The determinants of LDCs' export growth are a subject of long- standing debate. `Export-pessimists' claim that the low price elasticities of LDCs' exports make them highly dependent on industrial countries' demand, but there is little empirical evidence to support this argument. Indeed, countries that embraced export-promotion strategies have outperformed those still committed to import substitution, and many international organizations now recommend that LDCs radically reform their trade and supply policies to eliminate the bias against exports.

In Discussion Paper No. 499, Research Fellow Riccardo Faini, Fernando Clavijo and Abdel Senhadji-Semlali argue that this new evidence cannot indicate whether a wide range of LDCs could successfully adopt an export-led development strategy. A strong export drive by several LDCs might lead to a worsening of their terms of trade, which existing econometric studies typically ignore on the grounds that price elasticities are large. If several developing countries adopt such an export-led strategy, the assumption for an individual LDC that its competitors' prices will remain unchanged collapses. It may achieve a smaller increase in export quantities with even a fall in export prices if its manufactured exports compete mainly with those of other LDCs.

Faini, Clavijo and Senhadji-Semlali examine these patterns of substitution by estimating conventional export demand equations for 23 LDCs including export prices for developing and developed countries' manufactures. They find average long-run relative price elasticities of -2.1 (South) and -1.17 (North) and an average long-run (developed country) income elasticity of 1.95. These results and those for individual countries which display wide variation suggest that prices influence most LDCs' export performance more strongly than was previously believed. The pattern of competition appears particularly important for South and East Asian countries, whose successful export performance may be predicated on other LDCs' failure to compete effectively in world markets.

On the basis of these results, the authors show that almost 80% of the benefits of devaluation for the export revenues of a representative LDC will vanish when other LDC competitors pursue similar policies. Moreover, they dispute the claim that export demand for an individual LDC's manufactures may be be viewed as infinitely elastic. An exclusive focus on supply factors as determinants of export performances is therefore inappropriate, even at the level of the individual country.

The Fallacy of Composition Argument: Does Demand Matter for LDC Manufactured Exports?
Riccardo Faini, Fernando Clavijo and Abdel Senhadji-Semlali

Discussion Paper No. 499, December 1990 (IT)