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China’s Trade in IT Products: Variety, Scale, and Economic Gains

February 6, 2013

Introduction and Testable Hypotheses
Globalization of information technology products (IT) relates to economic growth through three channels:

(1) Terms of trade. The fall in quality-adjusted prices of IT products favors use of IT in the domestic economy and yields TFP gains.

(2) Economies of scale. Total factor productivity is positively associated with the scale of production of IT products.

(3) Variety. Greater variety means that more domestic users find good matches between products and needs, which increases productivity and growth. Greater variety and uniqueness of exports is associated with increased prices and profits.
Figure 7.2 reproduced from the Chapter sets out these three factors in terms of an integrated hypothesis relating TFP and trade in IT products.

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Empirial analysis using a sample of 36 countries for 2000-2007 finds:

(1) With regard to terms of trade, importers of IT gain relatively more than exporters, on average, from the declining prices of IT coming through international trade.

(2) With regard to economies of scale, despite falling IT prices, most exporters enjoy positive economy-wide benefits of trading in IT because of economies of scale in production.

(3) With regard to variety, countries with greater variety tend to experience greater TFP gains relative to those with less variety. Against this backdrop and empirical validation, where does China fit in?

 

China’s gains from IT trade
China’s participation in global trade in IT products exploded over the 1990s and 2000s. From 2% of global exports in 1990, China+ (China plus Hong Kong SAR) rose to 15% of global exports (ranked 1st) in 2004. On the import side, China+ moved from 9th ranked at 4% of global imports to top ranked with 20% of global imports. In terms of importance in global expenditure on IT, however, China+ both grew less and is less important. China+’s share of global expenditure, although it rose four times over and ranks sixth in global expenditure at 3%, remains quite small in comparison to the country’s importance in global trade.

Putting the data on trade prices, and production and expenditure into the framework reveals a pattern similar to what was hypothesized (Figure 7.4 from the Chapter replicated below). Increased imports of IT products (left panel) is associated with greater economic gains as measured by the social surplus concept, a concept that is isomorphic to TFP. This is consistent with other findings on the relationship between IT use and TFP in the domestic context.

For IT exporters (right panel), the relationship could be positive (if economies of scale gains outweigh terms of trade losses) or negative. Since the trend line cuts the y-axis at around 0.76%, it appears that a country does gain from being a producer and exporter; but the simple correlation coefficient of 0.016 suggests that there is not a strong relationship between the magnitude of exports and economic gain.

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China, as an exporter, lies above the regression line, suggesting that it gains relatively more from its pattern of trade, production, and expenditure compared to other net exporters. The story for these relatively greater gains for China, despite being an exporter, pretains to the variety of China’s products in trade.

Variety can be measured in several ways; this paper uses the Herfindahl (H) index calculated across 178 different varieties of IT exports and imports allocated into broader product categories, including Computers, Components, and Other ICT (embedded ICT such as medical devices). Within a category, a Herfindahl close to 0 implies a high variety in product trade, and Herfindahl close to 1 implies highly concentrated product trade.
Figure 7.5 from the Chapter shows Herfindahl indexes for three countries and three product categories. Returning to Figure 7.4, Indonesia is an exporter with lower than average social surplus for exporters (lies below the trend line for exporters). It has a very high concentration of trade in Computer exports. With a highly concentrated export pattern, but lower than average social surplus, this suggests that economies of scale in production does not outweigh the terms of trade effect, and, with high concentration, there are no gains from variety.

Click for original image size

 

China is also a exporter, but with higher than average social surplus (lies above the trend line in Figure 7.4) for exporters. Although China’s exports of Computers are somewhat concentrated, it has an even greater concentration in imports of Components. Therefore, China may achieve higher than average economic gain by importing and getting the benefits of the terms of trade on Components. And, with high variety (low H) in exports of Other ICT, China may gain from market power in trade, with attendent benefits of higher prices and profits.

 

This short paper draws on Chapter 7, “Information Technology, Globalization, and Growth: Role for Scale Economies, Terms of Trade, and Variety”, in Otaviano Canuto and Danny Leipziger, eds 2012. Ascent after Decline : Regrowing Global Economies after the Great Recession. © World Bank . https://openknowledge.worldbank.org/handle/10986/2233

Catherine L Mann

 

 

 

 

 

 

Catherine L. Mann
Barbara ’54 and Richard M. Rosenberg Professor of Global Finance
International Business School, Brandeis University
Visiting Scholar, Federal Reserve Bank of Boston

 

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Russia Enters Calmer Waters

Last winter’s demonstrations in Moscow and elsewhere have more or less died out. This is an expected outcome as this non-movement always lacked of a leadership. Neither did it have any common program beyond the goal “Putin out!” But nature and society alike abhor a vacuum: there was no answer to that question. Polls claim that those participants that had any political identity divided quite evenly into nationalists, communist and new leftists and modernizers. The last ones are routinely called liberals in outside media. That is a problematic piece of terminology, because in Russia even self-nominated liberals are often supporters of a strong state.

This is not the end of opposition in Russia. There will be re-births and new declines. Part of the lesson should have been learned already of the Arab Springs. One can call together demonstrations through social media, but nothing compensates repeated face-to-face contact in building a genuine political movement. It has to be an organization. And Russia lacks the Muslim Brotherhoods and traditionally politically active armies in place to fill the organizational vacuum left by the street demonstrations.

The regime in power continues to put out potential bush fires. This and that visible oppositional is put in front of court and very probably condemned in due course. Foreign aid to NGOs is squeezed out and other barriers to cross-border contacts will be established. Some Russians vote with their feet and many more at least consider the possibility. But on the level of large-scale politics the regime sits tight – for the time being at least. At least three large dangers loom.

The first one is complacency. It has economic as well as political roots. The macroeconomic situation of the country is better than perhaps ever before. Economic growth is a multiple of most European levels, unemployment a fraction of some. Inflation is lower than ever in independent Russia, official reserves are as high as they have been. Both investment and consumption grow faster than aggregate production. Both the budget and current account have a surplus.

This is a dangerous situation, as the Russian policy advice consensus is right when it calls for profound but at the same time difficult decisions. The low hanging fruit of systemic change were picked years ago, though they continue to impact the society now and in the future. Neither can one count on continuous growth in export. On the other hand, a collapse of them – even of gas prices – is not in the cards.

Typically the decisions now ahead are difficult, socially divisive and without a ready-made recipe. Russia is not alone in this respect. Pension reforms are nowhere particularly easy. No political regime finds it easy to allocate scarce resources between social needs, much needed infrastructure investment and military outlays. Preparing for demographic change is a common European challenge.

The regime should also be able to control itself. Though statistics are inevitably murky, corruption is widely seen as the big problem faced. There is a fair possibility that Vladimir Putin is finally serious about fighting corruption. He is also ready to call it a systemic feature of his country, and thus also of his own regime. If the former Defense Minister Serdyukov actually goes to court, a leaf in Russia’s history has turned. There was no necessity for doing that: a dismissal with lukewarm thanks would have sufficed.

But if that is the case, the Putin regime has to be able to control the Pandora’s box. In a society where so many people reportedly have files of negative material on so many others, a war of everybody against all would be easy to ignite. And when there is no political opposition or alternative society ready to take and use power that would be a recipe for catastrophe.

Finally, though new goods and services have flooded Russian markets, export-wise Russia remains as dependent on energy and other commodities as before. Being rich in resources is glorious, but they cannot continue maintaining an economy which is growing. Measured – as it should – in constant prices the share of the wide energy sector in Russia’s GDP peaked at about thirty per cent. It has already declined, and may well reach ten per cent in a couple of decades. This at least is what the Russian experts say, and the policy makers seem to concur.

This is a tall order and must imply a new kind of integration in the world economy. The first months of Russia’s membership have shown that Russia tends to be more apt in defensive than offensive measures. The country is testing the limits of what WTO membership allows in terms of protectionism and such. Established members are testing the limits of Russia’s resolve.

But that, naturally, was fully to be expected.
 

 

 

 

 

Pekka Sutela
Nonresident Senior Associate Carnegie Endowment, Washington D.C. & Visiting Professor at the School of International Affairs, Paris

 

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China: Economic Discussions Move Forward – but what about Reality?

Developments in China get increasingly interesting for economists, other analysts, and – certainly – for many corporate decision-makers. This can particularly be said about:

– the more immediate economic development,

– economic reports and discussions, and

– the future economic policy of the new political leaders.

What concerns the first point, it seems to become increasingly probable that China is on its way to enter a period of somewhat accelerating rate of GDP growth. This was also indicated by Linnaeus University’s China Survey Panel in December. However, skepticism about Chinese GDP numbers and other statistics remains in place. Regular readers of this blog are familiar with the issue.

The second point to be mentioned is the trend of economic reports and discussions. Here, I can see continuous progress. Openness is improving, particularly in the past few years. After having followed economic reporting on China during at least two decades, current economic discussions seem to be on a very different – and more frank – level compared to 5-10 years ago (as long as it remains a pure issue of economics). The following headlines – which I just picked in the past two weeks – would probably have been distant from publication ten years ago (sources for the headlines: different Chinese newspapers – but the mentioned improvements have to be seen in Chinese relative terms, not measured according to our Western standards):

¤“UK breakup from EU may hurt  China trade”: China’s concern about this risk is obvious.
¤“China must strive to improve WTO relations”: China’s disputes with WTO should decrease.
¤“China’s fiscal deficit may hit new high”: a cautious warning signal about public debt.
¤“The bane of private consumption”: about the difficulties of changing the growth model.
¤“Full RMB convertibility ruled out”: indicating that full RMB convertibility is far away.
¤“Domestic lenders need global outlook”: pointing at an important management issue.
¤“China’s Q4 property loans accelerate”: could be a hidden warning signal.
¤“Tougher measures on corruption”: one of China’s most frequently discussed topics.
¤“Food struggle may threaten urbanization”: the food issue in another critical perspective.
¤“Product quality improved in 2012”: product quality – a major future challenge.
¤“Manufacturing turns youth off”: a topic that starts to reach China.
¤“Chinese firms willing to do more public good”: aiming at state-owned enterprises (SMEs).

The third point is about the future economic policy of China’s new political leaders. The National People’s Congress (NPC) in March will certainly give hints on economic policy priorities. Such policy declarations are, however, usually without concrete timeframes – or held very generally. Consequently, one should not take these official ambitions for the future too verbally in all respects, even if they may indicate the road on which China’s new main political decision-makers wish to move forward.

Moving forward on a certain road does not say too much about real ambitions, speed and sustainability of the plans. This kind of more precise and applicable planning won’t be given already next month. It may be added as an example and little reminder that China’s already some years ago envisaged the transition to a more consumption-oriented economy. This strategy still remains invisible in reality. Rather the opposite is true when we look at the latest statistics – and probably in 2013 as well. Chinese reality remains many times very harsh – despite all progress we’ve seen in the past decade in quite some important economic areas.

 

Hubert Fromlet
Professor of International Economics
Editorial board

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