Evidence of the prebisch thesis in the countries of the southern African development co-ordination conference

'·

"'---.... DEVELOPMENT AND PLANNING

ECONOMIC COMMISSION FOR AFRICA DAKAR

EVIDENCE OF 'rHE PREBISCH rl'HES_~S::-IN THE COUNTRIES OF THE SOUTHERN AFRICAN DE~LOPMENT CO-ORDINATION CONFERENCE

The Thesis by

-.~rha.elo KEBAAGE'l'SE

. ...:::~~----.,..J

submitted :Ln pgrtial fulfil:lroent of the :tequireroents for the Degree of Master·of Arts in Economie Development and Planning ~n the African Institute for Economie Development and Planning, has been read and approved hy the Committee.

Date . . . 20.1}\1~\l~t J9~~-

....

Chai~man. _Ç_~ +- ^~

1,;67tk? .

Member ..

(Y.!!_ ... .

Corumi·t·tee

.·

· r? r

... ^'--c-

.

71 .... ..--- ...

^~tA-i.)

Merober

Z7

---

. -

r·

'1:

. 1 1

as the independent variable. Two types of data were· used to eatimate the elaatici ti es. The firat is baaed on .per capita real v.aluea while the second is baaed on.nominal values. In both cases the resulta ahowed a strong evidence of the Prebisch Thesis.

The policy implications are that the aix SADCC countriea should increase the share of industrial products in their exporta to the centre . in order to ease their balance of payments probleros.

First I acknowledge with. thanks and gratitude the assistance of Dr. A.A. Owosekun, my Thesis superviser, who relentlessly advi:S.ed me in the course of producing this thesis and Dr. E. Montasser, the Director of IDEP and my alterna te superviser, who provided guidance on the li te.;.:

rature.

My thanks also go to the lecturers Dr. P.K. Quarcoo. and Dr.

Y. Diaki te whom I cons.ul ted from time to time for guidance. I also acknow- ledge with thanks. the assistance of the IDEP Librarian, Mr. S.I. Odoteye and his staff, who selfless.ly assisted me in locating the materials needed for writing thi~ thesis.

r.,.am most grateful to the Government of Botswana for awarding me a fellowship to attend the Basic 9.-month. course on Economie Development

and Planning in the 19-82(83 academie year and to the United Nations Develop- ment Programme CWDP) for offering me a fellowship in the 1983/84 academie session to attend the 3-month specialisation.course on Industrialisation and Energy Plqnning, the end-result of which. ts this thesis.

Lastly, I thank all those who have assisted me in one way or the other to produce this thesis but whos.e names have been inadvertently omitted.

'

- iv -

PAGES 1 INTRODUCTION

CHAPTER ONE: OBJECTIVES AND SCOPE .5

1.1. Objectives 5

1.2 Scope 6

1.3 Sorne Foreign Trade Statistics of

the Six SADCC Countries 7

CHAPTER TWO: REVIEW OF LITERATURE 16

2.1 The Three Trade Categories 16 2.2 Mutually Adyantageous gains from 1rade 16 2.3 Structurally Biased Gains from Trade ¹⁷ 2.4 Trade-Induced Global Polarity 20 2.5 Recapitulation of the Prebisch Thesis 21 2.6 Criticisms of the Prebisch Thesis 23 2.7 Comments on the Criticisms of the

Prebisch Thesis 25

CHAPTER THREE: METHODOLOGY ²⁸

3.1 General Remarks ²⁸

3.2 The Madel ²⁹

3.3 Imports 31

3.4 Exports 31

3.5 Priees 33

CHAPTER FOUR: DATA SOURCES AND LIMITATIONS 34

4.1 Data Sources 34

4,2 Data Limitations 35

- v -

5.2 Results of the Relative Income Elasticities between the Center and the Periphery using Real Values

5.3 Results of the Export and Import Elasticities within the Periphery using Real Values

5.4 Reasons for Poor Results

5.5 Results obtained for Nominal Values 5.6 Limitations of the Results

CHAPTER SIX: CONCLUSION AND POLICY IMPLICATIONS 6.1 Conclusion

6.2 Policy Implications BIBLIOGRAPHY

- vi -

39

39 46 46 54 56 56 57 59

TABLE

- - -

Table A Botswana: Foreign Trade Statistics for a few

Selected Years 8

Table B Lesotho: Foreign Trade Statistics for a few

Selected Years 10

Table C Malawi: Foreign Trade Statistics for a few

Selected Years 11

Table D Swaziland: Foreign Trade Statistics for a few

Selected Years 12

Table E Tanzania: Foreign Trade Statistics for a few

Selected Years 13

Table F Zarnbia: Foreign Trade Statistics for a few

Selected Years 14

Table G Export Commodity Composition of the Six SADCC

Countries during the period covered by the thesis 37 Table H List of Countries to which the Six SADCC Countries

Exported during the Period Covered by the Thesis 38 Table

r

between the Center and the Periphery using Real Values 42 Table J Surr~ary of Results for the Export and !mport

Elasticities within the Periphery using Real Values 45 Table K Summary of Results using Nominal Values 53

·1

- vii -

Appendix 1; Botswanà•-s ~mports from t4e Center, ÇDP and Popu,lation.

Appendix 2 Botswana's Expo~ts to the Center, the Center's GDP and Population

Appendix 3 Lesotho's ~mports from the Center, GDP and Popu,lation Appendix 4: Lesotho's Experts to the Center, the Center's GDp and

Population

Appendix 5: Malawi's lmports from the Center, GDP and Population Appendix 6: Malawi's Experts to the Center, the Center's GDP and

Population

Appendix 7: Swaziland's ~mports from the. Center, GDP and Popu,lation.

Appendix 8: Swaziland's Experts to the Center, the Center's GDP and Population

Appendix 9: Tanzania's Imports from the Cente~, GDP and Popu,lation

Appendix 10: Tanzania 's Experts· to the Center, the Center' s GDP and Population Appendix 11: Zambia's Xmpo~ts from the Center, GDP and Population

Appendix 12: Zambia's ~xports to the Center, the Center's GDP and Population

Appendix 13: The Pe~iphe~y's Xmports from the Center, GDP and Population Appendix 14: The Cente~'s Xmports from the Periphery, GDP and Population.

- viii -

Most developing countries experience severe shortage of foreign currency, The deterioration in their balance of payments position makes i t difficult for them to -acquir.e the requisite foreign currency for the purchase of the goods and services which they need for their capital for-

mation processes. The deterioration in their external balance position, as already observed by sorne economists, is largely due to a discrepancy in sorne basic parameters in the trade relations between the developed

industrialised countries, the center, and the developing non-industrialised countries, the periphery.

Trade between the center and the periphery is believed to fall under one of the following categories1

) (a) mutually advantageous trade

(b) structurally biased gains from trade (c) trade-induced global polarity.

The basic tenets of each of these categories will be. briefly discussed under Ghapter 2. However, i t is important to note that the second categorisation, st+ucturally biased gains from .trade, deseryes particular attention since the present study is structuralist in its

approach. This point will be returned to later.

This thesis seeks to test the validity of the Prebisch Thesis that there exists a discrepancy in certain basic parameter values i.n the center-periphery trade relations leading to the growing structural

1) Smith,

s

(April, 1979), pp 1 ·- 18.

diseqüilibrium of the periphery and concentrating gains from international trade in the center. We shall also attempt to explain why such a discre- pancy exists. Six countries of the Southern African Development Co- ordination Conference (SADCC)2

, namely, Botswana, Lesotho, Malawi, Swazi- land, Tanzania and Zambia have been chosen to test the validity of this The sis.

Most of the countries of the periphery were former colonies and many years of colonial neglect condemned their peoples to very low living standards. When political Jndependence was achieved, promises were made by the political leardership to raise the people's living standards. Howeyer, even today the se promises remain; in the main,,. un- fulfilled. In sorne cases the situation may even worsen if past trends

. 3)

pers~st. Lack of the wherewithal to finance development is the main reason for this unhappy state of affairs. The meagre domestic savings, the falling export earnings, the low or non-existent domestic techno- logical capacity explain, in part, the predicament in which the pe~iphery

finds itself.

The importance of trade to the periphery cannot be over-

emphasised. It is through trade with the rest of the World (partic.ular;Ly the center) that the periphery acquires the capital, the technology and the skills i t so desperately needs to raiseits productivity, However, as i t is

•

2) The countries constituting SADCC are in alphatetical order, Angola Botswana, Lesotho, Malawi, Mozambique, SWazi land, · Tanza,nia,, Z·ambia and Zimbabwe.

3) Adedeji, A., Executive. Secretary, Economie Commission for Africa in Africa Guide, 1978 (Europa Publica,tions) •

periphery's exports of primary products have suffered two types of flue- tuations. Firstly, there is the tendency for the volume of the periphery's exports to the center to fluctuate due to the erratic nature of demand in the Center. Secondly,there is a secular tendency for the priees of the periphery's primary products to decline vis-à-vis those of its imports of industrial products, that is through a deterioration in the terms of trade.

In consequence, the volume of imports that the periphery can command is correspondingly re.duced. With reduced imports the· growth of sorne sectors is impaired. Therefore overall.economic growth is adversely affected and in that state the people's living standards further deteriorate.

The dim picture as portrayed above did not continue un- challenged. Development economists and international organisations4

) alike

started an enquiry into have_ ~

what might ~ gone wrong and ...;t.e- recommend measures for containment. Of particular intere.st is the work of R. Prebisch, an Argentine economist, who came up with the Thesis that there is a discre- pancy in certain basic parameters in the trade relations between the center and the periphery which makes i t impossible for the latter to fully enjoy the benefits of international trade. His argument was based on the low import co-efficient of the United States from whence came most of the imports of Latin American countries vis-à-vis the high import co-efficient in Latin America. Prebisch observes that "For every one per cent increase of incarne in the United States, imports of primary goods tend to increase 0.6 per cent as against a rouch higher import elasticity in Latin America.

Thus he concludes that there is an impressive disparity in the incarne elasticity of demand"S). This led hi.m to talk of the "dollar shortage" as

4) See for example, United Nations Department of Economie Affairs, "Relative Priees of Exports and Imports of Underdeveloped Countries", New York December, 1949.

5) Lekachman,· R (ed), National Policy of Econom:Lc Welfare at home and Abroad, New York,1955, pp 277-80.

an inhibition to the process of industrialisation in the periphery.

Prebisch contends that with a high income elasticity of demand for imports and a low income elasticity of demand for its exports the peri-

h t h h 6) . d

p ery cannot grow a t e same rate as t e center . If ~t oes, Smith and Toye 7) conclude that i t runs the risk of run,ning into foreigl} ex-

change crises at fixed exchange rates and worse still exchange depre- ciation has adverse effects on the terms of trade.

It is against this background of the existence of an impressive disparity in the .:j.ncome e.lasticity of demand between the center and the periphery that the Prebisch Thesis will be tested with respect to six out of the nine countries constituting SADCC.

The thesis has six Chapters. Chapte}:' One sets out the objectives and scope ; Chapter Two reviews the literature on the Prebisch Thesis i Chapter Three discusses the methodology used in estimating the elasticitie.s the Fourth Chapter concerns itself with the data, sources and their limi- tations ; the Fifth Chapter is devoted to the analysis of the results of the study and finally the Sixth Ch~pter focuses on the concluding remarks and the policy implications. There are eleyen tables, numQered alphapetically from A to K. 1\t the end of the thesis there are 14 appendices numbered

serially from 1 to 14,

6) Prebisch R., "Commercial Policy in the Underdeveloped Countrie.s", The American Economie Review, Volume 49, N° 2, (May, 1959), pp 251-73 7) Smith S. and Toye J. op. cit. p.6.

CHAPTER ONE OBJECTIVES AND SCOPE

1. 1 OBJECTIVES

The main objective of this thesis is to te.st the validity o;f the Prebisch. Thesis which contends that there exists a disparity tn the trade relations between the center and the periphery causing gains from inter- national trade to be concentrated in the center and leaving the periphe~

in structural and balance of payments disequilibrium, This disparity is said to be traceable to discrepancies in the incarne elasticity of demand between the center's imports of primary products from the periphery and the periphery's imports of industrial products from the center. That is, the incarne elasticity of demand for the center's imports of prïmary pro- ducts i.s less than the incarne elasti·ci ty of demand for the periphery' s imports of industrial products1

).

Mathematically the above elasti.cities can be represented as

E:M

y >

p p c c

where

M Imports of industrial products by the periphery p

yp Incarne in the periphery

M Imports of primary products by the center c

Y • =

·C

Hence E:M y

... Pp E:M _{c c}

y

Incarne elasticity in respect of imports of industrial products by the periphery.

lncome elasticity in respect of imports of primary products by the . center.·

1) Prebisch, R, Op, cit .. p. 252.

It has also been observed that even within the periphery itself the elasticity of exports of primary products with respect to incarne is less than the elasticity of imports of industrial products with

. 2)

respect to 1ncome.

1,2 SCOPE

Mathematically

where

X _p Exports of primary products by the periphery yp Incarne in the periphery

M Imports of industrial p~oducts by the periphery.

p

Therefore

EX y pp

=

EM y pp

exports of primary products.

Incarne elasticity in respect of imports of industrial products by the periphery.

Initially, the intention was for thethesis to caver the period 1960-80. However, due to the non-availability of data this was not possi- ble. Consequently, the thesiscovers a 13-year period (1968-80). Further- more, the thesis had envisaged to caver all the nine countries of SADCC, Unfortunately again this was not possible due to data constraints. Only six countries, Botswana, Lesotho, Malawi,$waziland, Tanzania and Zambia were covered by the the~is,rhe remaining three countries notably, Angolar Mozambique and Zimbabwe were. dropped from the study for . reas ons already stated.

2) Ibid. p. 2 53 •

Trade statistics on these last three countries are highly unreliable or for the most part unavailable. The main reason being that during the prosecution of liberation wars which led to the political Independence of Angola, Mozambique and Zimbabwe, the colonial authorities legislated against the publication of trade statistics. A case in point is that of the former Southern Rhodesia(now Zimbabwe) which outlawed the publication of trade statistics in a bid to protect those countries which continued to trade wi th her in defia.nce of the United Nations resolutions imposing trade embargos on her .3 ) These trade embargo resolutions were passed following the Unilateral Declaration of Independence (UDI) by the white settler regime in 1965. In the case of Angola and Mozambique records on trade statistics were ei the'r kept in Lisbon or were destroyed by the departing Portuguese in a campaign of sabotage against black governments

. h . 4'

ln t ese countr1es.

1. 3 SOME FOREIGN TRADE STATISTICS OF THE SIX SADCC COUNTRIES

In attempting to test the validity of the Prebisch Thesis, i t is necessary to have sorne insight into the foreign trade structure of each of the countries covered by the thesis. Tables A through F show sorne of the statistics country by country.

3) See Africa South of the Sahara, Europa Publications Limited, 19.76/77. It is stated therein that "no official trade figures have been published since 1965. In 1973 the publication of import and export figures was stopped".

This appears under the section on Rhodesia.

4) See Article by Davidson, B. ":Angola Recent·History", Africa South of the sahara, Europa Publications, Limited, 1983/84, pp. 190-95. In the same article it also stated that the civil war and lack of skilled personnel "to handle international transactions" are part of the explanation.

TABLE A: Botswana-Foreign trade statistics for a few selected years

! .

(current millions of Pula)

Item

Total imports

Total exports

Trade balance

Total impo~ts as percenta-1 ge of GDP

Total exports as percenta-!

. e of GDP

Imports of industrial pro-'!

ducts

Exports of prima~ pro- ducts

1968 27.8

10.2

-17.6

63.4

23.8

15.4

7.0

!

!

!

-!

!

!

.!

!

Years

19.72 _{1976 .} 1980

lU. 7 187.5 537.6

44.8 153.0 357.8

20.9- - 34.5 -179.8 1

64.0 69.5 77.9

38.8 50.1 51.9

70.9 145.9 453.5

!

39.0 135.0 346.4

Imports of industrial pro-!

! ducts as percentage of total imports

55.4 63.5 77.8 84.4

Exports of primàry pro- ducts as percentage of

total exports

68.6 87.1 88.2 96.8

sources: (.a) GDP (IMF), International Financial Statistics, Yearbook, 1983

(b) Exports, Ibid

(c) Imports, (Europa Publications Limited) , Africa South of the Sahara ; (Botswana Government) , National Development Plan n°5, Colclough., C. and McCarthy, S. The Political Economy of Botswana, Oxford University Press.1980.

Foreign trade is no doubt important to Botswana. Total imports expressed as a percentage of GDP are over 6~ per cent ; in 1980 for example the share of imports in GDP was 77.9 per cent as opposed to figure

of 63.4 per cent in 1968. This implies that imports grew by 14.5 per cent over this period. Of these total imports, imports of industrial products constituted a sizeable portion. In 1968 the share of industrial goods in total imports was 55.-4 per cent increasing to 63.5 per cent by 1972 ; to 77.8 per cent in -1976 and rising again to 84.4 per cent in 1980. Experts on the other hand also appear important although they started from a low figure of 23.4 percent of GDP. In .19.80., experts accounted for slighly over 50 per cent of GDP ,implying that between the two dates experts grew by 26. 3 per cent. Experts therefore grew faster than imports, but neve·rtheless their share in GDP still remained below that of imports. The."share of experts of primary products in total experts is quite significant, being 68.6 per cent, 87.1 percent, 88.2 percent and 96.8 percent for 1968, 1972, 1976 and 1980 respecti vely·.

Implicit in this, that is, imports claiming a higher share of GDP than exports is the balance of trade deficit. In 19.68 the balance of trade deficit between total imports and total experts stood at P17.6 rn or 40 per cent of GDP, by 1980 the trade deficit had jumped to a figure of P179.8 implying th~t the trade balance deficit increased by 10-fold between 1968 and 1980. How.eve+, expressed as a percentage of GDP there . had been sorne improvement.

1 .7

TABLE B: Lesotho: Foreign trade statistics for a few selected years (Current millions of maloti)

Item

Total Imports

!.

!. Total Exports

Balance of trade

Total imports expressed as!

percentage of GDP

Total exports expressed as!

percentage of GDP

Imports of industrial pro-!

ducts

Exports of primary pro- ducts

Imports of industrial pro-!

ducts as a percentage of , ! total imports

Exports of primary pro- ducts as percentage of total exports

Years.

1968 19-72 i4.0 46.5

3.2 5.8

-20.8 -40-.7

54.6 :J4.J

7.3 9-.3

19. 1 40.9

1.5 1.1

75.4 ~ 87.9

46.9 .18. 9 1.

1 .J

-!

!

.1976

186.3

21.0

-165.3

130.0

14.7

141.7 3.7

76. 1

17.6

. l . . 1980 386.6

47.1

! -339.5

142.2

17.3

331.1

31.6

85.6

67.1

!

Source: (a) GDP, (IMF), International Financial Statistics, Yearbook, 1983.

(b) Exports, Ibid

(c) ~mport (Europa Publications Limited) , Africa South of the Sahara (various issues)

Lesotho's foreign trade statistics portray an interesting picture.

The export base is very low bath. in absolute terms and as a percentage of GDP. The absolute level of exports in 1968 was M3.2 rn, by 1980 i t was

M4 7.1 m. The figure of M47 .1 .. m is attrib.uted to the an;:i val of diéjlmonds on the scene ; an addi tï.on to Lesotho' s· tradi tïonal exports of Mohair and wool. On the imports side, Lesotho appears· to rely heavily on imports. 54.6 per cent was the share of ïmports· in GDP in 1968 ; by 19.72 the figure had risen to 74. 7 per cent ; in -1976 and 1980. the share of imports in. GDP was well over 100 per cent, -130.0 per cent in 1976 and 142.2 per cent in .1980.

Thus indicating the strong influence of international assis·tance/borrowing.

Again imports of indus trial products cons·t i tute the bulk of imports. For the whole period under review imports of industrial products accounted for more than 70.0 per cent of total imports. The trade balance is quite huge consti- tuting 124 per cent of GDP in 19BO.

TABLE C: Malawi: Foreign trade statistics for a few selected years (Current millions of Kwacha)

Item

.! Total irnports Total Exports

!Balance of Trade

!Total Imports as percentage of GDP

!Total Exports as percentage. of GDP

!Imports of industrial products

Years J968 1972 1976

"79. 7 124.3 227.3

49;1 79.4 175.7

!

· l ..:.JO .: 6 · ! -4 4 . 9 · ! -51 . 6

!

35.4 34;6 37.1

. 21.8 22.1

58:2 104.2

1 28.7 1 188.1

.!

1980

413.5 269.0 -144.5 40.9 26.6 357.2

!Exports of primary products· · 24.9 44.5 125. 9. 184. 2

! Imports of indus trial products as:· a

!percentage of total imports

1 .73. 0 -!

!Exports of primary products as a per~- J. 50.7

!centage of exports ^{. !}

83,8

56.0 .1 1

82.7 J 86.3 1

71.6 68.5

! Sources: (a) GDP, (IMF) 1 International Financial Statistics,

Yearf:iook 19-83 (b) ·Exports: Ibi'd

( c) Imports 1 (Europa Publications. Limi ted) , Africa South of Sahara, (va,rious· issues)

The share of imports and experts in GDP in respect of ~l~wi do not appear to be so high. Actually the s.ha,re of experts in GDP fell from 28 .. .7 per cent in 1976 to 26.6 per cent in 19-80-. Meanwh.ile the highest percentage share of imports in GDP was in 1980. when they regi~stered a figure of 40.9. However, the share of the impor-ts of industriéll products: in· total ünports is. signi- ficant ; i t was over' 70 per cent over the study period. Equally important is· the share of the experts of pri'roa,ry· p:):'"oducts· in total experts .. Throughout the study period over 50. per cent of experts· was accounted ·for by prii:nary products. 50.7 per cent in 19.68 ⁱ 56-per cent in 1972, -71. 6. per in 19.76-gnd 68.5 per cent in .1980.

TABLE D: ·swaziland -· Foreign ^t,r~de stgti'stics· for a few s.elected ye~s

!

.J.

(Current millions:. of Ema,lgngen.:j:')

' . '

-!

Item ¹ Years

-!

'1,968 1912 ^l 19?Ei ^{l 1980}

! ' _.! l

!

Totql Jwpo.:rts ..! 38.8 ^{! '} 63.2 ^.! 168.6 ^.! 501.0

..! -!

Totql Experts ^'.! 41.1 ^{l '} 65.3 ' 161.1 ^-! 314.5

' 1 ..!

Trade Bala,nce ^.! +2.3 +2.1 ^.!

-

-l .!

Tqtgl .:1-mports as percent"\ ge of GDP ^..! .7.1.7 64.7 ^.! :~66 .. ·4 ^-! 107.8

-.! ..!

To:tal exports. as c·percentage of 'GDP . .16.9 66. 9. ^.! :63:5 ^.! 67.7

-l ..!

Imports· of indus trial products: · ^.J 16.1 45.4 ^.! 150 .. 7 ^..! 292.3

..! .! -!

Exports of primary produèts: ^{. .J} 23.5 39.6 106.2 ^.! .169. 0

-! ..!

Impo.:r:ts. of. indus trial p.:r:oducts as a ^..! 41.4 71.8 ^.! 89.4 ^..! 58.3 percentage of total irnports ^{' ..! .! ..!}

..! l .!

.Experts of primary p.:r:oducts;< .as. a, ^,,,,.J .57 .1 60.6 65.4 ! 53.7

pe.rcen tage of total exports: ..!

Sources: (al GDP (IMFl . Interngtiongl Financial Statistics., Yeélrbook 1983

(b) Experts·, · Ibi.d. The export of Iron Ore figures caùe from source below

(c) Imp0rts· (Europa, Publications Lirni ted), Africa, South of Sahara, (y'qrious i.ss.ues)

l .!

.

! '

.!

.!

.!

l

! l

!

Irnports and Exports of Swa,zi'la,nd e:xpressed as percenta,ge. of GDP are. qui te hicgh. In fact in .1980 imports represented 10.1 per cent of GDP, During the first four years of the study peri.od Swaziland enjoyed tra,de balance sur- pluses, however, by 1980 the trade balance had become negative and enormous

(M196.5). The share of industri~ël.l products. in total imports is also subs- tantial registering the highest pe+centa.ge share in .19.76 (89. 4 per cent) ; i t was only in 1968 that industriël.l products· represented less than 50 per cent of total irnports (4.1. 4 pel;' cent) . E:xports· represented over 6.0 per cent of GDP throughout the study period~ Of these exports over 50 per cent was accounted for by prirnary products·.

TABLE E: Tanzania - 'Foreign trë).de stattstics· for· a · few selected years

.J

!

!

J

!

(Current millions· of shilli'ngs.)

..!

Item -! ^Years·

. ~

. ^j~68 19-74 ^! 1~76 ..!

..1980.

...! .!

Total Irnports .. ! 20.16 3329 5841 .!1.1037

-! l

Total Exports -! 2041 2745 .! 5297 .! 5522

-! .!

Trade Balance -! 25 -584 -544 .!-5515

...! .!

Total imports as percentage

ot

..! ^{. !} .!

Total exports as ·percenta,ge of GDP ...! 24.3 24.5 J 2:/.h' l. 13.6

... ! .. ! .!

Irnports of indus trial products ^..! 641 1230 ^.53.'10 .· '!10308

-.! .! .!

Exports of prirnary products ^.! 652 864 2.1.17 ^{. .!· .} .1724

..!

Imports of indus trial prqducts a,s ^-! 31.7! 36.9 ^! 91.5 .! 93.3

percentage of total illlports. ^..! .! .!

-! .!

Exports of primary products· as .. ^-.! 3L9! 31,4 ^.! 40.3 .! 31.2

percentage of total products . .! ..! .!

Sources: (a) GDP, (IMF'),. :j:nterna,tïonal Financial Statistics, Yearboo:)c 1983 .

(b) Exports·, Ibid

(c) Imports, Africa South. of the Sahara (Europa Publications) Limited), (various issues)

Throughout the thesis period percenta,ge shares of imports. a,nd exports in GDP for Tanzania are less than -30. per cent. E.xports as· a percentage of GDP fell to 13.7 per cent in 1980. Jmports of industrial products as a percentage of total imports· were 31.--7 per cent (19.68) and 36.9. per cent

(1972), however in 1976 and 19-80 the figures were respectively 91. ~ per cent and 9-3.3 per cent. Therefo:re the sha,:x:e o·f industrial products in total imports can be said to be signifîca,nt..

The share of primary products· in total -èxports does not appear to be significant. It was· only· 19-76. thatthey representea 40 percent of total exports·. ·For the other ye.a,rs their share in total exports· was in the region of 31 per · cent. However, the· figures for pri·ma,ry products· should be treated with caution because i t is· apparent that the. source understated the true level of the volume of Ta,nza,nia' s exports of primary products.

TABLE F: Zambia - Foreign trade stati's.tics· for-a few selected yeqrs (.Current millions. of k:wacha)

.!

-! Yea.rs

Item

-! ^....

.19.6$ 19..:72 ^{.. !} 1980

-! ! .1976

J

.J ! ^j

Totql imports -! 470 ^{. !} 565 736 .! 1297 !

.j ! !

Total e.xports ^{! .} 545 586 ! 832 1129

. !

Trade Ba,la.nce J 75 21 ^.! 96 -168

. .J ..

Total imports as percentage of GDP . ^44~ 3 41;9· ! 39.3 43.4

.! !

Total exports as percentage of GDP . ! . 51.3 43;5 ^j 44.4 37.8

! 1

Irnports of indus trial products· -! 294 356 436 ^.! 817

. J. l !

E.xports of ·prirnary products. ^{'! .} 516.1 490.9 688.0 ^.! 1008.2

! .!

-! Irnports: of indus trial pioducts as: -! 62.5 63 .. 0 ^! 59.0 ^.! 63.0 pe.rcentage of total irnpo:rts ^{· . . .!} l

! l

-! -E.xports .. of primary products a.s ^.! 94.6 83.7 ^.! 82.6 '-' ^., 89.3 percentage of total exports .!

Sources: (a) GDP, (IMF), International Financial Statistics, Yearbook 1983

(b) Exports·, Ibid

( c) Impdts, Africa South of the Sahara (Euro pa Publications Li mi

The share of imports in Zambia's GDP is generally sl~ghtly over 40 per cent ; only in 1976 was this share less than 40 per cent (39.3 per cent).

Exports as percentage of GDP are also significant accoqnting for 51.3 per cent of GDP in 1968, however by 1980 their share in GDP had declined to 37.8 percent.

Slightly over 60 percent of Zambia's imports is composed of industrial products except in 1976 when industrial products accounted fo~

59.0 percent of total imports. On the other hand Zambia's total exports are dominated by primary products. At the sta~t of the study period, pri- mary products represented 94,6 per cent of total exports, in 1972 they constituted 83.7 percent of total exports, fall~ng slightly to 82.3 per cent in 1976 and r~sing to 89,3 per cent in 1980. From 1968 through 1976 Zambia enjoyed trade surpluses, but in 1980 the trade balance was negative.

Generally, the six SADCC countries'imports are punctuated by the preponderance of industrial p~oducts while their expo~ts are dominated by primary products. Only in Lesotho and Tanzania do primary products consti- tute a relatively small share of total exports, Reasons were given earlier for this divergence.

CHAPTER TWO REVIEW OF LITERATURE

2.1 THE THREE TRADE CATEGORIES

Allusion was made earlier to the three categories of trade ·relations between the center and the periphery·, These categories are:

(a) mutually advantageous gains from trade (b) structurally biased gains from trade (c) trade-induced global polarity

The arguments for or against each of these categories are well 'known,therefore repeating them here will be superfluous. Nevertheless,

the salient features of each will be briefly highlighted. Particular emphasis will be placed upon the second category, structurally biased gains from trade, for the same reason which had been given earlier.

2.2. MUTUALLY ADVANTEGEOUS GAINS FROM TRADE

Mutually advantageous gains from trade is based on the theory of comparative advantag·e developed by David Ricardo, The theory and all its variants exhort countries to specialize in the production of those goods in which they have comparative advantage. Su.rplus production would be

exchanged for goods produced by other countries which would have specialised in those goods in whose production they have comparative advantage, Further- more,international trade is said to increase welfare by bringing into use

the hi therto unemployed resources, This is the .so called vent for surplus theory. In this manner international trade is perceived to be advantageous, on a mutual basis, to those countries engaged in it,

Throughout the imperial epoch, the virtues of mutual gains from trade were preached to the periphery. However, with the demise of the colonial system and the emergence of new nation states, the theory of comparative advantage .was progressively called into question as the efforts of the emergent nations to develop were getting frustrated:

Condemned to the role of producing r~w materials by the international division of labour,the periphery started agitating for the re-structuring of the trade relations between the center and itself so as to maximise its gains of international trade. The periphery argued that given the varying levels of development-economic, political,institutional and tech- nological between the center and itself, i t was impossible to expect i t

(periphery) to reap the gains from trade to the same extent as does the center. It was then concluded that economie and social structures in bath the periphery and the center do not permit mutual gains from trade between the two because the center and the periphery are unequal partners. This then leads us to the second category of trade relations, that is, struc- tuially biased gains from trade.

2.3 STRUCTUR,I\LLY BIASED GAINS FROM TRADE

This version of the center-periphery trade relations sees the gains from trade concentrating disproportiona,tely in the technologically advanced industrialised center leaving the periphery with very little to content itself with. In other words, gains from trade are biased in favour of the centre with its developed structures and away from the periphery with its poorly developed structures. This approach to trade between the center and the periphery owe.s its genesis to the economists of the Economie Commission for Latin America· (ECLA)l). Hence the ECLA 1) For the names of those who have contributed to structuralisro see Seers D.!,

"A theory of inflation and growth in underdeveloped Economies based on,, the experience of Latin America", Oxf0·rd Economie Papers, Vol. .14. No 2, (June

1962), pp. 92-93 (Appendix: A note on Struct.ur.alism).

viewpoint has come to be popularly known qs the ECLA School or the struc~

turalis': scheel.

The emergence of the ECLA school of thought. w.-qs a respons.e to the monetarist remedies·· whïch. were being proposed by the Internationql Monetary Fund and the World Bank as a way of e.a.sing the. balance of pa.yments problems of Latin American countries. The two world bodies had been advising that the periphery should devalue its currencies in order to discourage imports and to make experts attractive to the. rest of the world. In addition the periphery has been exhorted to devote more resources to the export sector so as to increase the volume of experts, hence the. volume of export earnings.2

) It appears that the assumption is that the demand for primary product imports by the center is high enough to be able to abso.r.b additional experts of primary products· from the periphery·.

The structuralists see the existence of certain differences in the structures between the center and the periphery a.nd within.the periphery itself as the major causes of the Q.e;ël.inïng gains from trade in so far as the periphery is concerned. Technological imba.lance is responsible for the situation whereby the center has become more efficient in the use of

resources leading to the use of less resources to produce the same unit of output. The high level of technology enqbles the center to manufacture synthet:ics. The resul t is· that less of the periphery' s primary products is demanded. As income increases the Structure of demand changes,therefore pro- duction structures must be adapted to the changing demand pattern. Also the center in view of its technological advancement has been able to adapt

2) World Bank, Accelerated Development in Sub-Saharan Africa (An agenda for Action), Washington, D.C~, (Second print), April, 1982.

its production structures to the supply of those goods, notably manufac- tures, whose demand increases significantly with income.

On the other h.and, the periphery riddled wi'th technological back- wardness is not in a position to adapt its structures of production to the chang:ing :.pattern ·Of demand so as to reap the benefits· from international trade. The periphery produces primary products whose demand is low in the center while most of its imports comprise manufactures which. ït has no technological capacity to produce locally . .3) ·The low demand in the center for i ts primary products forces the periphe.ry to accept low priees for them and the high demand for manufactures not only in the periphery but also in the center renders manufactures expensive. Thus the pe.riphery is forced to pay high priees· for its imports of manufactures.

The two factors corr.l.)i·ned-low priees for primary products and high priees for manufactures cause gains to acrue to the center and away from the. periphery·, thus reducing the latter' s purchasing power and the capacity to develop.4

) One may add that gains are. lost to the periphery through the sale of unprocessed products. If the peripnery·processed its products skills would be developed. Moreover incarnes would be generated through the payment of the domestic factors of production engaged in the processing activites ..

In respons.e to these structural differences, the exponents. of structuralism argued vehemently for industrialisation in the periphery

through import substitution. It was thought that import substitution would lead to a curb .in .imports and ultimately provide a solution to the balance

3) Seers. D. op. cit. p. 275

4) Meier, G., International Trade and Development, Harper and Raw Publishers, New York., 1963.

of payments problems. On the contrary, however, import substitution industrialisation tended to be import intensive, thus worsening the balance of payments deficits. Internally,indust~ had no linkages with other sectors partic~larly agriculture wh.ere the ~ajority of the peri- phery's population still reside. This cast sorne doubt on the efficacy of .import substitution industrialisation pol~cy as a means. of correcting

trade and structural imbalances with the center and even with.in the peri- phery. Balance of payments crises therefore continued and the quality of life in the periphery did not improve. The third trade category, trade- induced global polarity or the dependency theory cornes in to provide further insight into the problem.

2.4 TRADE-INDUCED GLOBA.~ PO~l\RJTY

Trade-induced global polarity or the dependency theory of inter- national trade is

vi~ted

) by those who subscribe to it. The thrust of the theory is that development of the periphery is dependent upon developJllent of the center.· In other words, the periphery is devoid of internal stiiPuli which. could cause.

development to occur. The little develqpment which. appears to have ta,ken plçtce is no more than jus.t a reflection of major developments in the center.

Underdevelopment of the. periphery is vi'ew.ed as. a ne.ces.s·ary candi tian fqr the development of the center. 6) Bec a use of thi·s relationship of dependency the development of the periphery is geared towa,rds servicing the interests·

of the center as e:videnced by' the export-or~ented structure of production

5) Smith, S. and Taye, J. Op. cit. p. 9.

6.) Frank, A. G. , "Develop!llent of Underdevelopment" in W.t.lber,

c.

Given this state of affairs, the periphery is completely dominated by the center to a p:>int where ·aùtonmrro:us development in the former be cornes difficul t .

The policy prescription put forward by the proponents of the dependency theory as a ·way of ridding the periphery of this dependency is to break with the center so as to put the economies of the peripheral coun- tries in the hands of their people through a socialist revolution. This theory has often been criticised for automaticity in that i t assumes that breaking with the center will automatically bring about development.

2.5 RECAPITULATION OF THE PREBISCH THESIS

At this point in time, i t is perhaps necessa,ry to recapitulate the Prebisch. The sis. The ba,sis of the Prebisch Thesis· as regards the center- periphery trade relations· is that there is a secular tendency for the terms.

of trade of the periphery (whose exports are. mainly primary products) to deteriorate vis-à-vis those of the center whose exports are mainly industri'al products. Prebisch exp lains this phenomenon i·n two wa,ys. The first exp la- nation is couched· in instituti.onal terms·, He obse.+:ves that the fruits of

. .:) )

technical progress are not evenly distrib.uted between the center and the periphery· Q.ue. to disparities in the relative bê\rga,ning power of labour i'n the center and the periphery·.

When technic9l progress takes place in the periphery, i t expresses itself in the form of lower prices8

) for the periphery's products. This is due to lack of effective trade unionism which. can apply pressure on capital to pay higher wages so that productivity ga,ins can be retained. Since the purchaser in the center is the principal cons.umer of the periphery' s products,

7) Prebisch, R. Op. cit. p. 251

he stands to gain. On the other hand when techni·cal progress takes place in the center i t does not express i tself in the forrn of lower priees ,for its products in accordance with a priori expectations. Rather technical progress rnanifes·ts itself in the forrn of h.i'gher wages·: due to the strong bargaining power of labour unions. In arder to avoid a, .squeeze o~·p,rofits

capi talists in the center pass· the burden on to the consumer in the forrn of higher priees. Although. the consumer in the periphery is not the s·ole buyer of the center • s indus trial products, he. is the hardest hi t in view of his law and decreasing purchasing power. In this fashion incarne is transfered to the center ; if capital invested in the. periphery is foreign owned, the situation is worsened by the repartria,tion of profits.

The second explanation for the cause of the dispa,rity in the center- periphery trade relations according to the Prebisch. Thesis is viewed froJ;D the dernand standpoint. In other words, when incarne. increases tastes change.

Prebisch observed that the incarne elasticity of demand for prirnary products

~ the center i·s lower than the incarne elasticity of .demand for industrial products by the periphery·. To explain this dispa1;ity Prebisch invokes . Engel' s Law which says tha,t "expenditure on food is a decreasing function of incarne", that is, as incmne increases people tend to consUJ;De more of indus trial products and less of p+imary products. In a,ddi.tion the periphery' s interna,l dernand elastici t~es. a,lso play a rnaj or role. becquse wi thin the periphery the incarne elasticity of exports is less tha,n the incarne elasticity of dernand for imports:. This may be due to the supply conditi.ons in the

periphery o.:r a +eflection of the law derna,nd elasticities for the per.iphery's prfmé\ry products in the center.

Recently ?rebisch sees the fall in the demand fo+ the periphery' s p1;oducts by the center as being caused by structural irnbalances in the

9) .

center. The capitalist surplus which. .hitherto was re-invested is now being wasted on conspicuous consumption. As a result there is an imba-

lance between consumption and the accumulation of reproquctive capital.

This development damp~ns the tempo of economie growth, thus less of the periphery's products is demanded. The same conclusion is reached oy Khan and KnightlO) when they observe that the slow l.down of economie acti2ity in the center is one of the external causes of the periphery's balance of payments deficits. Another factor they identïfy is the soaring oil priees which eat into the export earnings of th.e periphery.

2.6. CRITICISMS OF THE PREBISCH THESIS

The Prebisch. Thesis has had its. own share of criticism having been

1.1) . 12)

criticised on both emperical and theoretical grounds. Sorne economlsts who carried out emperical research found out that emperical evidence did not

support the claim that th.e terms of trade for primary products tended to deteriora te over til:ne. For sorne the terms of trade for primary products ' improved vis-à-vis those for industrial products ; for sorne they fluctuated over time while for ethers the terms of trade remained the same.

9.) Prebisch., R., "The Crisis of Capitalism and International Trade", CEPAL REVIEW, Vol. 20, Santiago, August, .198.3.

10) Khan, M.S. andKnight, M., "Sources ofPayments Problems in'Ldcs",

Finance and .Develop)llent (IMF Publication), Vol. 20, N°4.Dec., 1983,pp.2-5 11) Higgins, B. Economie Development (Principles, Problems and Policies)

W. W. Norton and Company, New York, -19.59. p. -3J1.

12) See for example Clark,C., The 'Economies of 19.60 (London, 1944). ;

Lewis, W.A. "World Production, Priees and Trade, 19.J0-1960", The Manchester School of Economie and Social Studies. Vol. 20., .19.52 ^.i Aubrey, H.G., The Long-Term Future of the U.S .Imports and its. iiP.Plic~tions for prima:çy producing· countries:",. American Economie Review, May 19.55.

. 1 13) orie of the outstanding critics of the Prebi.sch.Thesis is Haberler.

Haberler argues that there is no theory that supports the claim that there is a secular tendency for the terms of trade of the periph.ery to deteriorate.

He argues that the fact that there might have been sorne deterioration in the periphery's terms of trade in the past is· no justification for extrapolating that trend into the future because things may change. He rejects the operation of Engel's Law used by Prebisch ta explain the disparities in the income

elasticities of demand between the center and the periphery by s·aying that

"Engel' s Law applies to food but not to raw materials , l4

~

15) -

the same. Copper remains copper, cotton remains cotton, etc . Also the The- sis is criticised for not taking into account the introduction of new pro- ducts as well as the payment of services such. as insura,nce and freight. The explanation here is that the improvement in the. quality of industrial pro~

ducts, addition of new products and the payment of the insurance and freight services may explain why the terms of trade have moved against the periphery·.

·. Another criticism levelled against the Thesïs is that Prebisch. takes periphery to be synonymous with primary production and the center to be.

synonymous with. industrial production. In reality, there are countries in the center which. are net exporters of primary products. Does i t therefore mean that they tao have suffered a deterioration ïn th.eir terms of trade?

13) Haberler, G., "Terms of Trade and Developrnent" in Ellis, H. S, (ed) , Economie Development for Latin America . . Macmillan and Company (Ltd.) , London, 1962. p.p 275 - 301.

14) Ibid, p. 284.

15) Ibid, p. 281.

Finally Haberler does not think that given the. differences in the corornodity composition of the exports of different peripheral countries i t would be fair to assume that they all suffer a degree of deterioration in their terms of trade to the same extent.

Those16

) who seem sympathetic to Prebi'sch's concern argue that what is important is not the small size of the elastfcity, but the fact that i t should be positive so as to enable the periphery to sell its products in the center. They argure that expenditure on primary· products has not fallen in absolute terms but has fallen only in relation to the JJ.evel of income.

Therefore even if the elasticity of demand for primary products is less than unfty, the periphery should be satisfied as long as there is an expansion in tqe demand for its products.

2.7 COMrœNTS ON THE CRITICISMS OF THE PREBISCH THEpiS

The criticis.ms of the Prebisch Thesis seem s.omewhat out of context in that they are not placed within the context of the structural differences which exp lain the center-periphery trade relati·ons. The cri tics have argued their case in a general context wherein the center and the periphery have been both. placed on the same platform.

. The cri tics argue that sin ce sorne countrïes of the center are als·o net exporters of primary products, they too should be. suffering a deterio.ra- tion in their terms of trade. Even if these. countrïes of the center do suffer such a deterioration1 its effect on their development ïs not the same as ït is in the periphery because export earnings· from prima.ry· products a,re not the.

main driving force behf.nd their development. The cente.r has ïnternal activities

16} Meier, G.M. ,op. ci·t. p. 62

which generate revenue for the financing of its development programmes.

The situation in the periphery is different. Its development is export~

led and a continous fall in its export earnings affects its growth. ad- versely. No interna! activities exist which. can generate developmept finance. Therefore the effect of the deterioration in the terms of trade is fel t more in the periphery ·than in the center due to the weakness· of the interna! structures in the former.

The cri tics ch.allepge Prebisch for his reliance on Engel' s Law to explain discrepancies in the income elasticity of demand between the Centre's products and the periphery 's products. They argue tha,t while Enge1' a Law

applies to food,it does not necessarily apply to primary products. That may be true within the context of the center alone. Within the context of the center-:- periphery trade relations ,however;.;L t may not ·be· true bEl Cause the center·~·. cqns~mp.,­

tion of primary products from the periphery represents a small fraction of the total volume of primary products it consumes, So when incarne in the center increases, the overall demand for primary· products. may be hïghly elastic, but the demand elasticity for the. periphery-'s primary products alone may be low. This is due to the fact tha,t most of the increase in the demand for primary products is satisfied by the center itself and the remaining fraction being satisfied from the periphe.ry' s supplies of primary products.

Coming to the periphery the situa,ti.on is different. The peri- phery has very limited technological capacity to produce industrial products. Its demand for indus trial products from the center is highly- elastic because all of this demand for industria,l p:r?oducts is s.atisfied from the center. Therefore the dispariti·es· in the. center-periphery t:r;ade relations is not so much a question of a change :j;n the tastes· as income increases, rather it is a structural problem.

The question of an improvement in the quality of industrial products and the addition of new ones, while the quality of primary pro-

' .. ducts has al ways remained the same, is part of the structural problem

discussed above. To be able to reap maximum gains· from international trade, the periphery should adapt its production structures towards the production of industrial products· whose demand is htgh. Industrial products are not only needed by the rest of the world, the periphery too needs them.

3 . 1 GENERAL REMARKS

CHAPTER THREE METHOOOLOGY

·' Th~ study is based on time-series data. Gross Dornes tic Product (GD?) , Export and Import data were collected for the 13-Year period (1968-80).

The sample data for Botswana, Lesotho, Malawi, Swaziland and Zambia are for 1968-80, whilst the data for Tanzania are for a 12-year period (1969-80).

The main focus of the study is to compare the intome elasticity of demand for the center's imports of primary products wïth the incarne elas- ticity of demand of the 11SADCC countri'es' (peripher:~t} imports. of industrial products. Therefore only data on the experts of p:r;imary· products from the peri- phery and the · imports of· inàustrial products fJ;:om the centre were collected.

For the purposes of this study, a primary product is de.fined as a COUUJ!Odity which cannat be cons·umed in its raw form, but has to be. transformed into a manufactured state be:fore final consumption. On the ether hand, an industri·al product is a commodity whi·ch. has already undergone processing and thus can be consumed directly without recourse of further process'ing. A .1-digit level of the Standard International Trade Classification (SITC) sections· has been adopted. All GDP, Export and Jmport values were converted into dollars using the appropriate dollar exchange rate.

SITC sections 0, 1, 2 (.Food and Liye anima,ls, Be.verages· and Toba,cco and Crude mate rials respecti vely) have been exclude.d from the SADCC countri.es' imports. Although sorne sections for ex~ple, SITC 2 · (severages and Tobacco)

contain elements of manufactures, i t was decided 'to exclude them. The reason

for excluding them is tha,t in sorne cases thes·e thre.e sections were lumped together as one category whereas in the da,ta, for ether countries they were presented as individual sections. For the sqke of consistency, the said

Il.

sections (SITC 0, 1, 2) were counted out in determining importa of indus- trial products of the SADCC countriea.

Exporta of primary products from the SADCC countries fall within SITC seetions 0-2.

3.2. THE MODEL

. 1)

Like other previous etudies double-logarithmic equations were used. The only explanatory variable is GDP. Absolute priees were the second explanatory variable. They were however uaed to deflate importa (the dependent variable) on the left-hand aide of the equation, therefore they disappeared from the right-hand aide of the equation. Later on it will be explained why absolute rather than relative priees were preferred.

Another possible explanatory variable could have,been the exchange rate.

Since importa and exporta were converted into dollars using the appropriate dollar ex change rate, the ex change rate as a variable ( explanatory) was taken care of by the conversions.

Importa of each of the SADCC countries (periphery) from the center are specified as follows:

1)

log M

p

where

M Per capita real importa of industrial products of

·p

the periphery.

See Houthakker, H.S, and Magee, S.P .. , "Incarne and Priee elasticities in w orld Trade", _R_ev_:!-_ew!!~o:.=f_!E:!!:c:.::o::..tn~o::.!m~i:.:c~s::_:a::::n=d~Statistics. Vol. 51, N~ 2, May, 1969, pp. 275-97.

i3ù. - cons. tant

a1 Elasticity with respe.ct to pe.r capital real GDF

Y Fer capi ta real GDF in the perîphery p

The same specification ; is used to determine the aggregate import d,emand of all the SADCC countries considered in this study.

Imports of primary products into the. center from the periphery are determined on the basis of a specification s·imilar to that used in the. case of the periphery ¹ s imports from the centex:·

log M

=

c c

where

M Fer ca pi ta real imports of p;p.iroa.ry products of the center.

c

b0. Constant

b 1 Elasticity with respect to per capita real GDF

Y =

The equation ·for the periphery ¹ s experts of priroary products regressed against its own GDF is of the form:

where

x

Elasticity with respect to per capita real GDF Fer capita real GDF in the periphery

.. :) Similarly the center ¹ s experts of indus.trial products regressed upon its GDF takes the form:

log X

=

c c