Export Pessimism: Nurkse’s Version and Testing | International Economics

In this article we will discuss about:- 1. Introduction to Export Pessimism 2. Nurkse’s Version of Export Pessimism 3. Empirical Testing.

Introduction to Export Pessimism:

During 1950’s many economists like Prebisch, Myrdal, Singer and Nurkse recognized that the exports of LDC’s during the 20th century were quite weak in contrast to buoyancy of exports during the 19th century. Many LDC’s started realising that trade was disadvantageous to them rather than being an ‘engine of growth’. The pessimism about demand for the exports of the LDC’s in the markets of the developed countries is termed as export pessimism.

Jagdish Bhagwati identified two distinct forms of export pessimism. One form of export pessimism prevailed during the period from the World War II to the mid 1960’s and the second variant prevailed in 1980’s. The first form of export pessimism was sought to be explained by Prebisch, Singer and Nurkse.

Prebisch and Singer related the phenomenon of export pessimism on the part of LDC’s to the secular deterioration in the terms of trade of primary products, the chief exports of the LDC’s vis-a-vis manufactured products.

In the opinion of Bhagwati, the phenomenon of secular deterioration of the TOT of LDC’s exogenous to the policies of LDC’s themselves. So far as Nurkse’s version of export pessimism is concerned, low growth of exports of LDC’s is due to low-income elasticity of demand for several agricultural products in the economies of developed countries.

With the acceleration of development process in the LDC’s there would be much difficulty for the developed countries to absorb large quantities of primary products that would be turned out by the former. As a consequence, the relative price of those exports would decline. It is clear that the causes of the decline in the TOT of LDC’s, in either case, lie outside the control of these countries.

The second form of export pessimism became manifest during 1980’s. Jagdish Bhagwati termed it as ‘new export pessimism’. The inability of less developed countries to enlarge their exports was explained in terms of Nurksian hypothesis that developed countries could not absorb expanding exports of primary products from the developing countries.

Bhagwati did not accept this hypothesis for three reasons. First, the exports could be rapidly increased during 1980’s by the newly industrialised countries such as South Korea, Hong Kong, Taiwan and Singapore. It is unlikely that all LDC’s would be able to increase exports at the similar higher rates. Second, the exports of LDC’s in the markets of developed countries constitute about 2 percent of the world trade. Even if this proportion gets doubled, the developed country would be able to absorb the exports of LDC’s. Third, there has been growth in intra-industry trade both between the LDC’s and developed countries and between the LDC’s themselves.

Another line of argument concerning the new export pessimism is that any accelerated growth of exports of LDC’s to developed countries would provoke protectionist reactions from the latter. In view of the protectionist threat from the developed countries, it is likely that the LDC’s would switch over to the import-substitution policies.

It raises the question whether or not the fear of protectionist threat from developed countries is justified. It is sometimes pointed out that the protectionist threat is over-stated. Baldwin, in this connection, has put forward the argument that protection, in fact, is not as effective as it seems at the first sight.

The exporting countries can circumvent protection through different means and increase their export earnings. Jagdish Bhagwati has advanced another argument that the foreign direct investment has much role to play in this regard. The investors can create political pressure upon the developed countries to desist from protectionism and continue to follow free trade. A most potent force for resisting increased protectionism from developed countries may also be the WTO.

Nurkse’s Version of Export Pessimism:

Apart from Prebisch-Singer line of argument based on secular deterioration of TOT hypothesis, the export pessimism in LDC’s was discussed by R. Nurkse in terms of the inability of developed countries to absorb the expanding exports of primary products from the developing countries.

According to him, the shrinkage of demand for the exports of the LDC’s during the post-war period was on account of the following factors:

(i) Change in Industrial Structure:

The post­war industrial restructuring in the developed countries resulted in the growth of such heavy industries that had a low content of raw materials imported from the other countries. That partly restricted the exports of materials from the LDC’s to developed countries.

(ii) Increase in Share of Services:

In advanced countries, there has been a tremendous increase in the share of services in the total output. It led to the diminution of the demand for imported inputs from the less developed countries.

(iii) Low Income Elasticity of Demand:

The income elasticity of demand for a large number of agricultural products is very low. Therefore, the prospect of raising the exports of agricultural products has remained low in the past. Even in future, there is very little possibility of raising the exports of farm products.

(iv) Economy in the Use of Raw Materials:

During the post-war period, there has been a trend towards the economisation of raw materials. Many industries in the developed countries undertake the reprocessing of scrap and waste materials. There is also the introduction of synthetic products. These developments in the fields of processing and manufacturing industries have led to a decline in the demand for exportable products of the LDC’s.

(v) Agricultural Protectionism:

The countries of European Union and the United States have continued to follow the policy of protection to agriculture through price-supports and subsidies. The developed countries stubbornly opposed the removal of agricultural subsidies so much so that Uruguay Round of negotiations came to the brink of breakdown on this issue. The agricultural protectionism resulted in a major impediment in the growth of exports of agricultural products from the LDC’s.

In view of disappointing growth of exports of the LDC’s, Nurkse and several other writers prescribed that the LDC’s should follow the inward- looking strategy, i.e., import substitution. In the words of Nurkse, “When developing countries face difficulties in exporting both traditional and new exports, import-substitution strategy may be adopted by them as an escape route from economic stagnation.”

Empirical Testing of Export Pessimism:

The phenomenon of export pessimism was dealt by Prebisch and Singer in terms of the downward trend of the prices of primary products relative to those of the manufactured products. In this connection, the empirical study made by J. Spraos in 1980 indicated that the downward trend in the ratio of prices of primary products to the prices to the manufactures was significant during 1900-1939 periods.

The post-war data upto 1970, however, indicated that the trend was insignificant. It implied that the trend of declining exports in the post-war period was less evident than during 1900-1939 periods. In the study made by D. Sapsford in 1985, it was concluded that the downward trend was of about 1. 3 percent per year in case the petroleum prices were excluded.

Another study attempted by E.R. Grills and M.C. Yang in 1988 indicated that the downward trend in the TOT of LCD’s was of much lower extent of about 0.6 percent per annum. No evidence of the downward trend of the price ratio of primary and manufactures prices could be found by J.T. Cuddington and C.M. Urzula in their 1989 study, thereby discounting the notion of export pessimism in the post-war period. M.F. Bleaney and D. Greenway estimated in 1993 that 1 percent fall in the relative prices of primary products was associated with 0.3 percent decline in the TOT of non-oil producing developing countries. The decline was too slow and it should not warrant any switch in policy by the policy makers in the LDC’s towards greater protectionism and import substitution.