From Export Promotion to Import substitution: Comparative Experience of China and Mexico Mehdi Shafaeddin Director: Global Vision (Training & Consultancy) Affiliated to the Institute of Economic Research, University of Neuchatl, Switzerland The QUESTIONS • What is the experience of China and Mexico in export processing? • Why is China more successful than Mexico • Can the experience of China be replicated? In two papers Outline • The literature • Performance of trade, MVA & GDP • Performance of Processing Industries • Conclusions:Prospects for the future The literature • Import Substitution and Export Promotion as Alternative Strategies • The process of MS & Prebisch’s thinking • MS as prerequisite to EP • Common Argument: Emphasize on learning – MS: Learning by doing – (outward-orientation )EP: Transfer of knowledge & Tech. – Opening up: imitation; catch-up opportunities; innovation • Differences – MS: need for Gov. intervention – EP: Hands off Critiques of MS,EP • Contribution to Learning: not much in either case • MS: often discouraged learning; – Reasons; lack of efficient Gov. policies – exceptions • EP: did not appreciate internal conditions for learning: – Simply exporting is not sufficient – Learning is not automatic – Gov policies required Literature (2): Productive Power (PP) and Learning • List: mental capita as main source of PP – Role of socio-economic factors – Importance of gov. Policies in industrial learning and education ; – external economies of learning • Others :Arrow, Linder;Fellner: role of experience • Capability Building Theory – Role of tech. capability in a broad sense – Market failure – Need for intervention • Test of Impact of FDI: Experience of Costa Rica/ Ireland Mexico &China :Similarities & differences • Similarities: – Opening up to trade; FDI and processing • Difference: performance: (table 1) – – – – – Growth of Xman. Trade balance FDI; national I MVA;GDP (graph 1) Trade in Parts (table 1.a Table 1: Comparative economic Performance of china and Mexico (1965-2005) China Growth rates Mexico 65-80 80-90 90-2000 2000-2005 2004 2005 60-80 80-90 90-2000 2000-2005 2004 2005 Manufacturing value Added 10.5 10.8 12.7 11.3 10.7 10 0.9 1.5 4.3 0.0 4.0 1.2 Gross Domestic Product 6.6 10.3 10.6 9.6 10.1 9.9 6.3 1.1 3.1 1.9 4.1 3.0 Gross Fixed Capital Formation 9.7 9.8 13.9 14.8 12.4 14.6 7.7 -2.7 4.1 1.8 7.5 7.6 Total Exports 12.8 14.5 23.7a 31 5.9 16.1 3.5.a 14.3 (Xman-Mman)/Xman. Initial period/%) -1.65 4.5 22.6 18.3 -67 -58 -13.1 -16 Ratios 70/71 80/81 90/91 04/05 70/71 80/81 90/91 04/05 MVA/GDP 34.4 39.5 32.8 44.1 23.1 22.1 20.7 17.9 GFCF/GDP 24.5 27.5 26.5 38.4 19.0 25.6 18.3 19.5 FDI/GDP 0.0 0.1 1.0 3.5 0.8 1.1 1.3 2.3 Exports of Manufactures / Total Table 1.a: Trade in Parts and Components: Manufactured Good; China and Mexico -------------------------------------------------------------------------------------1992/3 2003/4 China :Value($b) Exports 3.2 58.4 Imports 9.8 44.6 Balance -6.57 13.8 Shares : Components/total X: 6.3 17.6 Mexico:Value($b) Exports 6.8 26.3 Imports 13.8 33.8 Balance -7.5 -7.5 Shares : Components/total X: 20.2 23.9 Meomo : balance of man. trade ($b): China -5.8 125.2 Mexico -17.8 -1.7 Performance of Maquila sector Mexico 1974 1985 2000 2006 Ratio 98/85 Ratio 06/98 - Gross output ($b) 0.01 1.3 669 1139 341 2.6 - Local input:% 0.9 0.7 2.4 2.8 2.4 1.3 -VA:% 36.3 24.9 22.1 20.4 0.6 0.9 RV.% 37.2 25.6 24.5 23.2 0.93 1 Imported input:% 64.3 75.1 75.6 76.7 1.2 1 Performance of Maquila and non-aquila:1 Pe r for m ance of the m aquilador a s e ctor (1980-2006) 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 1980 1982 1984 1986 1988 1990 1992 Maquil exports/Non petrol exports A Maquil trade balance / Maquil exports *100 1994 1996 1998 2000 2002 2004 Maquil exports/Maquil interm imports 2006 Pe r for m ance of non-m aquilador a e xpor t s e ctor (1980-2006) 120 110 100 90 80 70 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 -60 -70 -80 -90 -100 -110 -120 -130 -140 -150 -160 -170 -180 -190 -200 -210 -220 -230 -240 -250 -260 -270 -280 -290 Processing trade of China: Evolution year Value($10m) Ratios Xp Mp RV Xp/Xm RV/Xp 1981 11 15 -3.7 5 -32 1990 254 188 67 55 26 2000 1377 926 451 62 33 2006 4164 2740 1423 58 34 Prospects for the Future • What are the prospects for increasing value added in assembly operation of China and Mexico? • Evolution of pattern of CA • RCA indices: – Rx= [Xij/Xj]: Xwi/Xw]; – Rm = [M ij / Mj ] [ M wj / Mw ]; – Cr= (Change in R)/R China: RCA in X • • • • • Choice of about 30 products=64% of X RCA in almost all 13 capital/tech. intensive; mostly elect. 14 L intensive Gain RCA (increase in Cr) in K/T, particularly elect. • Loss in Cr in most L intensive • So good prospects for X; BUT? How about production? China: RCA & M:Components Assembly Operation or Production? • Choice pf products: 30: 67% of M • Intermediate/components:19; bulk of M • Comparative advantage in assembly in all components: except automobile • Advantage in assembly increased in most cases • However in 4 cases (of components) adv. In production increased • How about finished good? China: RCA & M: Finished products Production? • Increase in adv. In production of: – Telecommunication equipment – Specialized machinery – Textiles and leather machinery – Aircraft – Machine tools for working metals – Passenger cars Mexico: RCA: X • Choice of products : similar to China • Mexico exports higher no. of K/T intensive products than china(18 out of 29) • Automotive &elect. 25 % of X • Gained adv. On components of auto. &data processing • Lost adv. In X on 11 K/T intensive finished goods • How about assembly operations? Mexico: RCA: M Production? • Paperboard the only intermediate product (out of 13)with adv. in production; but adv. In assembly increased! • Finished goods: advantage in production in: – Automotive – Data processing Examine these cases Auto. &data processing Prospects Exports R Rc Imports R Rc 1.Office machines and auto.data processing : Finished products: 751 0.63 0.45 0.44 752 2.076 3.677 0.91 Components: SITC 759 0.801 1.438 1.277 0.42 1.48 3.612 2.Automotive products: Finished products: 781 1.518 782 4.231 783 1.58 0.991 3.388 20.34 0.672 1.08 0.25 5.366 3.81 0.19 Components 784 1.1 2.32 3.66 1.7 Conclusions China Mexico Question?