Effects of Globalization on LDCs

Rapid technological advance, which drives the globalization process, pushes the production structure toward more technology-intensive products and activities. This requires countries to invest more in human capital formation so as to raise the skill level and access and absorb constantly evolving technology. The new technology will fast become old technology, shortening product life cycles. This, together with the building up of technological capability by LDCs, leads to "desophistication" of products, which eventually benefits all LDCs.

The result is that sophisticated manufacturing activities have gained relative to resource-based and low technology industries, as the former grew at around 7% during 1980-2000 compared to about 4% for the latter. In LDCs over the same period, the five fastest-growing activities were electrical machinery (8% per year), industrial chemicals (over 6%), instruments (near 6%), transportation equipments (5.6%), and other chemicals (5%), and the five slowest were furniture (slightly above 2%), apparel (about 2%), textiles (1.5%), footwear (over 1%), and wood products (1%). Similar patterns are also observed in MDCs: the five fastest growing manufacturing activities are other chemicals (3.7%), tobacco (3.4%), electrical machinery (3.2%), printing and publications (3.1%), and plastic products (about 3%); the two slowest are pottery and china (0.2%), iron and steel (0.1%); and the last three contracting are textiles ( — 0.1%), apparel ( — 0.9%), and footwear (—1.9%).

With new markets and input sources being opened, there has been an inherent, either internal or external, pressure to open up the economies previously closed or protected, leading to economic liberalization around the world. This liberalization intensifies international competition, with the result that only the most efficient can stay ahead. Less developed countries, being propelled by rising technological capability, are growing faster than MDCs in all manufacturing categories, especially high-technology products. The LDCs' share in the overall global manufacturing exports doubled from 13.5% in 1981 to 27% in 2000, with the share in high-technology exports more than tripling from 10 to 33%. This bodes well for the LDCs, since their share of high- technology in total global exports was steadily rising from 8% in 1976 to 23% in 2000, while the shares of resource-based and low-technology exports have been on the decline slightly, with medium technology remaining stable. Unfortunately, the export performance is uneven among LDCs. The share of world manufacturing value added (MVA) by the East Asian countries increased the greatest from 4% in 1980 to 14% in 2000, while the second most competitive group, the Latin American and Caribbean countries (LAC), saw their share down from 6.5 to 5%. The share of South Asia and Middle East and North Africa (MENA) increased from 1 to 2% and from 1.8 to 2.2%, respectively, while that of Sub-Saharan countries and South Africa (SSA) decreased slightly. Similar patterns are also seen in global exports. The share of world manufactured exports of East Asia (excluding China) doubled from 6% in 1981 to 12% in 2000, while that of Latin American countries (excluding Mexico) actually decreased from 2.5 to about 2%. China gained the greatest, from 1 to above 6%, and Mexico the second, from 0.5 to 3%. The shares of MENA and SSA fell slightly from 2 to 1.9% and from 0.6 to 0.5%, respectively. Besides East Asia, South Asia is the only other region which raised its share in world manufactured exports, from 0.5 to 1.1%. East Asia dominated the developing world exports in all categories except primary. It controlled 85% of total LDCs high technology exports, 58% medium technology, 68% low technology, and 46% of resource based. The second most successful region is LAC including Mexico with 12, 25, 11, and 24% shares in high technology, medium technology, low technology, and resource based exports, respectively. Primary exports were distributed among MENA with 37%, LAC (including Mexico) 29%, East Asia 20%, SSA 12% and South Asia 2% [4].

So far we have been concerned mostly with industrial progress among LDCs. Development experience during the last 50 years shows that development is more than mere economic growth. The latter, however, is a prerequisite for development. Today, focus has been set on development of people rather than on things. It might be seen as a process of expansion of human capabilities or freedom that people enjoy [5]. Human capabilities can range from basic freedom from hunger, disease, and lack of adequate housing, to freedom to travel, participate in communal life, and create institutions to express political, social, and religious choices.

Modern economic development requires economic growth as the basis for promoting human development. For most countries, economic growth implies industrialization. In this paper, we look at how LDCs can promote growth through globalization.

Agricultural development, of course, is a prerequisite for growth since it not only supplies food for the industrial sector but also provides demand for the industrial goods in the pre-take-off stage.* It is important for agricultural productivity to increase to create the purchasing power and growing markets for industry's output. However, domestic income by itself cannot hope to rise to a level that allows a country to achieve its noblest objectives. This is because while expansion in industry can perpetuate itself by generating increasing returns through division of labor, complementaries, and linkages, agricultural expansion is limited by a fixed factor: land. To raise income beyond that which can be provided domestically, export industries need to be developed.

During the last 25 years we have observed that the fastest-growing countries are those whose share of industry in GDP is rising most rapidly. Examples include newly industrialized countries (NICs) such as Korea, Taiwan, Hong Kong (China), Singapore, Thailand, and Malaysia. The growth in manufacturing output is crucial to the growth of productivity in manufacturing as a result of static and dynamic returns to scale [6-13]. Static returns refer to the size and scale of the production units and are characteristic largely of manufacturing where, for instance, doubling of the equipment and complementary factors will lead to tripling of production/ Dynamic economies relate to increasing returns brought about by "induced" technological progress, learning by doing, external economies in production, and so on.

The terms of trade between industry and agriculture govern how the two dependent sectors grow. Agriculture acts as both a supply and demand sector with respect to industry. Too high an agricultural price relative to industrial price will constrain industrial growth. But too low an agricultural price will leave the agricultural sector insufficient purchasing power to buy industrial goods. Thus, balanced terms of trade must be established to promote the maximum growth for the economy.

Over time, however, the importance of the agricultural sector diminishes and export growth becomes critical in fostering economic growth through the growth of the manufacturing sector. Competitiveness among labor-intensive and less sophisticated products depends, among other things, on unit labor cost which can be brought down by rapid growth in labor productivity. But productivity growth depends on output growth. For most countries with small domestic markets, output growth requires expanding exports. Ultimately, export growth depends on the growth of world income. Even if domestic markets are large, import of machinery and technology is still needed in the industrialization process. Imports of capital goods and intermediate inputs are a vehicle for technology transfer which can have spillover effects on output. Thus, fast export growth permits fast GDP growth through technology transfer via imports and FDI without balance of current accounts difficulty.

There is another reason for the urgent need to industrialize. For most LDCs, their major exports are still primary products. For instance, Indonesia's export of

* There are exceptions, of course, such as the cases of Belgium and Netherlands. t Large countries tend to have a lower ratio of export to GDP than smaller countries, because of the former's market size.

petroleum accounts for 49% of merchandise exports, which in turn account for 26% of GDP. Major primary products exported by LDCs are petroleum, copper, iron ore, tin, zinc, lead, silver, aluminum, bauxite, rice, rubber, tea, cotton, sugar, jute, coconuts, coffee, cocoa, tapioca, ground nuts, palm oil, wood, hides, and phosphates. But the net barter term of trade (NBTT) has been decreasing by 30% for the last 50 years. Worse yet, the rate of terms of trade deterioration has been substantially greater since 1980. In their trade with the European Union (EU) the commodities/manufactures terms of trade of developing countries deteriorated by an average 4.2% a year.

In addition, the 2.0% a year expansion in the volume of imports of commodities by the EU from developing countries means that the income terms of trade of developing countries (or the purchasing power of their total revenues from commodity exports in terms of manufactures imports) deteriorated by an average of 2.2% a year over the period to 1994. More generally, relating a unit value index of commodity exports from all developing countries to the United Nations index of the unit value of manufactures exported by developed countries shows a deterioration in the commodity/manufactures terms of trade of developing countries of 3.4% a year.

The deterioration varies according to the level of technology, barriers to entry, and market structure. The most technological advanced—South and East Asia—have experienced the smallest annual rate of deterioration. The least technologically advanced—the "least developed," consisting mainly of countries in SSA region—have experienced the greatest annual rate of deterioration. Latin American and Caribbean countries and MENA countries fall somewhere in between, both in their levels of technology and in the degree of their manufactures terms of trade deterioration [14]. Furthermore, countries at early stages of industrial development, with manufactures exports comprising mainly low technology and resource-based goods, sell in highly competitive world markets which operate in much the same way as the markets for primary commodities. By contrast, as we have seen in the discussion above, the exports of the industrially more advanced developing countries (East Asia) include a substantial proportion of sophisticated medium- and high-technology products, where markets are much more influenced by technological innovation, and where prices are determined generally on a "cost plus" basis.

A major part of the current trend in globalization is the development of global production networks (GPNs). Production essentially involves combining inputs to generate final outputs. GPNs are the international systems of optimum production, procuring, marketing, and innovation created through locating production activities, processes, or functions in different countries to maximize benefits from cost, technological, marketing, logistic, and other differences. This process is called by different names: fragmentation, segmentation, production sharing, integrated production, outward processing, or vertical specialization.

Fragmentation refers to the production activities that can be broken down into stages or blocks. Coordination is necessary but proximity helps to bring down its cost. When the production blocks are spatially separated, coordination becomes more complex and costly. Coordination is provided through service links. A service link is a combination of telecommunication, transportation, insurance, quality control, and management coordination to ensure that the blocks interact in the most productive manner. A firm may move the blocks around so that the components can be produced in the best possible location [15].

Advances in transportation and communication technologies, together with recent developments in the world trading system, have opened new opportunities for extending production fragmentation across national borders. A country may import goods from another country, transform them into finished products and export them. For instance, Italian firms import olives from Spain, process and package them, then export them under Italian brand names. Japan exports raw steel to Mexico, where the steel is stamped and pressed. It is then exported to the U.S. where it is manufactured into farm equipment much of which is then exported again. Among the 14 OECD countries, vertical specialization accounted for 21% of their exports and grew almost 30% between 1970 and 1990 [16]. Globalization facilitates fragmentation and helps LDCs specialize in activities or components that they have a competitive edge.

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