2120. Can Africa Export Manufactures? The Role of Endowment, Exchange Rates, and Transaction Costs

Ibrahim A. Elbadawi
(May 1999)

Africa's poor performance in manufactured exports in the 1990s (relative to East Asia) appears to be largely the result of bad policies—especially policies that affect transaction costs.

Elbadawi analyzes the determinants of manufactured exports in Africa and other developing countries, guided by three pivotal views on Sub-Saharan Africa's (Africa's) prospects in manufactured exports:

• Adrian Woods holds that Africa cannot have comparative advantage in exports of labor-intensive manufactures (even if broadly defined to include raw material processing) because its natural resources endowment is greater than its human resources endowment (endowment thesis).
• Paul Collier argues that, for most of Africa, unusually high (policy-induced) transaction costs are the main source of Africa's comparative disadvantage in manufactured exports (transaction thesis).
• A third approach (Elbadawi and Helleiner) emphasizes the importance of stable, competitive real exchange rates for profitability of exports in low-income countries (exchange rate-led strategy).

Elbadawi tests the implications of these three views with an empirical model of manufactured export performance (manufactured exports' share of GDP), using a panel of 41 countries for 1980-95. His findings:

• Corroborate the predictions of the transaction thesis, in that transaction costs are major determinants of manufactures exports. Investing in reducing these costs generates the highest payoff for export capacity.
• Lend support for the exchange rate-led strategy.

After controlling for other factors, ratios of natural resources per worker were not robustly associated with export performance across countries, but this cannot be taken as formal rejection of the endowment thesis - unless one is prepared to assume that manufactured exports' share of GDP was highly correlated with ratios of manufactured to aggregate (or primary) exports. But this is not unlikely.

This paper—a product of Public Economics, Development Research Group—is part of a larger effort in the group to research manufactures exports' competitiveness. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Hedy Sladovich, room MC2-609, telephone 202-473-7698, fax 202-522-1154, Internet address hsladovich@worldbank.org. The author may be contacted at ielbadawi@worldbank.org. (19 pages)

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