The Secular deterioration in terms of trade of developing countries confine them to be imitators and never innovators. Discuss.

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Secular deterioration the deterioration in the (commodity) terms of trade. Raul Prebisch and Hans Singer launched a hypothesis, secular decline in the terms of trade of primary products and primary producing region vis-a-vis manufactures and the industrial North (respectively). During the days of industrial revolution in the West, colonisation of the South led to the colonial pattern of North-South trade. Raw materials and food moved from the colonies and semi-colonies in the South to the industrial centre in the North. Artisan activities declined in the South due to competition from the machine-made goods as a part of the design of the colonial rulers.

Economic historians described this phenomenon as de-industrialisation. Mainstream economists hail this phenomenon as international division of labour according to comparative advantages. It was expected that the fruits of technical progress taking place in the industrial centre of the North would be transmitted to the peripheral agrarian countries constituting the South. This transmission mechanism was thought to be the improvements in the terms of trade of the agrarian region. Under free trade the operation of the so-called classical law of improvements in the terms of trade of primary product vis-à-vis manufactures operate.

Some of the explanations that have been offered for this decline include productivity differentials between countries, asymmetric market structure (where manufacturing industries capture oligopolistic rents relative to competitive firms earning zero economic profits and producing primary commodities) and high income elasticity of demand for manufacturing goods relative to that of primary commodities. One consequence of these findings is that developing countries, to the degree that they export primary commodities and import manufactures, will be subject to a secular deterioration in their net barter terms of trade. The clear policy implication is to diversify exports away from primary commodities or stimulate domestic production of manufactures.

In developing countries this secular deterioration was attributed to differences in the

possibility to capture the benefit spreading out from technical change. In the developing countries wages were said to be fixed at a competitive level as an effect of the high level of unemployment and of weakness of the labour unions. On the contrary, in the developed economies, the structure of products and of the labour markets tend to be more monopolistic, characterised by the existence of large corporation and well-organised labour unions.

While the developed countries productivities improvements were said to be translated into higher wages, in the developing countries labour supply pressure was said to keep wages unchanged, thus leading to lower prices.

With Prebisch's wordsthe great industrial centers not only kept for themselves the benefit of the use of new techniques in their economy, but are in a favourable position to obtain a share of that deriving from technical progress of the periphery. The combination of low income and price elasticities of demand for primary product, along with these different structures of the product and factor markets, were thought to be the keys of this persistent decline. These ideas support the view that developing countries had to develop a strategy that involved industrialisation, and in particular a reduced role of primary exports.

Several authors, notably Prebisch (150) and Singer (150), have argued that there is a secular tendency for the terms of trade for primary commodities to deteriorate over time. The confirmation of such a tendency through historical data is of course problematical. Since such data also include those for years characterized by unusual occurrences, like World Wars and breakdowns of currency regimes (as happened to the Bretton Woods system in 171), which have the effect of suddenly pushing up primary commodity prices, any tendency towards secular deterioration gets obscured by these sudden occasional boosts.

For long stretches of time, both before and after such sudden boosts however, a secular deterioration in the primary commodity terms of trade is clearly discernible. In particular, the fact that these terms of trade have moved against primary commodities over the last couple of decades, precisely when the contemporary phenomenon of globalization is claimed to have manifested itself, is undeniable.

Explanations for such a secular tendency for the terms of trade to move against primary

commodities have invariably focused on the behaviour of goods markets. Many of theses explanations of course, including Prebischs own one, are logically untenable. Prebisch argued that the effects of technological progress, leading to increases in labour productivity, in the manufacturing segment of the world economy do not get passed on in the form of lower prices, while the effects of similar technological progress in the primary commodity segment do; this according to him caused a secular deterioration in the primary commodity terms of trade.

The structure of the export trade of developing countries has, however, undergone a substantial transformation since the early 180s, with a rapid growth in the exports of manufactures, which by the early 10s had come to be the dominant flow of merchandise from developing to developed countries. By 11, for example, manufactures exports to developed countries represented three times the value of non-oil commodities, whereas in 180 exports of commodities had exceeded the value of manufactures exports. Over the past decade, the dominant exchange between developing countries and developed countries has thus become the `horizontal exchange of manufactures for other manufactures. This change in trade structure has led to the extension of the earlier debate on the vertical commodities/manufactures terms of trade to the new issue of the trend, if any, in the manufactures/manufactures terms of trade.

However, this new focus of the debate must not be taken to imply that the traditional concern with the commodities/manufactures terms of trade can now be ignored. This is because the expansion in developing countries exports of manufactures has been confined to relatively few countries. The four Newly-Industrializing Countries (NICs) of East Asia (Hong Kong, Singapore, South Korea and Taiwan) together with the Asian 4 (Indonesia, Malaysia, Philippines and Thailand) and China accounted for almost 80 per cent of the increase in the value of manufactures exported by all developing countries, including China, from 180 to 10. This leaves well over one hundred countries dependent, to a greater or lesser extent, on revenue from the export of primary (non-oil) commodities for the bulk of their export earnings. So, for the great majority of developing countries the commodity terms of trade remain a crucial element in their capacity to import essential goods for their economic development.

To say that the secular deterioration in terms of trade of developing countries confine them to be imitators and never innovators is partly true in the sense that the developing countries tend to imitate the developed countries in the terms of products so that

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