Trade Policy in Developing Countries: a New Trade Policy Consensus?

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Zattler, Jürgen

Article — Digitized Version Trade policy in developing countries: A new trade policy consensus?

Intereconomics

Suggested Citation: Zattler, Jürgen (1996) : Trade policy in developing countries: A new trade policy consensus?, Intereconomics, ISSN 0020-5346, Nomos Verlagsgesellschaft, Baden- Baden, Vol. 31, Iss. 5, pp. 229-236, http://dx.doi.org/10.1007/BF02927154

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JOrgen Zattler* Trade Policy in Developing Countries A New Trade Policy Consensus?

Development institutions are currently revising their traditional positions on the question of adequate trade policies for developing countries. Against this background the following article takes stock of the degree to which developing countries have become integrated into the world economy and considers the opportunities and risks which the integration process presents. Problems confronting national policies in less successful developing countries are then outlined which make further, efficient integration of these countries into the world economy more difficult. Finally, policies are identified which could ease further integration.

he academic and political debate on the question and development potential. The old neoclassical T of an adequate trade policy strategy for policy recommendation, which states that active trade developing countries is by no means new. The lively policy is either superfluous or damaging or both, was and passionate discussion pursued in the 1960s and called into question by the success of the countries of 1970s of whether to reject or embrace global market South East Asia which clearly applied unconventional integration, etc., only began to abate in the 1980s with instruments. The trade and economic success of the "revival" of the neoliberal doctrine which these countries finally acquired a theoretical essentially assumes that - based on a static foundation with the formulation of the so-called New interpretation of the concept of comparative cost Trade Theory' and the New Growth Theory? Within advantages - state intervention in national production the framework of these new theoretical approaches, structures falsifies the "natural" specialisation of the some of the traditional model's restrictive assump- economy according to its factor endowment and tions as well as the concept of perfect competition should therefore be eschewed: international trade were lifted, and a serious examination took place of leads to an alignment of factor rewards between such phenomena as economies of scale, external different countries by raising the price of those effects, technological advance, product differen- production factors which are available in relatively tiation, market structures and the role of human large amounts; state intervention thus has the effect capital. of hindering the use of resources in accordance with These theories lead to the conclusion that national their relative availability. competitiveness requires active promotion. While the The debate surrounding trade policy strategies question of competitiveness does not even arise in was rekindled at the end of the 1980s. Three the traditional model, since, with free trade and developments are responsible for this. Firstly, the flexible exchange rates, the "correct" production growing real integration of individual national structure evolves automatically and the economy economies has attained a new quality, and it has even becomes competitive, these new analyses been possible for many developing countries to concentrate on the question of how factor participate in the "globalisation" of the world economy. It is increasingly recognised, even by For an overview of the various contributions to the theory of strategic trade policy, see Henning Klodt: Theorie der strate- representatives of developing countries, that this gischen Handelspolitik und neue Wachstumstheorie als Grundlage process opens up significant potential opportunities for eine Industrie- und Technologiepolitik?, Institut f(Jr Weltwirtschaft, Arbeitspapiere No. 533, October 1992;and Elhanan Helpman, for trade and development. The second aspect Paul R. K r u g m a n : Market Structure and Foreign Trade, 1988. responsible for the renewed stimulation of trade 2 For an overview see, e.g., Michael Stolpe: Ans~tze der neuen policy debate concerns the exploitation of this trade Wachstumstheorie - ein LiteratudJberblick, Arbeitspapier No. 508, February 1992; RobertJ. Barro, X. Sala-i-Martin: Economic Growth, New York 1995; and Rainer W i I h e I m : Endogene Wachs- tumstheorien und ihre Implikationen f(Jr Entwicklungsl&nder, in: * Federal Ministry for Economic Cooperation and Development, EntwicklungsSkonomische Diskussionsbeitr~ge, No. 20, University of Bonn, Germany. The article expresses the another's personal views. GieBen, 1996.

INTERECONOMICS, September/October 1996 229 INTERNATIONAL TRADE endowments can be altered. In this context, policies developing countries have become integrated into the aimed at promoting technological capacity, human world economy and considers the opportunities and capital and productivity become increasingly risks which the integration process presents. important? The question of how a country can actively Problems confronting national policies in less influence its production structure is of particular successful developing countries are then outlined, significance. Here, as a rule, the original concept of problems which make further, efficient integration of comparative cost advantages is not challenged as these countries into the world economy more difficult. such, but is subjected to dynamic interpretation: Finally, policies are identified which could ease further factor combinations and specialisation structures integration and which could be implemented with change during the development process; it is not relatively little difficulty. It is implicitly assumed that a case of wanting to deny the critical role of the administrative capacity of many of these countries endowments for choosing an appropriate speciali- is very limited and insufficient to implement relatively sation, but to accelerate the process of structural complicated policies such as those practiced by the change by means of an appropriate economic policy. successful East Asian countries. Consequently, the main aim of such a policy is to shift the national economic activity - bearing in mind its Globalisation of the World Economy current strengths and comparative advantages - to The world economy is growing ever closer together. sectors for whose products the income elasticity of In the last two decades world merchandise trade has demand is high, in which labour productivity growth is increased continuously. Trade in industrial products fast, and where perspectives for growth are therefore developed particularly fast, more than trebling in favourable. volume from 1973 to 1994. The share of industrial The fact that development institutions are currently goods increased from around 60% in 1985 to reviewing and revising their traditional positions on approximately 78% in 1995. 4 the question of adequate trade policies for developing countries appears to be a result of these three World trade growth rates in the last decades were aspects. It is even possible - for the very first time - thus considerably higher than those of global that a consensus on questions of trade policy could production. The same is true of developments in be established among the relevant development foreign investment which increased greatly, largely on institutions such as the World Bank and UNCTAD. a cyclical basis, during the second half of the 1980s This view is confirmed by the UNCTAD IX conference and has been rising again since 1995, with a rate of on trade and development which was concluded in increase of 40% in 1995 alone. 5 The resulting drive the Republic of South Africa in May. towards global integration in the goods and capital markets - in contrast to the labour market - has led to The following article attempts to outline this a new stage of world economic integration. While in possible consensus which would involve recognising the past companies used to try to improve their the advantages of global market integration - production and sales conditions by exploiting trade especially in view of the integration of national advantages, today this is done increasingly by means economies which is currently taking place - and of shifting production locations. As a result, global deliberately exploiting trade advantages by production networks are emerging. introducing an active policy of trade promotion, including the use of unconventional instruments. The Following the conclusion of the Uruguay Round the article first takes stock of the degree to which globalisation of the world economy took a major step forward and will probably continue in the years ahead, 3 Competitiveness of the national economy can be achieved both by albeit presumably at a slower pace. According to lowering real income - e.g. by currency devaluation - and by World Bank estimates, 6 world trade should grow at an increasing productivity. Lasting competitiveness can only result from an increase in productivity. Static analysis blurs this difference (cf. average of 6% p.a. up to the year 2005. As in the past, Irfan u~ Haque: Technology and Competitiveness, in: trfan u~ H a q u e (ed.): Trade, Technology and International Competitiveness, production growth is unlikely to keep pace, reaching EDI Development Studies,World Bank 1995, pp. 11-48). around 3.5%. As far as expected import growth is 4 World Trade Organization: International Trade - Trends and concerned, East Asia leads the field with 11%, while Statistics, Geneva 1995. sub-Saharan Africa and the OECD countries bring up 5 Cf. OECD: Recent Trends on Foreign Direct Investment, in: the rear with 5.5% each. For Latin America the World Financial Market Trends 64, June 1996. Bank expects an annual growth rate of 6%. East Asia 6 Cf. World Bank: Global Economic Prospects and the Developing Countries, Washington 1996. also leads the field in export growth with 10%, while

230 INTERECONOMICS, September/October 1996 INTERNATIONAL TRADE only 4% and 5% is expected for the Middle East and countries' largest source of external capital, out- sub-Saharan Africa respectively. Latin America is stripping official development aid. It should be noted, again expected to achieve 6%. however, that China alone received a 34 billion dollar share of this total. Altogether, the Asian-Pacific region A number of different factors are responsible for the collected the largest part of world foreign investments increasing globalisation of the world economy. On the in 1994 with a sum of 61 billion dollars, followed by one hand, progress in communications technology Latin America with 20 billion dollars. In contrast, sub- has both greatly reduced the transaction costs of Saharan Africa received only 1.8 billion dollars and foreign trade and increased market transparency North Africa 1.3 billion dollars. Investments in Africa worldwide. On the other hand, the multilateral and are linked above all to raw materials and to the oil unilateral IJberalisation of trade and investment sector in particular.9 regimes as well as worldwide harmonisation of legal and institutional frameworks have also played a As a result of this development, the degree to which decisive role in reducing transaction costs. 7 developing countries, particularly in Asia, are inte- grated into the world markets has increased With the globalisation trends mentioned above, the considerably during the last twenty years. This is borderline between domestic and foreign policy manifested in trade growth and in foreign investments becomes blurred. As barriers to foreign trade fall, as a share of GNR domestic economic regulations increasingly become the focus of multilateral negotiations. State Import Liberalisation regulations concerning taxation, competition or The international prerequisites for the economic industrial policy are thus seen increasingly from the integration of developing countries improved with the point of view of international competition. conclusion of the Uruguay Round. Irrespective of any Role of the Developing Countries obligations entered into in the Uruguay Round, most developing and transformation countries have now The developing countries' share of world mer- opened up their economies, usually as an integral part chandise exports reached a peak of 28% 8 in 1980 and of structural adjustment programmes. This has also has since stabilised at approximately 22.5%. Behind improved the relevant conditions within these these figures, however, is a restructuring process countries for exploiting the new export opportunities. 1~ towards processed products and away from raw materials, especially oil. Since 1973, developing Average import protection has fallen continuously, countries have managed to treble their share of world more as a result of these unilateral measures than of industrial product exports. In 1995 it stood at multilateral trade liberalisation." Moreover, the extent approximately 20%. of foreign trade liberalisation is insufficiently docu- mented in the average levels of import duties levied, It is hardly surprising that individual groups of since the sub-Saharan countries, for example, first developing countries have participated to very started opening up their economies to the world different degrees in the growth of merchandise markets by abolishing their foreign exchange exports. While the Asian developing countries have increased their share considerably, Latin America's 7 cf. d0rgen W i e m a n n : Rahmenbedingungenund Anforderungen share of merchandise exports has stagnated and that an Handelsf6rderung in Entwicklungsltindern - die Perspektiven nach dem Abschlu8 der Uruguay-Runde, Deutsches Institut f~r of Africa and the Middle East has declined. These Entwicklungspolitik, Berlin 1996. figures reflect the fact that the Asian developing 8 ExcludingChina. countries and China primarily export processed 9 Cf. UNCTAD: World Investment Report, New York and Geneva products and, in part, products for dynamic markets, 1995. while the other countries export a considerably higher '~ Bleaney and Fielding assume that in 64% of all cases, proportion of raw materials with stagnating markets foreign trade liberalisation measures were part of structural adjustment programmes.(Cf. Michael B I e a n e y, David Fi e I d i n g : worldwide. Investment, Trade Liberalisationand Structural Adjustment, in: The Journal of DevelopmentStudies, Vol. 32, No. 2, December1995, pp. As a group, developing countries have participated 175-194.) However, these reforms were only partiallyimplemented. Possible reasons for this partial implementation of import substantially in the rise in worldwide foreign liberalisationwill be considered below. investment - albeit only as from 1990. In 1994 they " Most developing countries, and the least developed in particular, attracted investments worth 84 billion dollars or currently enforce considerablylower levelsof import duty than were put forward as binding in the UruguayRound. This is the main reason approximately 37% of all foreign investments. Foreign why the Marrakeshaggreements are currentlyof littlesignificance for investments have thus become the developing import duties in developingcountries.

INTERECONOMICS, September/October1996 231 INTERNATIONAL TRADE allocation systems and exchange rate adjustment Risks and the Need for Complementary Policies policies. Nonetheless, levels of import duty in most Globalisation of the world economy also entails big regions have been lowered considerably. Unweighted risks, however. As a result of the globalisation average import duty levels are currently highest in process, pressure of competition has also intensified South Asia at 45% (compared to 60% at the end of on developing countries' domestic markets. the 1980s). In Africa, average import duty levels are Moreover, further trade liberalisation heightens the around 25%, while Latin America and East Asia have risk of macroeconomic destabilisation. If exports fail lowered average duty levels to approximately 15%. 12 to take off while at the same time imports increase as Opportunities Resulting from Globalisation trade restrictions are relaxed, foreign trade imbalances will increase. The longer structural The process of globalisation and liberalisation adjustment continues without economic activity and presents significant trade opportunities to all the exports taking off, the more difficult it becomes for developing countries including the least developed governments to subdue domestic political resistance countries (LDCs). The most significant possibilities are to economic policy reforms. Only a lasting increase in largely the result of generally improved access to production and exports can sustain a government's export markets for products from developing will to reform and safeguard political liberalisation in countries due to a reduction in levels of import duty the relevant countries? 4 It is this recognition which as well as in quantitative import restrictions in unites the reform programmes currently being purchasing countries. The fast-growing sales markets implemented and the development policy aim of of the dynamic Asian economies represent an promoting the process of political iiberalisation in important export potential for less developed developing countries. countries. Market opportunities should improve for non-traditional agricultural products in particular Problems for further Integration (tropical fruits, fruit and vegetables, high-value fish products, etc.) due to changing consumer Characteristic of the structural adjustment pro- preferences, income growth and the liberalisation of grammes carried out in the 1980s was that trade agricultural trade. 13 reforms were introduced in a situation which - e.g. compared to the 1970s is - was hallmarked by large Furthermore, new possibilities arise as access to current account deficits and debt burdens, high real technology and capital improves. In times of exchange rates and external shocks. This was increasing international capital mobility, international allowed to happen despite the fact that there was a communications processes and the ever swifter relatively broad consensus amongst economists that sequences of innovation and imitation, "lack of a stable macroeconomic framework is a key capital" becomes more and more insignificant as a prerequisite for the successful implementation of development bottleneck. Nowadays, it is easier for microeconomic reformsJ 6This realisation was born, at developing countries to link up to the process of the latest, of the - unsuccessful - Latin American technological development taking place in the experience of trade liberalisation in the 1970s. industrialised countries, provided they can adapt generally available technologies to local conditions. In the meantime, further liberalisation of foreign Moreover, as wages and productivity in the newly trade appears to be running into difficulties in many industrialising countries increase, LDCs could in countries. 17 It is reasonable to assume that major future become more attractive as production reasons for this are inadequate progress in reducing locations for labour-intensive semi-finished products, macroeconomic deficits and the unsatisfactory assuming that they manage to implement adequate policies. ~s Cf. V. Corbo, P. Rojas: World Bank-supported Adjustment Programmes: Country Performance and Effectiveness, in: V. Corbe, S. Fischer, S. B. Webb (eds.):Adjustment Lending Revisited: Policiesto RestoreGrowth, World Bank, Washington1992. ,2 Cf. World Bank, op. cit. ~6 Cf. D. Rodrik: Trade and Industrial Policy Reform, in: J. ~ Cf. UNCTAD:The Least DevelopedCountries - 1996 Report, New Behrman, T. N. Srinivasan: Handbook of Development York and Geneva1996. Economics, Vol. III B,1995, pp. 2927 ft., as well as the literature ~4 Cf. EuropeanCommission: The Designof Economic Reforms in the quoted there. Context of Political Liberalisation - Issues Paper, Brussels, March ,7 Cf. IMF: World Economic Outlook - Prospects and Policy Issues, 1994; and EuropeanCommission: The Designof Economic Reforms Washington 1996. in the Contextof PoliticalLiberalisation - Findingsand Conclusions from Case Studies, Brussels, December 1994. '~ However,these figures includegrants from overseas.

232 INTERECONOMICS,September/October 1996 INTERNATIONAL TRADE development of export business. Successful trade Africa and the LDCs. 2' In comparison, customs duty liberalisation requires complementary policies. The revenues in the industrialised countries account for opportunities of globalisation can only be exploited if just 3% of state revenues. these countries succeed in implementing adequate What is therefore required is the introduction of fiscal and export promotion policies. complementary reforms aimed at stabilising macro- economic conditions which are coordinated with Importance of Fiscal Policy trade liberalisation policies. Countries which have Many developing countries, particularly LDCs, have initiated such complementary policies have on the great difficulty in reducing their budget deficits, which whole achieved better results. 2~ A number of reforms also hampers further liberalisation of their foreign are required in order to achieve lasting macro- trade regimes. It is true that, on average over all the economic stability, including tax system and tax developing countries, budget deficits have been administration reforms in particular as well as the reduced in the last five years: they ran to 5.5% of GNP development of suitable instruments of fiscal and during 1983-89 and 3.0% during 1990-95. TM The monetary policy. These reforms, in contrast to the private savings rate and the private rate of investment "stroke-of-the-pen reforms" of trade liberalisation, also increased on average - by over 3%. take a long time and are difficult to implement. For this reason, successful trade liberalisation requires The situation varies greatly, however, from region to simultaneous efforts to develop instruments of fiscal region and from country to country. On average, and monetary policy aimed at reducing the rate of budget deficits in the African countries have further inflation. The crucial challenge is therefore to increased in the last few years, from 4.8% during synchronise the timing and sequence of trade 1983-89 to 5.3% from 1990-95. Comparing these two liberalisation measures with these other structural periods, the current account also worsened in both reforms. This has been a central weakness in the Africa and Latin America. The budgetary situation is conception of economic and trade reforms, parti- also giving cause for concern in LDCs outside Africa, cularly in the least developed countries with weak such as Bangladesh or Pakistan. These figures administrations. probably belie the true public financial situation since in the past few years governments - often under Export Development and Balance of Payments external pressure to reduce state expenditure - have In many countries, especially in Africa, neither entered into semi-fiscal obligations such as the improved market opportunities resulting from the provision of state guarantees for public companies conclusion of the Uruguay Round and continuing which do not (as yet) appear in the budget. multilateral liberalisation nor unilateral measures Large budget deficits are not only a problem in aimed at dismantling trade protection (in particular themselves, they also impair the competitiveness of structural adjustment programmes) have so far led to the national economy. As long as these deficits are lasting economic growth or export success. In spite of financed externally, a real revaluation of the exchange rate takes place - ceteris paribus - as a result. TM This ~9 This is also valid if development aid is the source of external favours the non-tradable goods sector and makes finance as long as this aid does not help promote export production or import substitution but is used for consumptive purposes. This is exports and foreign investment unattractive. why it is of crucial importance how - in the wake of structural adjustment programmes - import structures in the countries in Financing budget deficits by means of domestic question are altered. It has been established in a number of cases monetary expansion also has a detrimental effect on that import structures in this context have shifted towards imports of consumer goods (cf. Jennifer Sharpfey: Supply Oriented national competitiveness. Sequencing of Adjustment Policies - Study of Mozambique, Sierra Leone, Uganda and Kenya, European Commission, DG VIII, April This problem of reducing budget deficits and 1993). raising tax revenues is a decisive reason why many 2o "increasing efficiency in the public sector, including tax administration, would also help to ensure that fiscal imbalances do countries have not lowered levels of customs duty any not impede structural reforms, such as the liberalization of trade and further. 2~ Further reductions of duty levels would have the financial system." (Cf. IMF: World Economic Outlook, 1996, p.109). The same source goes on: "Concern about inadequate tax involved the danger of further increases in budget revenues have also slowed the pace of trade and financial deficits, since these economies are highly dependent liberalization in some developing countries. Countries that have traditionally been dependent on trade taxes for a significant portion upon customs revenue to finance their state budgets. of revenues have dismantled trade barriers only gradually, despite the On average over all the developing countries, potential long-term benefits of liberal trade regimes." (ibid., p.113) customs revenues represent approximately 30% of 2, Cf. IMF, op.cit. state revenues. This figure is considerably higher in 22 Cf. World Bank, op. cit.

INTERECONOMICS, September/October 1996 233 INTERNATIONAL TRADE drastic structural adjustment programmes, many by the fact that capacity utilisation in this group of countries have so far failed to achieve any noticable countries has risen. 28 improvement in the development of their export trade, The greatest cause for concern, however, is the whereby it is not merely a question of the quantitative development in balances on current account. Current expansion of export volumes, but of a qualitative account deficits (as a percentage of GNP) have, on improvement of the range of export goods by means average, remained high. Comparing the periods 1983- of diversification towards higher levels of product 89 and 1990-95, these deficits fell on average from processing and improved product quality. 1.5% to 1.4% of GNPY In Africa and Latin America According to World Bank calculations, 23 real gross they have risen considerably, despite sometimes quite domestic product (GDP) in the sub-Saharan countries far-reaching structural adjustment programmes. While of Africa fell between 1991 and 1995 by an average of there are certainly many roots to this problem, there is 1.5% p.a.. In contrast, the East Asian countries every reason to believe that a conflict of aims exists posted GDP growth of 8% and Latin America of 1%. between trade policy liberalisation and foreign trade Average sub-Saharan per capita exports fell during stabilisation. the same period by 1.5% while those of East Asia grew by 14%. The processed goods share of total General import liberalisation which is not combined sub-Saharan Africa's exports is just 7%, while the sale with a deliberate programme of export promotion can of processed products accounts for more than 20% quickly lead to an increase in imports and a shortage of Latin American and over 50% of South and East of foreign exchange revenue. The risk of such a Asia's export revenue. For foreign direct investment development is particularly great in times of high (FDI) there was a share of 0.3% of GDP for South Asia inflation - which is usually an indication of deficient and 3% for East Asia, while foreign investment played monetary policy instruments - and over-valued ex- a relatively minor role for the African countries. 24 change rates. Two lessons should be learnt from this. Nevertheless, various studies have demonstrated [] The first measures to be implemented within the that, as a rule, countries which have carried out framework of an import liberalisation programme extensive structural adjustments have a better- if should be those which also have a positive effect on little better - export development and higher growth the balance of payments and/or export developments rates to show for it. 2~ On average, however, invest- and the budgetary situation. This means that import ment rates are declining even for this group of liberalisation must take the requirements of the countries, which seems to suggest that their relatively economy's productive and exporting sectors into favourable export and economic development is consideration. Transforming quantitative import based on the fact that externally financed structural restrictions into import duties, for example, does not adjustment programmes have increased their (short- lead to losses of revenue - in contrast to reductions in term) import capacities. This suspicion is confirmed import duty - but opens up a new source of income. Liberalisation of imports, which should be concerned initially with important inputs for the production of 23 Ibid. export goods, can ensure that there is an even 24 However, since 1994 there have been positive signs for the least balance between the foreign exchange requirements developed and for the African countries. Of the 48 LDCs, fourteen enjoyed relatively strong growth - over 5% - in 1995. This trend is of those sectors which produce goods for the expected to continue in 1996. African countries achieved the greatest domestic markets and the export sectors which earn improvement in growth rates in 1995, although the absolute rates are still unsatisfactory. The GNP growth rate increased by 2.2% foreign exchange? 8 Such policies confront the danger compared to an average of 0.6% during 1990-1994. Eight African of the possible negative effects which trade reforms countries even managed to achieve growth rates of over 5% in 1995. The average growth rate among Asian countries stood at 4.6% in can have on foreign exchange and tax revenues. 1995 (compared to 4% in 1994). However, relatively favourab~e climatic conditions, stabilising political and social conditions in a number of countries, and increases in commodity prices were largely responsible for improvements in the LDCs' economic situation. ~" Cf. Howard Pack: Productivity and Industria~ Development in 2s Cf. for example V. Thomas, J. Nash et al.: Best Practices in Sub-Saharan Africa, in: World Development, No 21 (1), pp.1-16. Trade Policy Reform, World Bank, Washington 1991; S. Webb, 27 Cf. IMF, op. cit. K. Shariff: Designing and implementing adjustment programs, in: V. Corbo, S. Fischer, and S. B. Webb (eds.): Adjustment 28 As far as import liberalisation is concerned, the World Bank prefers lending revisited: Policies to restore growth, World Bank, Washington the so-called "concertina method" which allows for a step-by-step 1992; D. G r e e n a w a y, O. M o r i s s e y: Structural Adjustment and reduction of import duties, beginning with relatively high duties. This Liberalisation in Developing Countries: What Lessons Have We often leads to a relative worsening of the situation for local industry Learned?, in: Kyklos, Vol. 46, pp.241-261; P. Mosley, J. which depends on the import of capital goods and intermediary Harrigan, J. Toye: Aid and Power: The World Bank and Policy- products while favouring imports of consumer goods, since duties on based Lending, London 1991. consumer goods are usually higher.

234 INTERECONOMICS, September/October 1996 INTERNATIONAL TRADE

[] It is reasonable to assume that the weak supply counteract any destabilisation of the balance of response to national trade liberalisation programmes payments caused by import liberalisation. Export is partly due to a lack of an export promotion promotion can take many forms. The following apparatus. Since no such apparatus exists and measures represent a minimum standard which because there is insufficient capacity to deliberately should also be aimed for in countries with weak promote competitive export sectors, it has, as a rule, administrative structures: proven impossible to reduce the foreign trade deficit. [] Creation of "free trade conditions" for all direct and This makes it difficult to exploit the market indirect export activities. Unhindered and un- opportunities sketched out above. bureaucratic access for export companies to It is therefore essential to deliberately strengthen imported inputs is one of the most important the supply capacity of the export sectors at the same prerequisites for export competitiveness. Depending time as carrying out trade reforms. There are many on the administrative conditions in a particular reasons for these countries' poor supply capacity. The country, this can be achieved e.g. by means of free underdeveloped private sector with its lack of export zones, the establishment of individual export technological, organisational and marketing capa- companies operating under customs supervision bilities, the low levels of worker education and (bonded factories), or procedures which provide tax training, and poor infrastructures are not the only relief for export transactions (e.g. duty-drawback problems. In developing countries, structural factors schemes). systematically discriminate against exports: relatively [] Construction of an institutional infrastructure (for high and fluctuating rates of inflation together with a technology transfer as well as production and sales- lack of the monetary and fiscal instruments needed to oriented services). Such an infrastructure could - control this problem deprive the export sector of a possibly with the help of corresponding state support basis on which to calculate costs and income; weak - also be provided by commercial service companies. administrations mean long procedures, for example in the procurement of imported products; weak [] The strategic role which is increasingly attributed to transport and communications infrastructures as well the development of technological capabilities in as a lack of facilities such as export financing and international competition has long since led to the export credit insurance present additional problems. creation of a variety of promotional instruments in the western and Eastern Asian countries. Better co- Given the administrative hurdles and financial operation between educational institutions, research bottlenecks at home and the high transaction costs establishments and private industry with regard to the involved in international trade (the search for buyers development of technological capabilities would be of and the cost of adapting products and production advantage for other countries, too. Furthermore, the procedures to export market requirements), the first success of the East Asian "tiger economies" has steps down the road towards export marketing are demonstrated the strategic significance of the very stony for private companies in a developing education factor - especially vocational training - for countryP These supply capacity bottlenecks have the assimilation not only of modern technologies, but always posed a problem, but their negative also of modern management and marketing con- consequences are being amplified in the wake of cepts. In this respect, the promotion of educational the globalisation and liberalisation process. Thus in institutions which develop such capabilities and the future, LDCs will also face increased competition in creation of a close association between these their own domestic markets. institutions and private industry appears increasingly important in addition to public support for further Instruments of Deliberate Trade Promotion education within private enterprises. The task of trade promotion, especially in the least developed countries, must be to improve conditions such that they, too, can better utilise the new ~ Cf. J0rgen Wiemann, op. cit. opportunities of global markets and international 3o Cf. the following World Bank publications: P. Harrold, M. Jayawickrama, D. Bhattasali: Political Lessons for Africa investment. Exports of processed products from from East Asia in Industrial and Trade Policies, World Bank Discussion Papers, Washington 1996; Y. W. R h e e: Instruments for developing countries apparently require additional Export Policy and Administration - Lessons from the East Asian promotion in order to overcome the many Experience, World Bank Staff Working Papers, No. 725, Washington 1985; Y. W. Rhee, T. Belot: Export Catalysts in Low-Income impediments on the way to the export market 3~and to Countries, World Bank Discussion Papers, Washington 1990.

INTERECONOMICS, September/October 1996 235 EUROPEAN MONETARY UNION

[] Active export promotion requires a close exchange process in which both sides can recognise their of information between state administration and specific roles more clearly and fill them accordingly. private industry and its organisations. Cooperation of this sort, which allowed the state administration to [] The increasingly perceptible and complicated formulate and, if necessary, revise, strategic goals for environmental and health requirements which the development of industry and exports, was one of consumers and legislators in the OECD countries the conditions which led to East Asia's economic place on domestic and imported products pose a miracle. Despite all the scepticism regarding the particular challenge within the new trading transference of institutional structures from one environment. It is to be expected that environmental cultural sphere to another, it does seem judicious for requirements which have hitherto been placed on developing countries to complement measures of products alone will also be extended to include trade policy with new forms of coordination between production processes in some form or another (seal of state administration and private industry. Close environmental approval, international standards for collaboration in mixed-membership coordination the burden placed by production processes on the bodies should contribute towards dismantling the environment). It is therefore increasingly important to mistrust which exists in many developing countries support the adaptation of export production to (and in Africa in particular) and help initiate a learning environmental and health standards.

Daniel Gros* Germany's Stake in Exchange Rate Stability

The position taken by politicians and important pressure groups in Germany concerning EMU will depend to a large extent on its labour market impfications - and thus on the (perceived) impact of exchange rate variability on employment and unemployment. Most economists would assume this impact to be minor. The purpose of this paper is to show that this presumption might be wrong.

hY should Germany want EMU? It is often but the government is held responsible for the state of W argued that it can only lose in economic terms: the labour market, which can be decisive for it is unlikely to gain in terms of price stability and the elections. The position important pressure groups, demand for its exports is rather inelastic so that such as trade unions, take concerning EMU will also exchange rate fluctuations should not have a strong depend more on its labour market implications than impact on its economy. It has indeed been difficult to on the volume of trade. document a strong relationship between the amount German support for EMU should thus depend on of trade and exchange rate variability.' But this the (perceived) impact of exchange rate variability on argument might be besides the point: German policy- employment and unemployment, Given the factors makers presumably are concerned mostly with the mentioned above most economists would assume performance of the economy at home. Trade matters that it should be minor. The purpose of this paper is to only if it has an impact on the factors that are crucial for re-election, namely inflation and unemployment. The former is the responsibility of the Bundesbank, ' For a recent survey see Andr~ Sapir, Khalid Sekkat and Axel A. We b e r: The Impact of ExchangeRate Fluctuationson EC Trade, Centre for Economic Policy Research (CEPR), Working Document * Centre for European Policy Studies, Brussels, Belgium. No. 1041, 1994.

236 INTERECONOMICS,September/October 1996