Will Peru’s Comparative Advantages Bring a Sustainable
Growth Rate for the Economy
CONTENT
1. MY PERSONAL MOTIVATION... 3
2. THEORETICAL FRAMEWORK... 4
2.1. Introduction ... 4
2.2. Theoretical framework ... 5
2.2.1 Technology prevents risk of depleting natural resources ... 6
2.2.2. Technologically advanced products tend to have more dynamic markets. ... 7
2.2.3. Technology improves living standards... 9
3. THE METHODOLOGY... 12
3.1. Data and sample... 12
3.2. Lall’s Classification ... 12
3.3.1. Technology prevents risk of depleting natural resources ... 13
3.3.2. Technologically advanced products tend to have more dynamic markets ... 14
3.3.3. Technology improves livings standards ... 16
3.4. Limitations of this thesis... 18
4. RESULTS ... 21
4.1.1. Technology prevents risk of depleting natural resources ... 21
4.1.2 Technologically advanced products tend to have more dynamic markets ... 23
4.1.3. Technology improves living standards... 28
CONCLUSION AND DISCUSSION ... 35
BIBLIOGRAPHY... 38
Databases and internet sources ... 39
APPENDIX ... 41
1. MY PERSONAL MOTIVATION
In 2004 I went for the first time to Peru, to study there for one semester at the university of Lima, a private university for the rich. I took classes such as “Political economics” and “the Peruvian economy”. These classes demonstrated clearly that there had been big economic crises in the past. However, the professors were quite optimistic about the present situation. Indeed, the Peruvian GDP and its exports were rising and this rise was backed with monetary stability. Yet every conversation I had with taxi drivers, every time I went into the mountains through small villages, I saw and heard only about the Peruvian malaise. According to the man on the street, the Peruvian economy was only worsening. Among the taxi drivers that told me jobs had diminished over the last couple of years, there were educated business administrators,
pharmacists, and one economist who was discussing with me the book by Hernando de Soto “the Mystery of Capital”. One taxi driver joked about the situation: “The Peruvian taxi drivers are the best educated taxi drivers in the world.”
It puzzled me, if all the economic indicators are demonstrating an economy that is rising, why then see such a different picture in real life?
When it was time for me to start my thesis, I knew I wanted the Peruvian economy as my subject. I felt I had not really gotten to the bottom of the story the first time and I was keen to go back and find out what was behind this Peruvian paradox. The question I asked myself was what will Peru’s future look like. I knew Peru is richly endowed with natural resources such as copper, gold and zinc. Since the rise of China and its endless need for natural resources, I could imagine these products stimulating the Peruvian export. Yet I also knew Peru had produced televisions and cars in the past and that these industries do not exist anymore.
2. THEORETICAL FRAMEWORK 2.1. Introduction
In 1990 the president of Peru Fujimori stopped an economic experiment named the import substitution model. The import substitution model started in 1959 with the law “La primera Ley de Promoción Industrial” (Luis Abugattás, 1999). The goal of the program had been to stimulate the domestic manufacturing industry by large series of protection methods and incentive policies. The role for the government was as “regulator, planner and even producer” ( Roca, Simabuko 1998:73). High import tariffs were popular as a protection method.
Initially the program was a success in the 60’s and 70’s, when the manufacturing industry’s participation in GDP increased from 23% in 1954 to 26,6% in 1974. However, the importance of the industry for the Peruvian economy started to declined again in the 80’s. Under president Garcia the macroeconomic situation landed in a deep economic crisis. Between 1988 and 1990 industrial participation in GDP dropped 30%, accompanied by a hyperinflation of over 7000% a year in 1990 (Luis Abugattás, 1999).
Under Fujimori, Peru opened up its market for international trade, lowering its tariffs from an average of 66% in 1989 to 16,1% in 1992. In 1997 the average tariff for import products was even further lowered to an average of 13% (Luis Abugattás, 1999). A popular method to measure the openness of an economy is to divide the export combined with the import by the nation’s GDP. The results for Peru between 1986 and 2004 can be seen in figure 1.
Fujimori’s tough regime effectively stopped the hyperinflation and Peru entered a period of growth of GDP. The Peruvian economy continued to be an unstable economy, as can be seen in figure 2. Despite the changes, the average increase of GDP between 1985 and 2002 was 2,63%. Opening up a country’s economy in order to benefit from the world’s globalisation process has had mixed results for different countries. Amongst others, Kaplinsky ( 2004) has clearly indicated the risks countries face when they open up their economy for international trade. He shows how some countries like China are catching up with the developed countries while others fall behind. Many countries specialize in products in which they have to face strong competition in the world market.
Figure 1.
Openness of Peruvian economy
Figure 2 Index GDP Peru
Source: Banco Central de Reserva de Peru, prepared by author
Their exports therefore drop in price while import prices rise or stay the same. Since there is no more protection, products previously protected with high import tariffs have to compete with foreign products that comply with international quality standards.
The gains of export need to offset the losses in the home market, which causes more problems for some countries than for others. Another complication of the extra competition in the home market is it becomes harder for countries to start new industries since foreign competitors will try to prevent such newcomers from entering. Likewise, deindustrializing countries take the risk of not being able to start the industry again in the future. This is why countries should fully realize the possible irreversibility of their specialization decisions, for path dependency now is widely accepted as an explanation why some countries do and other countries do not thrive on globalization (Lall, 2000). As Kaplinsky (2004,16) states, “there are winners and losers in the globalisation game”.
2.2. Theoretical framework
Peru’s performance based on what is necessary for a country to gain from globalisation is the main topic of this thesis.
This thesis will bring an in-depth analysis of the specialisation pattern of Peru and will attempt to answer the question if Peru is focusing on unconcentrated markets in order to secure a future of constant growth. For this, the Peruvian export will be classified on technological content using the Lall classification ( 2000), so as to find out if Peru is developing sustainable comparative advantages. With a sustainable comparative advantage is meant a comparative advantage:
- In commodities that do not require more natural resources than the environment can produce at the same rate. (§ 2.2.1)
- In commodities with dynamic world markets (§2.2.2)
- In commodities that stimulate an increase in the standard of living of the country (§ 2.2.3).
Table 1
Framework of the thesis, what makes a growth rate sustainable
Technology class Lall Nature Dynamic markets Living standards
Primary products - - - Resource-based manufactures - - - Low-technology manufactures + + +/- Medium-technology manufactures + + + High-technology manufactures + + +
Table 1shows the technology necessary for products is in this thesis key to a sustainable growth rate on all three parts of the definition.
The suggestion of table 1 is straightforward, high technological content of the exports means a country is a winner. If the export only contains primary products and resource-based products the country will loose. The connection between all three parts of the sustainability definition and technological content of products will be explained in the next three sections section 2.2.1, section 2.2.2. and section 2.2.3.
2.2.1 Technology prevents risk of depleting natural resources
The first element of the definition on a sustainable comparative advantage is:
Comparative advantages are sustainable if the products do not require more natural resources than the environment can produce at the same rate.
How does exporting more technologically advanced products instead of primary products and resource-based products prevent depletion?
A country has two types of natural resources, renewable and non-renewable resources. Non-renewable resources are resources such as minerals or fossil fuels (Ficksel, 2006). These resources are finite, the creation of these resources by nature is an extremely slow process. Extraction of these resources thus inevitably leads to depletion in the future.
Renewable resources are for example forests, biomass and topsoil (Ficksel, 2006). These resources will be replenished over time as long as the rate of exploitation does not exhaust the existing stock.
Specialization in non-renewable resources cannot be sustained in the future, because every time demand expands the depletion of those non-renewable sources advances at a faster pace. Extracting these resources in an ever quickening pace may even lead the country to the point it has to import those resources from other countries.
High-technology products do use natural resources as well, but since these products contain many natural resources, pressure on every single natural resource is lower, thus leaving more time for the natural environment to recuperate.
In times of strong growth then, the economy will prosper without giving a devastating blow to nature’s resources.
An alternative reason why depending on resource-intensive products can be harmful for a country, is the economy becomes vulnerable to strong climate changes. For example, Peru has been affected numerous times over the past century by a recurring natural disaster named “el Niño”. El Niño is a periodic warming of Pacific Ocean waters (Suplee, 1999). The consequential flooding of Peru’s rivers caused extensive damage to agriculture. Furthermore, normally the fishing waters of Peru are one of the richest in the world. However, because el Niño is a large pool of warm water entering the Peruvian coasts, “the economically essential anchovy
populations heads south in search of cooler richer waters” (Suplee, 1999). A particularly strong Niño caused Peru an economic damage of 4,5% its GDP in 1998 (Vieira, 2005). The frequency and intensity of el Niño is increasing. In the past 98 years there were 23 El Niños and the four strongest el Niños all occurred after 1980 (Suplee, 1999).Thus, if Peru develops more
technological capabilities they are economically less vulnerable for natural disasters such as El Niño.
Box 1
. Exhausting ones own habitat.The book “Collapse” by Jared Diamond (2005) gives strong examples of countries destroying their own habitat by exhausting their natural resources. The most famous example of collapse due to depletion of natural resources is the Easter Island society. Once covered with forests, these days Easter Island is completely deforested, due to a too intensive use of land. Another
interesting example given in the book is of a modern society, the island Hispaniola. Hispaniola is divided in Haiti and the Dominican Republic. One would expect the two countries to share the same fate, because they share the same nature. However, Haiti has only 1% of its forests left and is considered the country with the lowest standards of living outside Africa. The Dominican Republic is also a developing country, but they are industrializing. Furthermore, there is considerable consciousness on environmental issues. Today the Dominican Republic still has 28% of its forests and has many natural parks and laws to protect nature.
The general message of the book cannot be misread, societies that use their natural resources too intensive will suffer a serious cutback in standards of living, or even may face a collapse of their civilisation.
2.2.2. Technologically advanced products tend to have more dynamic markets.
Following the CAN method used in the Tradecan 2005 database, a sector is called dynamic if the ratio between the sector’s world market share of export and world import demand has increased during the period under consideration. A world market is considered stagnant when the ratio does not change or when the ratio decreases (Cimoli & Di Maio, 2002).
Even when a country is the strongest player in a stagnant product market, growth rate would approach zero eventually when market share comes close to hundred percent. Therefore, a high growth rate in a stagnant market cannot be sustained.
The advantage technologically more advanced products provide is that they tend to be more income-elastic and consequently their markets are more dynamic ( Cimoli and Di Maio, 2002). Table 2 gives the percentage of export in the world market for every technology class. As can be seen in the table, the more advanced the technology of the products and its processes, the higher was the growth of the market. Resource-based manufactures and primary products saw their participation rate in the world market decline dramatically.
Table 2.
Percentage of export in the world market for every technology class
Categorie Examples Percentage of export world 1980 % Percentage of export world 1998 % Commodities classified as dynamic % High Technology Computers, TV.
Telecommunication equipment. Pharmaceutics, airspace equipment.
10,6 22,3 61,1 Medium Technology Cars, trucks.
Synthetic fibres, chemicals and paint. Engines, Industrial Machinery.
31,0 34,3 33,3 Low Technology Textile and Leather products, Footwear,
Tableware, furniture, metal parts. 14,2 16,8 31,1 Resource-based
manufactures
Prepared fruit and meat, drinks.
Cement, rubber, petroleum products 18,7 11,6 23,8 Primary products Fresh fruit, meat, rice, coffee
25,6 15,1 4,2
Source: BID, 2001. Translated by Author from Roca, Simabuko (2004) Figure 3. *
Frequency of product groups in Top 25 “Most dynamic markets” per technology class
* Table I in the Appendix contains all information
Figure 3 underlines this tendency, it shows the frequency of the same technology classes in the top 25 of most dynamic world markets.
Thus, growing comparative advantages in technologically more advanced products gives a higher chance a country is exporting products with dynamic world markets.
Another advantage of dynamic markets is pressure tends to be lower on prices. Once a market stops growing, pressures on the price of a product increases. As a consequence, eroding rents could cripple a country’s development. Dependence of a country’s development on choosing the right specialization path is topic of the subsequent section.
2.2.3. Technology improves living standards
Last part of the definition of a sustainable comparative advantage was:
Comparative advantages are sustainable if the products stimulate an increase in the standard of living.
My purpose of this study was to find out if Peru is on a path to prosperity from which the whole population can benefit (See chapter 1). I do not consider growth in export volumes at the expense of wages of people already living in poverty as a healthy sustainable growth. This thesis wants to study how product choice may affect the development of a society as a whole, not just the few wielding power.
In the next section will be explained how higher technological content of products creates extra income. In the subsequent section will be explained how higher technological content of products improves the distribution of income, and therefore raises living standards in a country.
Higher technological content of products improves prices
Extra rents may be earned if the market can be shielded against potential entrants. Countries gain bargaining power to set prices of their export products when their industries focus on these more unconcentrated export markets ( thus gaining more rents). Two possible entry barriers to block entrants are:
1. Technological investment. When a product or process of making a product is more technologically advanced, potential entrants will have to invest time and money in acquiring the necessary technology. These extra costs deter those potential entrants who aren’t committed enough.
2. Tacit knowledge. Tacit knowledge is inarticulable and conceived through one’s actions ( Polanyi, 1969).It is typically hard to copy and transfer. This characteristic of
non-transferability makes this type of knowledge costly to attain and therefore hinders potential new entrants.
Creating these barriers of entry by upgrading can be characterized as the “ high road” to becoming more competitive (Giulliani, Pietrobelli & Rabellotti, 2004; Humphrey and Schmitz 2002; Kaplinsky and Readman, 2001; Porter, 1990). The four types of upgrading are: Product-, process-, functional- and intersectoral upgrading1 (Humphrey and Schmitz 2002).
Functional upgrading is shifting from performing low rent activities in the value chain
(production for instance), to high rent activities (marketing for instance). The value chain of a
product “describes the full range of activities which are required to bring a product or service from conception, through the different phases of production delivery to final consumers, to the final disposal after use” (Kaplinsky, 2000).
Thus, because technology erects barriers of entry and gives opportunity to enter the highest earning product markets and the most profitable phases in the value chain, governments should stimulate their firms to produce more technologically advanced products.
Box 2
. Economic history.Graham already argued in 1923 that manufactured products have increasing returns while primary products as well as resource-based products have intrinsically decreasing returns. Prebisch (1950) and Singer (1950) both observed that manufactured product markets are relatively imperfectly competitive in comparison to primary products, hence leaving a gap
between the costs of manufactured products and the gains compared to those of primary products. Prebisch and Singer both detected a deterioration of the terms of trade of developing countries in comparison to developed countries. A reason why developing countries terms of trade decline, they stated (1950), is the domination in exports of primary products and resource-based products, while developed countries principally export manufactured goods. The developed countries earn higher rents because their manufactured products are not homogenous and therefore do not solely have to compete on price.
Improving the standards of living
A good standard for measuring the living standards of country is looking at the wages of the workers and the income distribution of the country. In many poor countries income distribution is unequal, with the unskilled worker hardly being able to earn even the absolute minimum to survive.
The character of a country’s products contributes highly to the living standards of its population. When a country exports products that lack uniqueness and therefore need to compete on price, a situation named “immiserising growth” may arise. Kaplinsky (2000:22) defines immiserising growth as “an outcome when overall economic activity increases, but the returns to this economic activity fall”. He then identifies two clear situations of immiserising growth. First, when export prices fall faster than export volumes rise. The second situation is when increased exports can only be paid for by lower wages. A typical case of immiserising growth was
presented by Humphrey and Schmitz (1995). They showed that although the shoe industry in the Brazilian Sinos Valley had two and a half decade of tremendous growth, real wages had fallen 40%. In this case the consequence of producing low technology products was an actual decline of living standards for the population, while export volumes still rose.
Even if there would be room for wages to rise when producing low technology products, workers are in a poor bargaining position to negotiate proper wages.
manual labour. In Canada for instance, every percent of increase in total Research and
Development, induced a 0.148-0.203 percent decline in wages of the most unskilled (Grenier & Tavakoli, 2006).
It is the workers bargaining position that changes when a country starts to produce more technologically advanced products. As mentioned before, more technologically advanced products have a higher margin and therefore wages have the opportunity to rise. The higher margin in itself, however, does not explain why the wages would rise.
When the industry of a country develops, tasks that need to be performed become more complex. With the new complex tasks workers can develop and differentiate themselves from other
workers, which makes them harder to replace.
This new bargaining position gives room for trade unions. A strong trade union can negotiate for the workers collectively. Trade unions in developed countries are better organized and therefore can demand higher wages (Balassa 1989; Prebisch 1950; Singer 1950). Table II in the appendix shows the strength of the unions in the OECD and Latin America together with the Caribbean. Furthermore, Grenier and Tavakoli (2006) proved for Canada that every incremental percent of trade union increase, the wage gap between skilled and unskilled workers decreases 0,11- 0,22 percent., Once trade unions are there, they can improve wages for the unskilled badly positioned worker as well then.
Thus, advancement in technology gives more margin for wages to rise, while empowering the workers at the same moment to grasp these extra rents.
Box 3.
The effects of industrialization on Peru.The effect of technology on wages was proven for Peru. Roca and Simabuko (1998) found a connection between the level of participation in GDP of primary products versus manufacture products and the level of real wages and salaries in the Peruvian economy.
For every incremental percent point of primary products, private consumption declined 2,6%. White-collar real wages and blue-collar real salaries react even stronger with a 5,4% and 7.4% decline respectively. On the other hand, every percent of increase of the industrialization had a positive effect on private consumption with 4,2%. White -collar real wages react with a 10,6% increase and even a 15,5% increase of blue-collar real salaries. As Roca and Simabuko rightfully comment, the effect of industrialization on the Peruvian standards of living is twofold. First, wages and salaries increase when industrial participation in GDP increases. Secondly, there is a positive effect on income distribution because blue-collar real salaries react stronger on the increase than do the white-collar real wages.
3. THE METHODOLOGY 3.1. Data and sample
For the data of this thesis I used two databases and data from the Peruvian central bank. For the macro economomic data I used:
1. Export data Tradecan 2005
2. Import data Comtrade 2006
3. GDP Banco Central de Reserva del Perú (BCRP)
4. Terms of trade Banco Central de Reserva del Perú (BCRP)
As a measure of value I chose the F.O.B. value for both export and import. The OECD Glossary (2004) defines the F.O.B value as: “The f.o.b. price (free on board price) of exports and imports of goods is the market value of the goods at the point of uniform valuation, (the customs frontier of the economy from which they are exported).”
I chose the data range from 1985 to 2002, on the simple criteria of availability in the Tradecan 2005 database. The Peruvian economic history is an erratic one with strong changes and many changes in macro-economic policies by the governments. Therefore I chose the longest time horizon possible in order to level out as much short-term influences as possible.
The Tradecan 2005 database has complete statistical series from 1985 to 2002 on 73 countries, but has data on over more than two hundred “countries” in total. Since Tradecan also has aggregated geographical groups in its database, the line between aggregate geographical groups and countries can be very unclear at times. Therefore I only selected countries that were
sovereign, meaning the country must have declared and received independence. The Microsoft Encarta Encyclopaedia (2005) together with the Wikipedia Encyclopaedia (2006) were used to decide whether the countries were independent or not. Whenever Peru is compared with other nations, the nations were again selected on availability of data on the subject and year. In order to make a fair judgement on the movement of Peru in comparison to other countries, countries were only selected when there was information for all the years under analysis.
3.2. Lall’s Classification
Products are classified according to the Lall classification (2000), in which every product is classified on its technological content and the technology necessary for the production. The products are coded according to the Standard International Trade Classification (SITC) revision 2, at a 3-digit level. Lall used revision 2 instead of revision 3, because currently more data uses revision 2.
The Lall classification is the combination of a method of classification by Pavitt (1984) and the OECD (1994) suggestion of a more detailed classification based on technological content of products. Lall says about the manner of classifying:
Judgement is inevitably involved in assigning products to categories. The
Table 3.*
Technological classification of products
Scale Classfication Examples
1 Primary products
Fresh fruit, meal, rice, cocoa, tea , coffee, wood, coal, crude, petroleum, gas
2 Resource based manufactures
Prepared meat/fruits, beverages, wood products vegetable oils, ore concentrates, petroleum/rubber products, cement, cut gems, glass.
3 Low-technology manufactures
Textile fabrics, clothing, headgear, footwear, leather manufactures, travel goods, pottery, simple metal parts/structures, furniture, jewellery, toys plastic products
4 Medium-technology manufatures
Passenger vehicles an parts, commercial vehicles,
motorcycles and parts, synthetic fires, chemicals and paints, fertilizers, plastics, iron, pipes/tubes, engines, motors, industrial machinery pumps, switchgear, ships, watches.
5 High-technlogy manufactures
Office/data processing/ telecommunications equip, TVs, transistors, turbines, power-generating equipment,
pharmaceuticals, aerospace, optical/measuring instruments, cameras
- Other transactions
Electricity, cinema film, printed matter, "special" transations, gold, art, coins, pets
*:Table III I the appendix contains the full classification
Source: Lall (2002), adapted by author to five group classification.
I chose to use Lall’s five product group classification2 because it gives a clear picture when comparing countries with each other. Examples of the product groups are given in Table 3, while the exact classification using SITC revision 2 can be found in the appendix as Table III.
The product group named “other transactions” will be called in this thesis “not classified”. This group will only be presented very briefly only to show which percentage of Peruvian exports and imports it represents. In the rest of the thesis this group will be excluded from the calculations, since the group cannot be classified based on technology nor do all products in this group have one underlying characteristic. For the exact methodology of the classification by Lall I would like to direct the reader to Lall (2000), in which he extensively explains his method of classification. 3.3.1. Technology prevents risk of depleting natural resources
First, the Peruvian export will be classified according to Lall ( 2000) based on its technology. Then I will continue with a measurement of the diversifaction of Peru’s export, because the threat of depletion becomes larger when a country exports a limited variety of products.
The diversification of an economy represents its resilience and adaptability when unforeseen circumstances affect production of important exports. Diversification also indicates the
dependence on a specific product. If diversification of exports is limited and the country depends highly on primary products and resource-based products, depletion becomes a more serious threat. A simple top 10 will be given to indicate Peru’s most important exports for 1985 and 2002. As another measure of diversification I have calculated the Herfindahl- Hirschman index for the exports of all countries in the database. First I calculated the level of diversification for all
countries per product. Then I calculated the level of diversification for every country per technology class in order to judge Peru’s diversification efforts.
Here after I will simply refer to the Herfindahl- Hirschman index as the Herfindahl index. The Herfindahl index is normally used to measure the concentration ratios in product markets. Vanlommel, de Brabander and Liebaers (1977) compared eleven different measures of industrial concentration for capturing the number of firms, the inequality of market shares and the coalition potential of a product market. The Herfindahl index proofed to be the best individual
concentration index. An advantage of the Herfindahl index is its simplicity, what makes it an easy measure to work with. The Herfindahl index is calculated as follows:
The percent participation of one product in the export is x. The number of products exported by the country is n. H represents the concentration level of the export, which goes from 10000 as
totally concentrated when there is only one product being exported ( ), to a
value infinitely close to 0 when many products only represent a small percentage of total export. 3.3.2. Technologically advanced products tend to have more dynamic markets
The technological classification of Lall gives us information about the structure of the Peruvian export and shows which products are important to Peru. Now we need to know how these products perform in the world market, to see if Peru’s products are bringing a high growth rate. The efficiency of a country in exporting products with high growth rates is measured using the “Revealed Comparative Advantage” from Balassa (1965), although it has been adapted3. Tradecan’s “Revealed Comparative Advantage” (RCA) uses the market share of a product in its calculation. It divides the country’s market share in the world market of one product, with the country’s average market share in the world market for all products. In formula:
It thus demonstrates which product of a country is strongest in the market. Changes in the RCA represents a movement of a country’s competence compared to other countries, in relation to the country’s other products. This only holds as long as the changing variable is the numerator, and
3 Balassa’s original RCA calculates a score for every product by dividing the percentage of export the product represents for a certain nation, by the percentage of export the product represents for the world. In formula form:
Table 4
The Revealed Competitive Advantage matrix
Stagnant Sectors Dynamic sectors
Revealed comparative advantage increases
Declining Star Rising Star
Revealed Comparative Advantage decreases
Retreat Missed Opportunity
Source: Tradecan 2005
not the denominator. When the denominator decreases, it indicates a country is on average getting weaker for all products relative to the product in the numerator.
The RCA is insensitive to changes in market size, since measurement is market share4.
The data used to calculate the RCA comes from Tradecan 2002. In order to calculate the RCA, the database again used the F.O.B. values for exports. The world market size is the export from all countries combined. Thus, Country 1 its market share in the world market of product A, is product A its F.O.B. value of export for country 1 divided by the F.O.B. value of product A for all countries combined.
Gaining market share however, should not be the only goal for a country in search of economic growth. If a country does not pay attention to which markets are growing and which aren’t, its growth rate may suddenly stop when its success markets turn out to be saturated.
Therefore, a perfect export situation is when a country gains market share in growing product markets. Tradecan calls this combination “the right specialization”. Tabel 4 is a two dimension matrix which classifies all export products into four categories. A Rising Star product is such a “right specialization”.
To have a better understanding of whether Peru’s specialization is successful now and in the future, I examined which percentage of Peruvian export belonged to what category.
If Peru wants to improve its economy in the long run, they should be gaining market share in growing markets and retreat from markets that are stagnant.
The data necessary to determine whether a world market was dynamic or static between 1985 and 2002 came from Tradecan 2002. A product market is dynamic if its F.O.B. value of export increased more than the total F.OB. value of export for all products. Otherwise the market is called to be stagnant.
As Gereffi & Hempel (1996) indicated, for developing countries to catch up with the developed countries, they need to “run faster just to stay in place”. In order to compare Peru’s development to the rest of the world, I made an index per Lall technology class.
Peru’s position per technology class in the world is given for 1985 and 2002. The variation of the Revealed Comparative advantage per product group between 1985 and 2002 is given as
indication of the “speed” of the development in comparison to the other nations. This is done to examine where Peru is running to, and if they are outrunning countries or are lagging behind.
3.3.3. Technology improves livings standards
Mentioned earlier was the work by Roca and Simbako (Box 3), in which they demonstrated the dependence of wages and salaries on the composition of GDP in Peru. When the industry increases its participation in the economy relative to agriculture, wages and salaries improve. Quality information on salaries and wages however, is hard to find. My attempts to get hold of a list of salaries and wages classified using SITC, ISIC or HS were in vain.
As a proxy for the living standards of the country I therefore chose the terms of trade of Peru. Peru’s trade is every year increasing in importance for its GDP ( Trade value being 34% of GDP in 2003, Figure 1) and so has its influence on Peru’s internal prices.
As mentioned before, markets for exports with higher technological content tend to be more unconcentrated, which improves a country’s bargaining position. Therefore prices of technology intensive products tend to rise faster than prices of primary products and resource-based products. Countries exporting dominantly primary products and resource-based products, while importing technology intensive products will see export prices stagnate while import prices rise. However, prices for domestic products will also rise, when domestic companies need to buy advanced imports to produce. In such a situation the domestic consumer is confronted with increasing prices of both import and domestic products. However the consumer cannot be compensated with higher wages and salaries because of the stagnant prices of the country’s export products. The result of higher prices and stagnant wages is a decrease in the consumer’s living standards. If we assume wages and salaries are the same in the tradeable and non-tradeable sector, the effects of a country’s terms of trade on the living standards only strengthens when export and import
increases relative to GDP. The reason for this is average wages are increasingly depressed by the wages of the tradeable products, while domestic prices increasingly rise because of the higher percentage of tradeable products in the economy.
Peru’s terms of trade from 1986 to 2002 where found in the BCRP Memoria 95/96 of the National Bank in Peru5.
Two possible explanations of why terms of trade change are:
- A difference in technological content (classification of Lall) between import and export - A change in Peru’s bargaining position for the import and export prices.
In the next section I will first classify the Peruvian import using the Lall classification. With this information I can compare the price changes between export and import products, in order to see if changes in terms of trade are affected by the technological composition of imports and exports. Secondly, a change in a country’s bargaining position may occur even if technological
composition of import and export stays the same, because of scarcity of products or the entrance of new competitors. Therefore I will make an analysis of Peru’s bargaining position in 1985 and 2002. A change in the concentration of suppliers in Peru’s combined export markets, opposite to
5
The terms of trade were calculated by the BCRP as follows:
TE NeTI Ni
the concentration rate in the markets of Peru’s imports may have an effect on the price setting of the products and therefore an effect on Peru’s terms of trade.
Peru’s technological import composition in comparison to export
The analysis of the import products was conducted to see if the composition of the imports relative to the composition of the exports gives an explanation of why the terms of trade of a country change.
This analysis was done in much the same way as the export analysis. The composition of the import is classified into different technology classes using the Lall classification. Again the group “not classified” is mentioned to show what percentage of imports belongs to this group. Just as with exports, the group “not classified” is not taken into account in further analyses, because the products in this group could not be judged on their technological content.
I then checked how successful the imports were in the world market by looking at what percent of the products belonged to dynamic or stagnant world markets. I compared the success rate of the import bundle with the success rate of the export bundle.
Concentration rates and their effects on Terms of trade
Products that are more technologically advanced tend to have more unconcentrated markets, which gives the possibility f higher rents. I wanted to verify if indeed there is less competition in technologically advanced products than in primary products and resource-based products. Therefore, the first condition tested in this thesis is if indeed technology erects entry barriers:
Condition 1. Products with higher technological content have higher concentrated markets
I again used the Herfindahl- index as a concentration measure (for formula see Chapter “Formulas” in the appendix).
I calculated the Herfindahl-index for all products of the SITC, at a 3-digit level between 1985 and 2002. Now x is the market share of one country for product A, and n the number of countries exporting product A. H represents the concentration level of the market for product A. When only one country exports product A, H would have the value 10.000. I then calculated the average Herfindahl index per technology class for 2002. As before the technology classes were placed on an ordinal scale with primary products being class 1 and ending with high-technology products being class 5. I continued with a Spearman’s rho correlation between the technology class of a product and the Herfindahl score for that product to see if I could find a higher concentration rate for technologically more advanced products. Then, another Spearman’s rho correlation was calculated, this time between the change of the Herfindahl scores and their technology class to see if concentration rates change at different rates in a technology class.
The other goal of calculating the Herfindahl index for all products was to see if the concentration rate of a world market has any explanatory power on prices of exports and imports of a country, because of a changed bargaining position.
I therefore calculated another Pearson correlation to see if the concentration rate in the product markets could explain some of the price changes in the export and import data set. The products in this sample where selected on whether they had a complete data set ofr all years between 1997 and 2002, both in the export as in the import dataset.
import bundle. As mentioned before, the idea is that if the concentration rate changes in the combined markets Peru sells to (export) and buys from (import), Peru’s bargaining power to set prices changes. A change in Peru’s bargaining power in the export market opposite to the import market may explain some of the terms of trade changes.
I used the percentage of export and import respectively per product as weight and then proceeded to calculate the average concentration of the Peruvian export markets:
Where H is the Herfindahl score of product a, and Pe is the percentage of export that product represents.
This weighted average Herfindahl index for the export is a proxy of the competition Peru faces in its export markets. A rise or decline in this concentration ration indicates if Peru wins or loses negotiation power for better prices. As a reference, I first calculated the average concentration rates for all technology classes in the world markets. This way I was able to make some
statements on whether some concentration rates of Peru’s export and import bundles were high or low. As a final step, I calculated the change between 1985 and 2002 in Peru’s bargaining power per technology class and in total by adding every percent of decline in the average concentration rate of Peru’s imports, to every percent of rise in the average concentration rate of Peru’s exports, corrected with the change in the ratio between Peru’s export and import. In formula form:
∆ B= ∆ŪUHea ∆ Ra ] [ ∆ŪUH ia ]
Where :
Ba=Bargaining power
Ū
UHea= Herfindahl score export technology class a
Ra=
Total export technology class a Total import technology class a Ū
UHia= Herfindahl score import technology class a
As far as I could investigate trying to explain terms of trade changes with a change in a country’s bargaining position using the concentration rates of the combined export markets and import markets have not been tried before . This could give some interesting insight on what drives terms of trade changes.
3.4. Limitations of this thesis
First of all, although Tradecan and Comtrade are arguably the most comprehensive databases on international trade, they work with the data delivered by the countries themselves. For all kinds of reasons, such as secrecy about military deals or simply a bad registration, it is possible the data contains some bias. Peru itself is notorious for having changed valuation methods many times over the last couple of decades. These changes presented extra difficulties and possibly an extra bias.
The technology classification used (Lall, 2000) does not contain a couple of product groups. The classification excluded “special transactions” like electric current, cinema, printed matter, special transactions, gold, works of art, coins and pets. These products were excluded because they cannot be classified on technological content. Between 1985 and 2002, they represented on average 2,68% of Peruvian exports and 1,17% of imports.
Also, since this study was a longitudinal study, product groups had to be part of the export of Peru in 1985 and in 2002. If in one of these two years the export percentage for a product group was zero, the group was excluded. This did not affect results much since these product groups were never of any significant size, neither in 1985, nor in 2002. Excluded product groups were: 012, 041, 043, 244, 246, 261, 286, 323, 341, 351, 675, 683, 688, 712, 911. (Table III in the appendix).
Furthermore, the current technological classification does not distinguish between all aspects of technological upgrading. First, the used classification is based on the technological capabilities in 2000. Product groups were divided into the technology classes based on the technological
capabilities of 2000. This fixed classification brings some bias, since products that were only low-technology in 2000 may have been state of the art in 1985. This bias was unavoidable, since no comparable technological classification of products existed in 1985.
The most significant problem is that the classification does not take into account the
fragmentation possibilities of a product process, nor the different phases in the development and production of a product. A not so advanced part of a high-technology production process, such as an assembly line for instance, can be done in countries without many technological capabilities. Since the development of the product may be state of the art, the product as a whole is classified as “High-technology”. If the complicated part of the production is done in the United States of America and it is send to Vietnam for further assembly, both countries will have the product on their export list classified as high-technology manufacture.
The bias this creates in my results are considerable and especially in favour of the developing countries. In the case of Peru this may actually improve its score on medium and high technology products. Results influenced are the concentration levels of every technology class for the world market and the top 50 lists for strongest growth in Revealed Comparative Advantages.
Restrictions in time prohibited me from starting extra research on, for instance, requested patents over the world.
Lall says on the matter:
“Ideally, they should distinguish the levels of technology used in disaggregated export activities and their upgrading over time. They do not.
This level, reasonably disaggregated, puts together activities at different levels of technological complexity under the same category. For instance, telecommunications apparatus can include highly advanced mobile telephone technology as well as simple plastic telephone receivers. It does not distinguish quality differences within given categories, say fashion clothing from mass-produced items. It does not indicate the process involved in making a product in different locations: semiconductors can involve high-tech processes in the USA and simple assembly in Malaysia. In our data both would appear equally high technology. Finally, export values do not show technological
upgrading over time within product categories.”
4. RESULTS
This chapter is structured in much the same way as the last chapter. Every section will contain Peru’s results for one of the three criteria of what makes a comparative advantage sustainable. Section 4.1.1 contains Peru’s results on whether its export products are sufficiently diversified and technologically developed not to run the risk of depleting the natural resources. Section 4.1.2. contains the results of whether or not Peru’s exports have dynamic world markets and section 4.1.3. displays the results of whether or not Peru’s exports help to increase the living standards of its inhabitants. Every section is followed by a short conclusion that partly answers the question if Peru’s comparative advantages will bring a sustainable growth rate.
4.1.1. Technology prevents risk of depleting natural resources
Figure 4 gives the composition of the Peruvian export in technology classes from 1985 to 2002 using the Lall classification.
The Peruvian export is dominated by its primary products, which has stayed around the 50% of export value for over twenty-seven years. After a sharp decline in resource-based products from 39% in 1986 to 25% in 1999, the share rose to 29.4% again in three years time.
The only “technology” product that increased was LT manufactures going from a 7.1% to 14.6% in 2002. MT manufactures even decreased 33% from 3.9% to 2.6% in 2002. HT manufactures is
Figure 4 *
Composition of Peruvian export
hardly represented in the Peruvian export. Only 0.45% in 1985, and 0.54% of the Peruvian export in 2002 belonged to the most sophisticated technological products.
On average the “not classified” group represented 2.68% of Peruvian exports between 1985 and 2002.
Table 5 gives the top 10 Peruvian export products for 1985 and 2002. the top ten products have become less important to Peru although they still represent 62.70% of all export. Only two out of the ten products had low technology content, the rest were primary or resource-based products. Seven products in the top ten of 1985 were non-renewable resources representing 61% of total exports. In 2002 this had been reduced to only five products representing 35% of total exports. However, as can be seen in Table 6 - which presents Peru’s position on diversification in the world- Peru has not diversified relative to the rest of the world. In general Peru has stayed on its 42nd place. Their diversification of primary products and resource-based products declined and they diversified in the more advanced technology products. Of the 30 OECD-countries 22 were more diversified than was Peru in 2002.
Table 5
Top 10 Export products Peru 1985 and 2002
Rank SITC code and commoditiy name
Technology Class
Percentage of export
1985 2002 1985 2002
9 1 081 Feeding stuff for animals (excl. unmilled cereals); PP 2,93 13,56 1 2 287 Ores and concentrates of base metals n.e.s.; RB 16,01 12,95
2 3 682 Copper; PP 13,93 12,39
- 4 845 Outer garments, other articles, knitted/crocheted; LT 0,30 4,42
3 5 334 Petroleum products, refined; RB 11,28 3,57
4 6 681 Silver, platinum and other metals of platinum group; PP 6,63 3,46 - 7 054 Vegetables, fresh, chilled, frozen, simply preserved PP 0,15 3,33 - 8 846 Under garments, knitted or crocheted; LT 0,35 3,30 6 9 071 Coffee and coffee substitutes; PP 6,57 3,28
5 10 333 Petroleum oils, crude PP 6,63 2,45
7 - 281 Iron ore and concentrates; RB 3,44 1,90
8 - 686 Zinc; PP 3,37 2,33
10 - 651 Textile yarn; LT 2,49 0,88
Total 73,27 62,70
Source: Tradecan 2002
Table 6
Peru’s position in the world for diversification*
Short conclusions section 4.1.1
Peru depends heavily on its natural resources, in 2002 primary products and resource-based products are still responsible for nearly 80% of the export. Furthermore, Peru’s diversification of primary and resource-base products actually declined, which indicates pressure on Peru’s natural resources as further increased.
Positive is the development of the low-technology manufactures, which doubled its participation in exports at the expense of resource-based products. However, medium-technology
manufactures decreased one third and high technology does not even seem to play any role of importance for the Peruvian exports.
The importance of minerals seems to have decreased. These commodities were replaced in the top ten by other primary products. In other words, there has been a shift from non-renewable resources to renewable resources. An advantage of this substitution is that these agricultural products cannot be depleted as fast as minerals. Despite this positive development, in 2002 Peru’s export still is mainly based on its natural resources.
Is Peru’s growth sustainable from an environmental perspective? The answer is no, Peru’s growth is mainly based on mining and its other natural resources. You can not support a country’s
growth rate in the long run only with agricultural products and mining. Land has limits to how intensive it can be used without completely being exhausting.
4.1.2 Technologically advanced products tend to have more dynamic markets
Peru’s composition of exports shows overall technological content was low until 2002. To make claims about Peru’s future position however, it is more important to understand in which markets Peru is developing relative to the competition. I therefore wanted to see which comparative advantages Peru is developing. As mentioned earlier, for the sustainability of ones growth rate it is important to develop comparative advantages in dynamic world markets. Table 7 presents the ten fastest growing world markets between 1985 and 2002 ( Table I in the Appendix presents the top 50). The list is dominated by products with a high-technological content.
Table 7
Fastest growing products in the world market*
Rank Sitc code+ name product Pi** Percentage Technology
1985 2002 growth class
1 871 Optical instruments and apparatus 0,08 0,32 287,80 HT 2 776 Thermionic valves and tubes, and other semiconductors, n.e.s. 1,51 4,17 176,63 HT 3 541 Medicinal and pharmaceutical products 0,92 2,47 168,33 HT 4 752 Automatic data processing machines, units thereof 1,28 3,31 159,69 HT 5 764 Telecommunications equipment, n.e.s. 1,33 3,21 141,61 HT 6 553 Perfumery, cosmetic and toilet preparations 0,17 0,39 127,65 MT
7 351 Electric current 0,08 0,18 125,64 Not classified
8 111 Non-alcoholic beverages n.e.s. 0,04 0,09 123,81 RB
9 679 Iron and steel castings, forgings and stampings 0,03 0,06 114,81 LT 10 771 Electric power machinery (other than 716) 0,27 0,57 111,99 HT * For the top 50 fastest growing world markets, see Table XI in the Appendix
Figure 5.
Revealed Comparative Advantage Peru
* Table VI in the Appendix contains all information Source: Tradecan 2005
Peru’s specialization process for the past 27 years is represented by Figure 5. Comparative
advantages were measured in Revealed Comparative advantage ( RCA). A score of 1 RCA stands for the average market share Peru occupies in the world market for all its exports, a score of 2 RCA means the product has twice the market share an average Peruvian export product has. Peru’s market share of primary products went from 3.4 times Peru’s average market share in 1985, to 7.4 its average market share in 2002. Peru’s Revealed Comparative Advantage in resource-based products also rose significantly from 1,8 to 3.8 times Peru’s average market share in the world market. Again the technology products are barely represented. All technology
products had world market shares under Peru’s average world market share. Only low-technology manufactures rose, from 0.43 RCA to 0.79 times the average market share. Medium-technology manufactures fell from 0.34 to 0.25 RCA, and high-technlogy manufactures also experienced a decline going from a mere 0.04 RCA to 0.02 times the average Peruvian market share in world markets.
Now we know where Peru’s comparative advantages lie, we can see whether these markets are dynamic or in other words, whether they have grown relative to the other world markets. Table 8a. represents the performance of every of the Lall technology classes and the Peruvian exports and imports on the world market. Table 8b. further displays the performance of the Peruvian exports by showing which of exports with dynamic and stagnant world markets
Table 8.
a. Performance Lall’s technology classes for all countries and Peruvian exports and imports in the world markets
% Dynamic world market % Stagnant world market
Peruvian exports 14,70 85,30 Peruvian imports6 45,73 54,27 Primary products 2,07 97,93 Resource-based manufactures 3,13 96,87 Low-technology manufactures 71,73 28,27 Medium-technology manufactures 66,97 33,03 High-technology manufactures 97,63 2,37
b . Performance Peruvian Exports per technology class in the world market 7
Total value export
Rising Stars
% Class 2002%RCA 1985 RCA 2002 ∆ RCA % Primary products (pp) 2,07 1,03 0,63 2,44 289,17 Resource-based manufactures 2,12 0,62 0,06 0,35 453,83 Low-technology manufactures 70,45 10,27 0,2 0,95 367,24 Medium-technology manufactures 43,06 1,14 0,05 0,2 304,08 High-technology manufactures 37,34 0,21 0 0,02 278,95 Average 13,27 0,12 0,56 359,36
Total value export
Missed Opportunities
% Class 2002%RCA 1985 RCA 2002 ∆ RCA % Primary products (pp) 0 0 0 0 0 Resource-based manufactures 1,01 0,298 0,3 0,21 -30,00 Low-technology manufactures 1,28 0,186 0,39 0,16 -58,97 Medium-technology manufactures 23,91 0,632 0,19 0,08 -57,89 High-technology manufactures 60,29 0,331 0,06 0,02 -66,67 Average 1,45 0,2 0,1 -50,00
Total value export
Declining Stars
% Class 2002%RCA 1985 RCA 2002 ∆ RCA % Primary products (pp) 82,31 41,11 3,58 10,52 193,85 Resource-based manufactures 77,82 22,95 2,12 6,04 184,91 Low-technology manufactures 18,65 2,72 0,49 0,9 83,67 Medium-technology manufactures 13,32 0,35 0,27 0,33 22,22 High-technology manufactures 2,37 0,01 0,03 0,03 0,00 Average 67,15 1,95 5,46 180,00
Total value export
Retreats
% Class 2002% RCA 1985 RCA 2002 ∆ RCA % Primary products (pp) 15,6 7,792 3,09 1,65 -46,60 Resource-based manufactures 19,05 5,62 2,99 2,24 -25,08 Low-technology manufactures 9,63 1,403 0,92 0,61 -33,70 Medium-technology manufactures 19,71 0,521 0,86 0,37 -56,98 High-technology manufactures 0 0 0 0 0,00 Average 15,34 2,05 1,25 -39,026 See for Peruvian composition of imports section 4.3.1
Figure 6
Peru’s Performance per Technology class
Source: Tradecan 2005
Figure 6 represents the performance per class, which is the second column of Table 8, “% Class”. We can see that 82.3% of all primary products are declining stars, these primary products
represented 41.1% of all Peruvian exports. Another 15.6% of the primary products are in the retreat category. Only 2.1% of the primary products were rising stars, no primary product belonged to the “missed opportunity” class. In general, the primary product markets are
declining. The RB manufactures had a similar division among the classes. Again most products were declining stars , more specifically 77.8% of the RB products. Of the RB products 19.1% was a retreat, only 2.1% of all RB products was an actual rising star and finally no more than 1% of the RB exports represented a missed opportunity. The on average shrinking markets for
primary products and resource-based products are serious threats for the continuity of Peru’s growth rate.
The LT manufactures class had the highest percentage rising stars, 70.5% of the LT products belonged to this category, representing 10.3% of all Peruvian exports. Still, 18.7% of the LT manufactures were declining stars, 9.6% were retreats and only 1.3% was a missed opportunity. The MT manufactures world markets were for 66.97% dynamic markets. were mainly in the rising star or missed opportunity category with 43.1% and 23.9% respectively. Another 19.71% of the products were retreats and 13.3% of the MT manufactures were declining stars.
Finally, the HT manufactures. Almost all HT products, 97.6%, had dynamic world markets. Peru however, did not take advantage of this growth because only 37.3% of Peru’s HT exports
belonged to the rising star category, while 60.3% of the HT manufactures belonged to the missed opportunities category. The few HT manufactures that did not have dynamic markets went with 2.4% to the declining star category. In total, only 14,7% of all Peruvian exports had a dynamic market.
Table 9 shows Peru’s position in the world rankings per technology class in 1985 and 2002. Peru improved its position in the world for primary products, resource-based products and
low-technology products. Peru’s resource-based products even had the 18th strongest relative
.Table 9.
Position Peru’s RCA in world markets
Source: Tradecan 2005
the edge of the top 100 with position 94, HT manufactures moving to position 125 from position 112. The speed of development for every country per technology is given in Table VII in the appendix. Figure I a, b, c and d in the Appendix represent the Top 50 fastest growing countries in the world and Peru, per technology class.
With its primary products, Peru was the 28th fastest moving country in the world. Peru was the 44th fastest growing country in the exportation of resource-based manufactures.
In low-technology products Peru advanced as well, although not as fast as in primary products and resource-based manufactures. There were 57 countries that specialized at a faster rate than Peru.
In comparison with the other 152 it is clear Peru is not concentrating its efforts on MT or HT manufactures. For the MT manufactures, Peru was the 128th fastest developer of its Revealed Comparative Advantages. However, as can be seen from figure I d in the Appendix, its
development in RCA is negative, actually indicating a retreat from MT manufacturing. The same has happened for the Peruvian high-technology industry. Whether Peru is retreating from these advanced industries on purpose or not, fact is that the gap with the rest of the world will only become larger in subsequent years.
Short conclusions section 4.1.2
Figure 6 further underlines the continuing Peruvian dependence on natural resources. The
Revealed Comparative Advantages in primary products and resource-based products indicate that this dependence is only growing with time. Instead of decreasing its vulnerability to nature ( el Niño), Peru’s economy is becoming more unstable. The decreasing RCA scores for both MT-manufactures and HT-technology MT-manufactures indicate Peru is deindustrializing.
Tables 8a,8b and 9 together present a grim picture for Peru. Peru’s export mixture of mostly primary products and resource-based manufactures performs poorly in the world market, with only 14.71% having a growing world market. Although Peru is effectively gaining market share in those markets with a 28th and 18th position in RCA, the positioning itself will not deliver a secure future, because those markets are declining in size. The products that are successful can almost all be found in the technology classes, where HT-manufactures indeed is the most
dynamic class. This represents a serious threat to Peruvian progress. The markets Peru is gaining competitiveness in are declining, while Peru is retreating from the fastest growing markets in the world.
The Peruvian deindustrialization is further shown when comparing its specialization efforts with other countries. Again, Peru is making strong progress with its primary products and resource-based products. It belongs in both classes to the fifty most competitive countries and is continuously improving its position.
However, the competitiveness of Peru in the fields of medium-technology and high-technology manufactures has declined strongly relative to the other countries. Of the 152 countries in the MT-manufacture class, only 14 countries decreased their specialization at a faster rate. Peru has always had a low position in the HT-manufactures class, but there are now only 27 countries that are less competitive in this class. It is worrying to notice that Peru is decreasing its capabilities in the most dynamic markets, while competition does increase their competence in these markets. Capabilities cannot be bought and therefore Peru should realize that beyond a certain point the gap in competence between Peru and the competition might be to big to overcome.
The only positive news is the steadily increasing capabilities of Peru in exporting LT-manufactures. Peru took almost full advantage of these dynamic markets by developing its comparative advantages in these markets and therefore now occupying the 67th position in the world.
Can Peru sustain its growth based on the current markets in which they specialize? The answer is no. Peru is developing its comparative advantages in primary products and resource-based products. Only 14.7% of Peruvian exports had dynamic markets, which were mainly technology class products. Peru’s growth is based on exports with stagnant world markets, it therefore seems very unlikely these exports will support the current growth rate in the future.
4.1.3. Technology improves living standards
The Peru’s terms of trade are given in Figure 7. Although the terms of trade rose between 1993 and 1995 to 120% the 1994 value, in 2002 the terms of trade were even 10% below the 1994
value. A clear visual downward trend can be seen in the Peruvian terms of trade. In 2002 living standards in Peru were far lower than they were sixteen years before in 1986.
Peru’s technological import composition in comparison to export
In order to get more insight in why import prices are rising faster than export prices I conducted an import analysis, for which the results are given in Figure 8.The composition of imports is far more equal in shares for every technology class than is the export composition. MT manufactures are imported most with 35% of total exports in 2002. There was a 32,2% difference between the import and export of the MT manufactures. HT manufactures has a larger share in the imports as well, with 12,9% in 2002. LT manufactures has around the same share in exports as it does in imports. RB manufactures are 11,7% imported less than exported. Primary products share in imports was 29,7% lower than was the share in exports. Over time the division of import has become more equally divided, from 1993 on all classes but medium-technology manufactures were between 10% and 20%.
Concentration rates and their effects on Terms of trade
I analysed the concentration rates of world markets for two reasons. First to verify condition one, which would underline the importance of technology in export products. Secondly, as an
alternative explanation on why terms of trade fluctuate.
I calculated the effect of the concentration in the world markets and the effect a concentration rise has on the price level.
Table X in the appendix contains all products according to the height of their corresponding Herfindahl score.
First I wanted to see if condition 1 holds and concentration levels differ among the different technology classes and if concentration levels over the last years have changed differently for the technology classes.
Figure 8*.
Technological composition of Peruvian imports
* Table VIII in the appendix contains all information Source: UN Comtrade 2006, prepared by author
0 5 10 15 20 25 30 35 40 45 1985 1987 1989 1991 1993 1995 1997 1999 2001 years
Primary products (pp) Resource-based manufactures Low -technology manufactures
Table 10.
Correlation Herfindahlindex with Lall classification
Spearman's rho Herfindahl index ∆ Herfindahl
Correlations 2002
Correlation Coefficient Technology class 0,02 **-0,12
Sig. (1-tailed) 0,40 0,03
N 229 229
**Correlation is significant at the 0.05 level (1-tailed). Table 11
Correlation between Changes in Peru’s prices and the Herfindahl index
Pearson Correlation ∆ Price Pearson Correlation ∆ Price
Export set Import set
Pearson Correlation ∆Herfindahl 0,05 Pearson Correlation ∆Herfindahl **-0,07
Sig. (2-tailed) 0,42 Sig. (1-tailed) 0
N 1430 N 3379
**Correlation is significant at the 0.01 level (2-tailed).
Table 10 shows there is no significant correlation between the concentration
level in markets of product groups, and their technological content. Therefore condition 1 has to be rejected, concentration levels do not differ between the technology classes. A small correlation of –0.12 does exist between the Herfindahl change between 1985 and 2002 and the corresponding technology class. Lower technology classes have faster rising concentration rates than higher classes. However, the value only explains 1% of changes in concentration levels measured with the Herfindahl index and therefore is not very relevant.
Table 11 gives the relationship between Peru’s price changes from 1997 to 2002 and the change of concentration levels in the world markets. Again both export dataset as import dataset were used. The results from table 11 show that there is no correlation of any importance between changes in Peru’s export and import prices and changes in the concentration levels in world markets on a five year period. In the export dataset there is only a 0.01 correlation and this correlation is not significant. The import dataset does show a significant correlation of 0.07, however this is too small to be called relevant. Thus, from this sample I could not prove a correlation between Peru’s prices for export and import and the concentration levels of the corresponding world markets.
This section will compare the concentration level of the Peruvian export markets with the concentration levels in the world markets in general and the concentration rates of the Peruvian import markets combined. Would the Peruvian bargaining position worsen for instance ( thus, concentration rates of Peruvian export markets would decline in contrast to those of the Peruvian imports), it may cause downward pressure on the Peruvian terms of trade.
Figure 9*
Herfindahl index World import markets
*Table IX a in the appendix contains all data. Source: Tradecan 2005
Figure 10*.
Herfindahl index for Peruvian export and import
*Table IX b in the appendix contains all information Source: Comtrade 2006
and in 2002 had almost the same concentration level as the medium-technology and high-technology markets.
The high-technology manufactures market had the most drastic decline in concentration,
declining 31.5% to a Herfindahl index of 1042. While in 1985 the high-technology manufactures market was the highest concentrated market, in 2002 the primary product market had become the most concentrated market in the world.
