If Development Succeeds

Let us assume that development succeeds, to the point where living standards are similar in all countries. (This does not seem to me to be terribly unrealistic; it is a logical consequence of the hypothesis that less-developed countries tend to grow more rapidly, which is in turn explained primarily by the fact that knowledge is in large part a public good so that latecomers do not have to reinvent the wheel. Of course, it is quite inconsistent with some economic model-building, specifically with those models that postulate that countries tend to reach the same equilibrium growth rate but differ in their trajectories. So far as I am aware these models have not been subjected to empirical testing.)

The question is: what does this imply about future world events?

Consider first what are the implications for strategic events. I see no obvious reason why this should impinge on relations among the great powers: the competition among them is not economically motivated. Countries do not engage in a competition with the objective of catching up, nor would they cease to act in competitive ways if there were no commercial motivation. Where I would anticipate a benefit is in eliminating the widespread tendency of poor countries to engage in civil warfare: whether one attributes that to an increased opportunity cost of warfare, or to greater contentment of the population, it appears there is a strong tendency for poor countries to be the ones that have civil wars. If one abolishes poverty, the leading countries may have difficulty in using small countries as agents in their contest, which would be a gain, but it is unlikely to resolve the tensions among the leading countries.

Where I would anticipate far greater impact is on the economic relations among states, in particular, with regard to migration and trade.

So far as migration is concerned, it would surely relieve the tensions that are so evident at the present time. There would be an end to the desperate search to enter richer countries that is motivated primarily by the poverty at home. Instead, migration would become far more similar to that which presently takes place among the developed countries: migration that is often temporary, more balanced, and therefore does not generate great social tensions.

Consider trade. At the present time, trade is fundamentally of three types. First, there is trade of the sort first analyzed so brilliantly by David Ricardo: trade that ultimately is based on different factor proportions and therefore leads to differences in comparative advantage. This explains most trade in primary products: country X imports a commodity because it lacks the resources to produce it domestically. Obviously there are shades of grey here: at more expense a country could produce some of the commodities currently being imported, while others demand a factor of production (say, iron ore) that it totally lacks. But when a country imports commodities for this reason, it must export an (approximately) equal value of products. A second type of trade is the inter-industrial trade that was first extensively analyzed in explaining the early success of the European Common Market (as it was then called). It is well known that this trade cannot be explained by differences in factor endowments, but reflects instead differences in demand preferences, with each country tending to make products that satisfy majority demands at home, and then satisfying minority preferences by importing goods. Today there is a third great category of trade: that which consists of the import of goods that were formerly produced at home. Like trade in primary products, this trade will also be explained by differences in factor proportions, but differences that will tend to erode as countries become more equal.

Let us call the first motivation for trade Category A. We make the strong assumption that all trade in primary products is explained this way. Inter-industrial trade is labeled Category B. We make the strong assumptions that all manufactured exports of advanced countries and all industrial intra-trade of emerging markets consist of Category B. We label the third motivation for trade Category C. We make the very strong assumption that all industrial exports of emerging markets to advanced countries consist of Category C at the present time: in practice they surely include Category B too, and indeed one expects that the proportion of Category B will progressively increase as countries approach maturity, but the assumption is essential to permit identification of Category C.

The first two categories are liable to persist indefinitely. In contrast, the third is a temporary phenomenon, which arose after the “third world” mastered the techniques of the first world but had not achieved their living standards. It is destined to disappear if and as living standards catch up with those in the advanced countries.

Some facts about the value of trade in 1995 and 2013 are shown in Table 1. Trade is disaggregated merely into primary products and manufactures, and countries are disaggregated merely into the “advanced” (OECD less Mexico) and the Emerging Markets (all other countries). The data come from the World Bank, courtesy of Tyler Moran.

trade

It is a well-known fact that trade has grown more rapidly than GDP since the Second World War. This is no doubt partly because trade was unnaturally repressed at the end of the war, and has since bounced back to a more natural relationship. Inter-industrial trade was the primary victim of the anti-trade bias of policy inherited at the end of the war, and was progressively eliminated during the postwar period, which explains why it was inter-industrial trade that first accelerated markedly. But the rapid growth of trade relative to GDP is also due to the fact that Category C has been coming on stream. This is a new phenomenon in the postwar period: there was previously virtually no trade of this type.

Is the phenomenon of trade growing more rapidly than output likely to go into reverse as this type of trade disappears, which it will do as incomes become more equalized? For that one needs an estimate of the current breakdown of trade, along with extrapolations of the growth rates of the first two categories. It is easy to get figures for the level and growth of trade in primary products, since this simply involves extracting the relevant figures from the SITC classification of trade, as is done above. This shows that trade in primary products, defined as SITC 0-5 and 67 and 68, has grown at an average rate of 9.0 percent per annum over the 18-year period 1995-2013. However, a part of the primary product trade is a reflection of the new trade in products that were previously manufactured domestically. If one assumes that emerging markets spent 20% (31%) of their export earnings on primary products, as they did in 1995 (2013), one should deduct 20% (31%) of the estimated value of “new” trade from the exports of primary products to get the trend estimate of primary product trade. (The increase in 2013 over 1995 presumably reflects the recent boom in the prices of primary products.) The figure for the trend in 1995 was 766 – 276/5 = 711, and the relevant figure for 2013 is 3637 – (0.31)(1903) = 3046. Thus primary product trade would have increased from 711 to 3046 over the 18 years from 1995 to 2013 in the absence of manufactured exports by emerging markets, so our estimate of the trend rate of growth of primary product trade is 8.4 % per annum.

Unfortunately it is more difficult to make a similar breakdown between the remaining two categories, since this refers to alternative motivations for trade in industrial products, and no sub-division of industrial products is likely to approximate the desired division. (For example finished cars are a single SITC code, even at a finely disaggregated level; but a developing country may well export cars to an advanced country that represent Category C, while much of the trade in cars represents Category B.)

The sub division of trade in industrial products between Categories B and C is thus bound to be rough and ready, which is reflected in the fact that the assumptions previously listed were described as “strong”. However, let us assume that industrial exports of advanced countries are entirely accounted for by category B as are the exports of emerging markets to other emerging markets, while the industrial exports of emerging markets to advanced countries consist entirely of category C. In that case inter-industry exports amounted to $2340b in 1995 and to $6744b in 2013, which is an increase of 6744/2340 = 2.882 over the 18-year period, or 6.06 percent per year. Since both 6.1% and 8.4% are in excess of any likely growth of GDP, one may conclude that the growth in trade is likely to exceed the growth in GDP even after Category C disappears.

There is, however, a fundamental problem in the preceding calculations. The fact is that both Category A and Category C are exported with a view to being able to import. It therefore makes no sense to consider the trade motivated by comparative advantage as merely the export of primary commodities; one needs also to include the imports (other countries’ exports) they permit. Consider primary products. They are typically exported with a view to being able to import industrial products, so to the extent that this occurs one should increase the weight of comparative advantage trade (Category A) and decrease that of inter-industry trade (Category B).

It is in principle simple to calculate the extent to which the three categories change as a result of trade in primary products, on the assumption that “expenditure patterns” in a particular year – the division of spending between primary products and manufactures, and the division of spending between goods made in the EMs versus the advanced countries – is constant. Then, labeling as follows:

products

we can say that the primary product exports of EMs amount to (a1 + a2). The money they earned is divided in the proportion (a1 + a3)/(b1 + b3) between primary products and manufactures; (b1 + b3)/(a1 + a3 + b1 + b3) is therefore the proportion of spending on manufactures. So the size of “induced” manufactured imports (some other country’s exports) is (a1 + a2) (b1 + b3)/(a1 + a3 + b1 + b3). A part of the counterpart of EM primary product exports is exports of manufactures, and to this extent it is clearly appropriate to reallocate the value of B, to A.

The primary product exports of advanced countries amount to (a3 + a4). They can be analyzed in exactly the same way, which results in “induced” manufactured exports that reduce B by (a3 + a4)(b2 + b4)/(a2 + a4 + b2 + b4). This is added to the result for the EMs.

It is less clear that it is appropriate to make a similar adjustment in the value of A for the induced component of primary product exports. They are already included as reflecting comparative advantage; the logical procedure would therefore be to first deduct them and then add them back, leaving the value of A unchanged.

Consider next the export of manufactures by the EMs, b2. These were classified as Category C. The purpose of exporting is to be able to import, so that we need to include (in Category A) an estimate of the additional exports that result from EM exports of manufactures. Insofar as the imports (= exports) are of industrial goods, there is a further diminution of B. Once again, the reduction in B is b2(b1 + b3)/ (a1 + a3 + b1 + b3). Again, it is unclear whether we should change A, so we don’t. Note that in this case we do not add a term for the advanced countries, since (by definition) they do not export Category C.

Substituting in the above formulae for 1995 and 2013, one concludes that A95 = 776 + 174 + 629 +265 = 1844, B95 = 2606 – 174 – 629 – 265 = 1538, C95 = 276. Similarly, A13 = 7498, B13 = 2883, C13 = 1903.

During the 18-year period 1995-2013, Category A increased 7498/1844 = 4.066 times, an annual rate of growth of 8.1 percent. Category B increased from 1538 to 2883, i.e. by 1.875 times, an annual growth rate of 3.6 percent. Combining the two, using the 2013 weights of 7498 and 2883, yields a growth rate of 6.9 percent per year. Since this is well above any plausible growth rate of GDP, one may conclude that the phenomenon of trade growing more rapidly than “World GDP” is still likely to outlast the end of Category C trade under this expanded concept of Category A trade.

If and as the emerging markets catch up with the advanced countries, rather than get caught in a “middle-income trap”, the growth of trade is likely to slow down. There is, however, no reason to suppose, on the basis of recent experience, that it will cease to grow more rapidly than output.

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