
Uruguay Round, andthisgoal wastoadegree achieved. InCanada, there willnow belittle orno
tariff escalation affecting paper, rubber, zinc, andtin. IntheEuropean Union, thesame holds true
forpaper andtin,while theabsolute level ofescalation fortobacco products hasbeen greatly reduced.
Theextent oftariff escalation forU.S. imports willbeeliminated orgreatly reduced forseveral products,
including paper, jute, nickel, lead, andtobacco. Nevertheless, tariff escalation continues tobeafeature
ofdeveloped country tariff structures whose reduction orelimination willnodoubt remain animportant
developing country goal.16
35. TheLLDCs inparticular have alsobeen concerned bythegrowing importance offreetrade
areas andcustoms unions inrecent years, which now cover virtually alltheir major export markets,
including Europe andNorth America. Since most ofthemajor regional trading arrangements donot
include LLDCs, theyareconcerned thatthese arrangements willresult inalossofpreferences vis-à-vis
third countries and, more generally, increase their degree ofmarginalization. While theLLDCs and
other third countries might benefit from thetrade-creating effects oftheregional arrangements -and
from thestimulus togrowth andthusimport demand inthemember countries -theymight incur costs
asaconsequence ofthetrade-diverting effects (and perhaps alsoinvestment diversion). While the
importance ofthetrade-diverting effects isdifficult toassess, there arereasons tothink thatactual
diversion effects onoverall LLDC exports willbelimited. Most LLDC exports donotdirectly compete
with members 'mutual trade, even ifthere might besome exceptions such asclothing forBangladesh
andvarious agricultural products. Thetariff reductions andbindings agreed tointheUruguay Round
agreement willensure thatthedegree ofdiscrimination against third countries isreduced.17
36. Anadditional concern thathasbeen raised bydeveloping countries over pastdecades hasbeen
theimplications ofanti-competitive practices byprivate enterprises inrestricting themarket access
ofdeveloping countries toindustrialized countries. Forexample, arecent UNCTAD Report drew
attention totheneed toensure thattrade obligations andconcerns arenotfrustrated byprivate anti-
competitive practices andthatthere isaconvergence intheobjectives andtheapplication ofnational
16Fordetails onpost-Uruguay Round tariff escalation, seeGATT (1994). According totheWorld Bank theimportance
oftariff escalation inexplaining thisbias indeveloping countries 'exports should notbeexaggerated (World Bank, 1996).
When estimating themagnitude oftariff escalation faced bydeveloping countries, account needs tobetaken oftheGSP and
theLomé Convention preferences. Results derived from astudy ofthestructure ofEuropean Union tariffs applied toprimary
commodities exported from Sub-Saharan Africa show thatbecause oftariff preferences, tariffs have notbeen amajor general
constraint tothefurther processing andexport ofAfrican commodities. (reference?). The World Bank points totwoother
explanations forthebias. First, some commodity processing operations involve highly capital intensive and mechanized
operations thataretypically thecomparative advantage ofmiddle- andhigh-income countries. Second, various other market
entry barriers such asinternational transport costs which have been found toescalate with processing, canwork against further
processing insome developing countries.
17SeeUNCTAD (1996a).WT/COMTD/W/15
Page 17
competition policies toprohibit cartel andcollusive tendering as"most national competition policies
stilldonotapply torestrictive business practices which solely attract foreign markets.18
Keeping the"market access" factor inperspective
37. Theaspects ofmarket access described above arerelevant toanyexplanation oftheexport
performance ofdeveloping countries asagroup over thepasttwodecades. Ontheother hand, they
arelesshelpful inexplaining whymany developing countries have been much lesssuccessful thanothers
inexpanding their exports over thatperiod. Insome industrial country markets, such asthatofthe
United States, nearly alldeveloping countries have confronted essentially thesame import barriers.
Inothers, such astheEuropean Union, many ofthecountries inAfrica oramong theLLDCs with
abelow average export record actually hadmore liberal market access forawide range ofproducts -
forexample viaLomé Convention preferences -thandidthecountries which recorded above average
expansions ofexports.
Capital inflows
38. Although notdirectly related toexports inthefirstinstance, thegrowing constraints onforeign
aidandthedifficulties inattracting increased foreign private financing andinvestment areaffecting
thegrowth prospects ofcountries lagging behind inglobal integration.
39. Thefigures inTable 5document thewell-known trend forofficial development aidtorepresent
amuch smaller share, andprivate capital inflows amuch larger share, ofcapital flows todeveloping
countries (export credits arealsodown sharply from the1989 level). Injusteight years, there has
been nearly acomplete reversal oftherespective shares ofofficial development finance andprivate
capital inflows.
40. Recent capital flows intodeveloping Asia andLatin America have been largely private direct
investment andportfolio flows toprivate sector borrowers rather than official flows andcommercial
bank lending topublic sector borrowers; inAfrica, incontrast, aggregate netcapital inflows arestill
largely official flows.19With limited access toprivate capital, official development assistance continues
tobebyfartheleading source ofexternal financing forthepoorest countries. Forthe1988-94 period,
flowsofofficialdevelopmentassistancerepresented98percentofthenetfinancialflowstotheLLDC s.20
18SeeUNCTAD (1996b).
19OECD (1996a).
20UNCTAD (1996a).WT/COMTD/W/15
Page 18
Table 5-Capital flows into developing countries from OECD countries,1986-94
(Billions ofU.S. dollars, andpercentage shares inparentheses)
1986 1989 19941
Official development finance250.1
(66.9)60.9
(52.7)70.2
(38.2)
Ofwhich: ODA 38.5
(51.5)48.8
(42.2)59.7
(32.5)
Total export credits -0.6
(-0.8)9.4
(8.1)3.2
(1.7)
Private flows 25.3
(33.8)45.3
(39.2)110.4
(60.1)
Ofwhich: Direct investment 10.7
(14.3)26.5
(22.9)47.0
(25.6)
Total netresource flows 74.8
(100.0)115.6
(100.0)183.8
(100.0)
1Provisional.
2Theconcept ofOfficial Development Finance embraces theresource receipts measure ofOfficial Development Assistance
(ODA) together with non-concessional disbursements fordevelopment purposes from multilateral institutions andother official
bilateral flows fordevelopment purposes (including refinancing loans) which have toolowagrant element toqualify asODA.
Source :OECD (1996a).
41. World foreign direct investment flows (FDI), measured incurrent dollars, declined intheearly
1980s after thecyclical peak in1979-80. By1984-85, annual FDIflows hadrecovered totheprevious
peak level. Thereafter, asharp riseinFDIflows could beobserved inthesecond halfofthe1980s,
andin1989-90 theflows were about four times larger than theaverage FDIflows of1980-85. This
record level ofFDIflows wasnotmaintained, andmarkedly lower FDIflows were reported forthe
years 1991 to1993. Averaging global FDI outflows andinflows, itisestimated thatin1994, FDI
flows were roughly atthesame nominal level asintheprevious peak 1989-90. Preliminary datafor
1995, indicate anew surge inFDI flows with anincrease exceeding 40percent.21
21Itisgenerally acknowledged thatinternational statistics onFDI areofpoor quality. Despite efforts toharmonize balance-
of-payments 'statistics, theconcepts andmethods applied bythenational statistical agencies continue todiffer widely -even
among themajor OECD countries -which impairs severely thecomparability between countries and thequality ofthe
information forany regional orglobal aggregate.
One major distortion intheFDI statistics isthetreatment ofre-invested earnings which isnot-asrecommended -
always included inFDI flows. Inthecase oftheUnited States, re-invested earnings often account formore than half of
FDI outflows inagiven year. Itistherefore nosurprise thatreported values onbilateral investment flows candiffer widely
depending onwhich source isused, andthat global estimates forFDI outflows andinflows candiffer markedly although,
inprinciple, both should beidentical.WT/COMTD/W/15
Page 19
42. Foranalytical purposes itisworthwhile torelate global FDIflows toother global indicators
which experience similar cyclical andprice factors. Theavailable data forthethree times series -
global FDI, world merchandise trade andgross fixed investment ofOECD countries -indicate that
global FDIflows didnotgrow faster thanworld merchandise trade orOECD fixed investment during
the1980-85 period, butexpanded considerably faster inthesecond halfofthe1980s. Forthe1990-94
period, FDIflows lagged behind both gross fixed investment andworld merchandise trade. In1995,
FDI flows again expanded significantly faster than world merchandise trade (40percent versus 19
percent).
43. Theshare ofthedeveloping countries inworld FDIinflows, which decreased between thefirst
halfofthe1980s andthesecond halfofthe1980s, increased from 15toabout 35percent between
1990 and1994. China played amajor roleinthisincrease, butother developing countries, inparticular
inAsia andLatin America, have alsobenefited from asharp increase inFDI. Atthesame time, FDI
flows tothedeveloping countries arehighly concentrated. In1994, China accounted forabout 40
percent ofallFDI inflows intothedeveloping countries andanother nine countries foranother 40
percent.22
44. Anoteworthy development isthatalarge partofthisincrease canbeattributed toasharp rise
inFDIoutflows from Hong Kong. Estimates, based onpartner statistics, indicate thatHong Kong FDI
outflows rose from $2.2 billion in1990 to$21billion in1994, accounting formore than two-thirds
ofalldeveloping countries 'outflows.
45. Most oftheOECD FDIoutflows gotoother developed countries. Ascanbeseen from the
FDIstock data, 75to80percentoftheoutward stock ofOECD countries isinother OECD countries.
This high ratio isnotsurprising astheshare ofintra-OECD exports intotal OECD exports in1994
wasalsonearly 75percent. Both trade andinvestment datareflect thestrong integration within the
OECD area.
46. Thecomposition ofcapital inflows hasalsodiffered dramatically across regions. While FDI
comprised over 40percent ofnetcapital flows toAsia during 1989-94, themajority offlows into
Latin American countries have been portfolio investment, with FDI accounting forlittle more than
aquarter ofcapital flows tothatregion.23Anticipating thediscussion of"domestic factors" inthe
nextsection, itisevident thatinsome Latin American countries, high realinterest rates attracted large
portfolio investments andcontributed totheriseinFDIinflows. Intheaftermath oftheMexican Peso
crisis, theimportance ofmore stable, longer-term oriented capital inflows intheform ofFDIbecame
apparent again. Thebenefits ofFDIinflows linked toapolicy ofbroadly-based economic liberalization
andprivatization programmes areperhaps lessspectacular intheshort-run, butimprove thelonger-term
growth perspective. Portfolio flows have alsobeen amajor factor intheMiddle East andEurope,
including inEgypt andTurkey, while FDIintothatregion hasbeen minimal. InAfrica, thedominant
type ofinflow isofficial flows.
47. Once again anticipating thediscussion of"domestic factors", according totheWorld Bank
East andSouth Asia areexpected tocontinue togrow ataslightly reduced butstillrelatively rapid
22The teneconomies with thelargest FDI inflows in1994 are(indescending order), China, Singapore, Malaysia, Hong
Kong, Brazil, Peru, Indonesia, Nigeria, Chile and Colombia. SeeIMF (1996c).
23This paragraph draws onIMF (1995b).WT/COMTD/W/15
Page 20
pace dueto,among other things, increasing intra-regional trade, strong domestic demand andlarge
inflows offoreign capital.24InLatin America andtheCaribbean, growth will besluggish as
macroeconomic adjustments inMexico andBrazil continue towork themselves out. Similarly, the
recent boom inFDIinflows toEurope andCentral Asia areforecast toconsolidate thepositive growth
performance inthese transition economies, although conditions remain difficult inseveral Central Asian
andCaucasus republics. Prospects fortheLLDCs arelesssanguine, particularly forthose inAfrica.
Theforecast forworld commodity prices isforcontinued decline, albeit agradual one, following the
rebound in1994-95. This points tofurther terms oftrade declines forthese countries andfurther
weakening oftheir growth prospects andability toattract foreign investment.
48. More generally, Africa 'spoor performance inattracting capital flows canbeexplained bythe
region'sdifficultiesinimprovingeconomicpolicies,itsloweroveralleconomicperformance,itspersistent
debt problems and-asacrucial economy-wide reflection ofthese factors, worth bearing inmind in
devising new approaches -thegreater uncertainty facing investors, domestic aswell asforeign.
According totheIMF, "some African countries -theCFA franc zone countries, Kenya andUganda,
forexample-haverecentlyattractedprivatecapitalflows,aspolicyreformeffortshavegatheredstrength
andstructural adjustment measures have helped tomaintain gains incompetitiveness resulting from
more appropriate exchange ratepolicies".25
Other external factors
49. Astheworld economy becomes increasingly integrated, external influences have anever-greater
impact oncountries 'owndomestic economies. Duetotheir typically smaller sizeandlessdiversified
economic structure, many developing countries aremore strongly affected by,andmore vulnerable
to,changes intheinternational environment thantheindustrial countries. Indeed, over thepastseveral
decades developing economies have experienced tovarying degrees theimpacts of,among other things,
fluctuations inworld interest rates ontheir outstanding debts, andcyclical changes inindustrial country
demand fortheir exports. Over 1984-93, theIMF estimates thatthese effects, together with the
previously mentioned relative decline inprimary commodity prices, combined toreduce theaverage
growth rateofthose developing countries with thelowest growth performance bythree-quarters of
onepercentage point.26
50. Finally, mention should bemade ofafactor thatstraddles theexternal/domestic distinction,
namely thedebt burden oftheLLDCs. Thelevel oftheLLDCs 'stock ofexternal debt isestimated
tohave been $126.7 billion in1993, while theratio ofthetotal debt toGNP was70percentinthe
same year.27Thesituation iseven worse forAfrican LLDCs, where theexternal debt amounted to
$96.7 billion in1993, with aratio oftotal debt toGNP of130percent.
51. There isanemerging consensus ontheneed toaddress theLLDCs debtburden bynewmethods
andapproaches. Inparticular, anIMF-World Bank debt initiative under consideration recognizes the
need tobring thelevels ofLLDC debt toapoint ofsustainability. Theplan entails theparticipation
24This paragraph draws onWorld Bank (1996).
25SeeIMF (1995b).
26SeeIMF (1994).
27SeeUNCTAD (1996a).WT/COMTD/W/15
Page 21
ofother international financial institutions, andtheParis Club ofofficial creditors, andother bilateral
creditors toreduce tosustainable levels theexternal debt burden ofanumber ofcountries pursuing
sound economic policies.28
(2) DOMESTIC FACTORS
52. There islittle doubt thatformany ofthedeveloping countries whose export performance in
thepastdecade hasbeen disappointing, theprimary problem isaninadequate domestic supply response
rather than alackofexport opportunities. Inthepastdecade, about one-third ofthecountries inthe
LLDC grouphavebeenafflictedbyacutecivilstrifeandpoliticalinstabilitywhichhaveseverelyretarded
development efforts.29Theeconomies oftheLLDCs have been hampered byanumber ofstructural
factors, including macroeconomic imbalance, lackofhuman andphysical capital, poorly developed
infrastructure, andpoorly functioning institutions.30
Trade policies andparticipation intheWTO
53. Domestic protection isoneofthemain sources ofdistortions between domestic andinternational
prices, which cause countries tousetheir scarce resources lessefficiently. Very highlevels ofprotection
inparticular canseriously impair both export performance anddomestic growth. Protection reduces
theprofitability ofexporting relative toserving thedomestic market ("ataxonimports isataxon
exports"), blunts incentives toadopt world-class standards ofproduct quality andproduction efficiency,
and,particularlywhenthesizeofthedomesticmarketisnotinitselfasufficientattraction,cannegatively
affect thecountry 'sattractiveness toforeign investors.31There arestilllarge differences between
developing countries intheextent ofliberalization undertaken andthelevels ofexisting protection.
Tariffs inSouth Asia, averaging around 45percentintheearly 1990s remain very high, withsubstantial
peaks andrestrictions inconsumer goods. African countries, ingeneral, have been more successful
inreducing quantitative restrictions than tariffs which arestillinthe25-30 percentrange, showing
little change from thesecond halfofthe1980s. Incontrast, average tariffs inEast Asia (excluding
China) areinthe10-20 percentrange andnon-tariff measures have been cutback although many such
measures remain. Protection inLatin America hasalsobeen dramatically reduced with average applied
tariffs now inthe10-20 percent range andfewremaining non-tariff measures.
54. Thedisciplines accepted byallWTO developing countries intheUruguay Round increased
significantly through their tariff bindings, acceptance ofalltheMultilateral Trade Agreements, including
moreintensifieddisciplinescoveringdomesticpolicymeasuressuchassubsidization,andnewmultilateral
28SeeIMF (1996 b),pp.229-34.The suggested criteria forsustainability areadebt-service ratio (debt-service payments
asapercent ofexport earnings) intherange of20-25 percent, andapresent value ofallclaims onthecountry notexceeding
200-250 percent ofexport earnings. Other criteria thatcome with theplan are“vulnerability factors ”.These include the
country sreserve position, itsvulnerability toshocks, itsdependence onasingle orsmall number ofcommodity exports,
and theimpact ofdebt service onitsfiscal position.
29SeeUNCTAD (1996a).
30Institutions andtheir rules have avery strong bearing onaneconomy 'sefficiency andgrowth prospects, apoint which
ismade very forcefully and convincingly byNorth (1990).
31Foranexplanation, backed upbyempirical analysis, ofhow acountry 'sown import barriers inevitably endupreducing
itsexports, seeClements and Sjaastad (1985).WT/COMTD/W/15
Page 22
commitments intheareas ofservices andintellectual property rights.32Commitments intheir goods
andservices schedules alsohelp lock-in reforms inthetrade regime, thereby adding tothecredibility
ofthereforms intheeyes offoreign anddomestic investors.33Atthesame time, provisions invarious
agreements grant differential andmore favourable treatment (principally longer implementation periods)
todeveloping countries, andinsome cases tocountries intransition toamarket economy.
55. Asaresult, thedeveloping countries, andinparticular theLLDCs, arefaced with thechallenge
oforganizing themselves toeffectively participate inthemultilateral trading system. Among the
prerequisites foramore effective integration intotheinternational trading system, andthus intothe
global economy, aretheneed (i)toseize thetrading opportunities arising from therules, concessions
andcommitments bytrading partners; (ii)toeffectively exercise their trading rights inexport markets;
(iii)tofully implement their trade obligations, turning them intoawayofenhancing thestability and
transparencyoftheirtraderegimes,andtodeviseandexecutedevelopmentpolicieswithintheframework
ofthese obligations, and(iv)todefine andpursue their trade anddevelopment interests intrade
negotiations, ensuring thattheir concerns arefully reflected inthefuture international trade agenda.
Many developing countries -andespecially theLLDCs -have found themselves poorly equipped in
terms ofinstitutional infrastructure andhuman andfinancial resources available tomeet these challenges.
Amajor effort isrequired ontheir partwith respect toinstitution building andtheupgrading and
specialization ofhuman resources andimproved forms ofinformation collection andmanagement.34
56. With respect totheadministration oftheir trade regimes andtotheir participation inWTO
work andactivities, thedeveloping countries need toexpand their human resources andinstitutional
infrastructure.Internationalorganizationsaswellasdonorgovernmentsarepresentlyassistingdeveloping
countries andcountries intransition tomore actively participate intheinternational trading system.
These organizations anddonors should collaborate tocoordinate andfocus their assistance oninstitution
building, training andinformation management, keeping inmind thepotential forimprovements in
these areas toplayanimportant roleinhelping theLLDCs toreverse thetrend toward marginalization.
Export concentration
57. Inmost oftheleastdeveloped andother low-income countries, primary products -incorporating
lowlevels ofprocessing -continue toaccount forthebulk ofboth national production andexports.
Given thechanging structure ofworld trade described atthebeginning ofthispaper, itisnotsurprising
thatmost ofthecountries thathave participated little ornotatallinglobal integration areprimary
commodity-dependent countries with relatively small andhighly inefficient manufacturing sectors.
32This and thethree subsequent paragraphs draw heavily onUNCTAD/WTO (1996).
33However, there isstillscope forpolicy reversals asmany developing countries have bound their tariffs at"ceiling"
levels, often well above theapplied rates. Forexample, most Latin American Members oftheWTO have bound their post-
Uruguay industrial tariffs atrates ranging between 25and45percent. This matters because ceiling bindings, even ifthey
give some certainty ontariff levels forthefuture, confer less stability than tariffs bound atapplied rates.
34Strengthening institutional infrastructure willrequire intensified training programmes involving academic andresearch
institutes and"on-the-job training". Anessential element ofastrengthened institutional infrastructure isanimproved capacity
tocope with increasing information anddata andimproved access toanduseofinformation technology andthedesign of
effective, user friendly trade data andinformation networks. This could involve developing countries pooling their resources
tosetuporstrengthen sub-regional orregional institutions tosupport their participation intrade negotiations andinthetrading
system ingeneral.WT/COMTD/W/15
Page 23
Asaresult, these countries areespecially vulnerable toexternal (ordomestic) shocks andaregenerally
viewed ashaving limited growth prospects.
58. Intheir assessment ofthefuture trends ofAfrican economies, Goldin etal.(1993) note that,
Agriculture remains thefoundation ofAfrica 'seconomic development,
anditsweakness underlies thepoor overall performance. Over thelast
20years thegrowth inagricultural production trailed behind population
growth byalmost apercentage point peryear. Theresult wasincreasing
dependence onfood imports anddeclining food exports (down anaverage
of3percentperyear) andalossofupto50percentofAfrica 'smarket
shares abroad. Despite this,dependence onagricultural exports hasgrown:
more than 75percentoftheexport revenue for14Sub-Saharan nations
comes from agriculture, andsixcountries relyonagriculture forover
90percent oftheir export earnings.
Moreover, itshould beadded thatSub-Saharan countries have generally failed todiversify intonon-
traditionalcommodities,suchashorticulturalproducts,fruits,andvegetables,whereasOECDcountries'
imports ofsuch products have increased much faster thanimports oftraditional unprocessed products.35
59. Thatbeingsaid,itisalsotruethatarecentWorldBankstudycallsintoquestiontheconventional
wisdom that"commodity dependence" isalways badforeconomic growth.36Theauthors conclude,
...thatproblems often associated withcommodity-dependence donotarise
because ofcommodity-dependence per-se andthatthey canbealleviated
through appropriate policies. ...Inother words, ...countries canbeboth
commodity dependent andhave high export and income growth.
Anexamination ofthecomponents ofsuccessful commodity sectors in
various countries strongly suggests thatitistheinitiatives andinnovative
actions oftheprivate sector thatmake these commodity sectors dynamic
andvibrant. Such successful cases arefound inthecoffee sector in
Uganda,thegoldminesinGhana,andthecut-flowerindustryinColombia.
Transfers offoreign capital andtechnology thathave played important
roles indeveloping newcommodity andprocessing industries inanumber
ofcountries arebestachieved when theprivate sector takes theinitiative.
...important roles forgovernments toplay ....include eliminating price
controls andstate monopolies, promoting research anddevelopment,
developing infrastructure intransportation andcommunication, enticing
foreign capital andtechnology transfers, andestablishing alegal system
fortheuseofinnovative financial instruments (p.40).
35SeeWorld Bank (1996) and OECD (1996c).
36SeeYabuki and Akiyama (1996).WT/COMTD/W/15
Page 24
Macroeconomic policies
60. Countries which recorded above average export growth andability toattract FDI reported
median inflation rates of7-11 percentage points below those inthelesssuccessful performers inthe
1984-93 period. They alsoreported realexchange ratevolatility onlyaquarter thatinthelesssuccessful
group. Thelesssuccessful groups, moreover, tended tohave higher budget deficits, tohave more
volatile deficits over time, andtoshrink their deficits ataslower rate(those inthepoorest performing
group actually expanded their deficits during the1980s).37
Table 6:Developing countries: budgetary andeconomic indicators inAfrica and
Developing Asiaa
(Annual averages, inpercent ofGDP, unless otherwise noted)
Africa Asia
1983-89 1990-95 1983-89 1990-95
Central government fiscal balance -4.8 -5.3 -3.4 -2.3
Private saving 16.5 16.8 26.4 33.1
Private investment 13.5 13.5 15.0 20.1
External debt 59.5 86.5 25.8 26.2
Real GDP (annual percentage change) 2.6 1.8 7.7 8.0
Consumer prices (annual percentage change) 16.0 26.6 7.9 9.2
aFigures fordeveloping Asia include China.
Source: IMF (1996a).
61. Macroeconomic instability isnottheonly way large fiscal deficits adversely affect thepace
ofacountry 'sintegration intotheglobal economy. Inparticular, when they areexternally financed,
fiscal deficits tend toappreciate therealexchange rateviainflows ofcapital (thesame effect occurs
viainflation when thedeficits arefinanced bydomestic monetary expansions). Arealappreciation
inturnaffects trade byfavouring thenon-traded sector over thetraded sector, deterring exporters and
foreign investors, andencouraging capital flight atthefirsthintofadevaluation. Equally, ifnotmore
seriously, inmany instances, persistent fiscal imbalances aretheunderlying cause oflowrates ofnational
saving andinvestment.
62. Between 1983-89 and1990-95, theaverage fiscal deficit fortheAfrica region widened, while
forthedeveloping countries asagroup itdeclined. AstheIMF (1996, p.64) notes:
While some of[theAfrican] countries have managed tomake modest
progress inreducing fiscal deficits, inpart because ofexternal debt
rescheduling agreements inthelate1980s andearly 1990s, ...most of
theadjustment hasbeen intheform oflower capital expenditure ...for
37SeeWorld Bank (1996).WT/COMTD/W/15
Page 25
Africa asawhole, theratio ofcurrent government expenditure toGDP
increased byover 2percentage points inthe1990-1995 period, while the
ratio ofcapital expenditure toGDP wasmarginally lower thaninthemid-
1980s. Theaverage fiscal deficit declined in1995 tojustunder 4percent
ofGDP, butformost African countries thefiscal situation remains fragile,
withmany countries stillheavily dependent ongrants tofinance large fiscal
imbalances.
63. Infrastructure .The experience ofdifferent countries 'reform efforts suggest that stable
macroeconomic policies, structural reforms, andoutward-oriented trade andinvestment regimes go
along waytoprovide economic stability andthereby lower theriskpremium attached toinvestment
inLLDCs -aprecondition toattracting foreign investors.38Inthose countries which have persisted
ineconomic reforms, thepositive results arebeginning tobecome apparent. Inparticular, reforms
designed tostrengthen thefinancial sector appear tobeanessential first step. Particularly forthe
LLDCs, financial market regulation andsupervision canpave theway forsubsequent liberalization
ofcapital movements, which arenecessary topromote growth andimprove resource allocation.39Then,
areform program aiming towards fullcapital account convertibility canbegin with theliberalization
oftrade-related investment andFDIflows, allowing LLDCs toachieve many ofthebenefits offoreign
capital while minimizing therisks ofcapital flow reversals orsimilar problems.
64. Thelargely successful adjustment program undertaken byUganda since 1986 provides acase
inpoint. Faced with aninfrastructure devastated bycivil war, anenormous andgrowing debtburden,
afixed andovervalued exchange rate, anddeclining coffee prices (virtually itsonly remaining export),
Uganda enacted theEconomic Recovery Program andhassince staged animpressive turnaround in
growth, savings andinvestment, andinflation.40The components oftheprogram included fiscal
stabilization through taxreform, tight monetary andcredit policies toincreasingly shift domestic credit
towards theprivate sector, andfinancial reforms such asthecreation ofagovernment securities market
andthestrengthening ofbanks andcentral bank operations toimprove themonetary policy transmission
mechanism. Foreign exchange andprice liberalization took place insteps, thepublic sector hasbeen
downsized andmany former state-owned enterprises arebeing privatized. While thereforms continue
andthegains arebeing consolidated, thebenefits toUganda from political andeconomic stability,
aswellasenhanced credibility amongst theinternational investment community, arereadily apparent.
65. Most LLDCs have implemented financial sector reforms aspart ofbroader policy-reform
programmes. AsUNCTAD (1996a, p.XII) notes,
Financial liberalization in[LLDCs] hasmainly comprised thereduction
orremoval ofallocative controls over interest rates andlending, the
introduction ofmarket-based techniques ofmonetary control andtheeasing
ofentry restrictions onprivate capital.... Theimpact [ofthese reforms]
ontheefficiency ofresource allocation hasbeen limited, however, largely
because ofproblems relating tomacroeconomic instability.... Large
governmentbudgetdeficitsinseveral[LLDC s]haveforcednominalinterest
38SeeIMF (1995a).
39SeeIMF (1995b).
40Uganda 'sexperience with economic reform ismore fully detailed inWTO (1995). Seealso IMF (1995b).WT/COMTD/W/15
Page 26
rates tovery high levels andcrowded theprivate sector outofcredit
markets.
Insome LLDCs, financial markets arestilldominated bygovernment banks which donotbehave as
efficient, commercially oriented, financial intermediaries. Effective institutional solutions tothese
problems have notyetbeen devised inmost LLDCs.
Other domestic factors
66. Inadequate and inefficient road/rail/air transport facilities, storage facilities and
telecommunications have alsoacted tolimit thesupply-side response ofdeveloping countries, with
theproblems being especially serious intheLLDCs. Totakeoneimportant example, high transport
costs areaserious impediment toAfrican exports.41Recent analysis suggests that, insome instances,
freight costs outweigh theimpact oftariffs. Freight costs forAfrican exports totheUnited States
generally areconsiderably higher than onsimilar goods originating inother countries, andthere can
belittle doubt thatthese charges reduce incentives fornewinvestment inexport-oriented production,
forexample, inthefurther processing forexport ofgroundnuts andcopra.42
67. Institutions. Attheinstitutional level, many developing countries, particularly LLDCs, lack
atransparent legal andregulatory frameworks, including company andbankruptcy laws andinvestment
codes. Moreover, UNCTAD (1996, p.III)notes that,
...theprivate-enterprise sector, which isthekeyagent ofdevelopment,
isnotwell developed inmost LLDCs anditsgrowth isconstrained by
shortages ofcapital andofentrepreneurial, managerial, technical and
marketing skills. Technological capacities inmany industries inLLDCs
arerudimentary,whichtogetherwiththelowlevelsofeducationalattainment
oftheworkforce, isamajor impediment toraising productivity.
Despiteexportopportunities,manysmallandmedium-sizedexportenterprises-especiallyintheLLDC s-
arecritically constrained bythelack ofpre- andpost-shipment credit facilities and, bythelack of
business information andmarket intelligence.
68. Tradepromotion.Effortstoenhanceexportperformancewillrequirenotonlytechnicalassistance
aimed atstrengthening theinstitutional infrastructure fortrade andtrade policy, butalsoinitiatives
aimed atenhancing theoutward orientation oftheprivate sector. Enterprise-oriented technical
cooperation programmes canunderpin efforts toimprove international marketing and business
development, especially intheLLDCs, byfocusing onproduct andmarket development, trade finance,
41SeeWorld Bank (1996).
42Using estimates oftheeffective rates ofprotection corresponding tothetransport costs, theWorld Bank study shows
thatfreight costs contribute toabias inthestructure ofAfrica 'sexports away from processed products. Forexample, in
thecase ofanimal andvegetable oils, theeffective rate ofprotection associated with transport costs isestimated at56per
cent, which ismore than 5times higher than thecorresponding nominal rate ofprotection. The other important conclusion
oftheWorld Bank study isthat there aremore policy options forreducing transport costs than isgenerally recognized.
These options include measures aimed atachieving economies ofscale andother cost reductions intransport services. Many
developing country governments have adopted anti-competitive cargo reservation schemes inthehope ofachieving objectives
such asthedevelopment ofnational fleets. These reservation schemes have been largely unsuccessful inpromoting national
lines, buttheir anti-competitive effects have resulted inmarkedly higher freight rates (World Bank 1996).WT/COMTD/W/15
Page 27
export quality management, export packaging, andtraining ininternational purchasing andsupply
management. Under theright conditions, thepay-off tosuch efforts canbeeven higher when special
attention isgiven totheneeds ofsmall andmedium sizeenterprises, again especially intheLLDCs.
(3) INTERACTION AMONG THE EXTERNAL AND DOMESTIC FACTORS
69. Inreality,themanyexternalanddomesticfactorsthatdetermineacountry'sexportperformance-
andmore generally thepace ofitsintegration intotheglobal economy -donotoperate independently.
There isacomplex interaction, both positive andnegative; afactor inonecategory caninteract with
others inthecategory, anddevelopments inexternal factors canimprove orworsen theeffects of
domestic factors andvice versa.
70. Totakejustoneexample from avirtually unlimited listofpositive andnegative interactions,
inflows ofFDI, bybringing resources which areinshort supply inthehostcountry -including capital,
technology, andsuch intangible resources asorganizational, managerial andmarketing skills -canassist
national efforts torestructure theeconomy andmake itmore competitive. Asafinancial inflow, it
canhelpwithbalance-of-paymentsproblemsand/ormakepossibleincreasedimportsofcapitalequipment.
Italsocanimprove market access forthehost country 'sexports ofgoods andservices, through the
multinational corporation 's(MNCs) intra-firm exports (that is,exports from host-country affiliates
toeither theparent firmoraffiliates inother countries) andarm'slength exports tointernational markets
serviced bytheMNC.
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Clements, K.W. andL.Sjaastad (1985), How Protection Taxes Exporters ,Thames Essays No.39.
Gower fortheTrade Policy Research Centre.
GATT (1994), "The Results oftheUruguay Round ofMultilateral Trade Negotiations", mimeo.,
November.
Goldin, I.,O.Knudsen, andD.vanderMensbrugghe (1993), Trade liberalization: global economic
implications ,OECD andTheWorld Bank.
IMF (1994), World Economic Outlook ,May.
IMF (1995a), World Economic Outlook, May.
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ANNEX
TWO GROUPS OFDEVELOPING ECONOMIES
(A) Aselection oftwenty-five economies whose merchandise exports expanded more rapidly than
world exports during 1985-94, listed indescending order ofthepercentage increase inexports
(anasterisk indicates those economies which recorded above average export growth inboth sub-
periods, 1985-90 and1990-94):43
Thailand*
Viet Nam*
Hong Kong*
China*
Singapore*
Malaysia*
Malta*
Korea, Rep. of*
MauritiusChile*
Chinese Taipei*
Philippines*
India*
Israel*
Pakistan*
Tunisia*
Bangladesh
BotswanaSriLanka
Colombia
Costa Rica
Nepal
Mexico
Syria
Indonesia
(B) Thirty-five economies whose merchandise exports in1994 were below the1985 level, listed in
increasing order ofthepercentage decline inexports (Guinea hadthesmallest decline, andso
on):
Guinea
Burundi
Suriname
Grenada
Trinidad andTobago
Côte d'Ivoire
Sierra Leone
Congo
Dominican Republic
Niger
Togo
GambiaVanuatu
Qatar
Brunei Darussalam
Kiribati
Nigeria
Netherlands Antilles
Libyan Arab Jamahiriya
Comoros
St.Vincent andtheGrenadines
Cape Verde
Algeria
SaoTome andPrincipeMongolia
Barbados
Zaire
Liberia
Haiti
Rwanda
Afganistan
Samoa
Cuba
Iraq
43Twelve economies with above average export growth arenotincluded inthelistbecause (i)the1985 figure was very
small (less than $50million) and/or the1985 figure was more than 25percent below the1980 figure (which suggests that
merchandise exports were unusually low in1985).