DP499 The Fallacy of Composition Argument: Does Demand Matter for LDC Manufactured Exports?

Author(s): Riccardo Faini

Publication Date: December 1990

Keyword(s): Devaluation , Export Demand and Supply , Price Elasticities

JEL(s): 130 , 410

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP499.asp

The constraints imposed upon the growth of LDC exports by international demand have been the subject of a long-standing controversy. In this paper we present estimates of manufactures export-demand functions for 23 LDCs. We focus first on the constraints that the international environment imposes upon export growth for an individual LDC. We assess the claim that supply factors play a dominant role in affecting export performances by testing the `small-country hypothesis' of an infinitely elastic demand. We turn next to the constraints on global export growth and ask whether exports from LDCs compete mostly with Northern products, or are instead substitutes for exports from other LDCs. This allows us to assess the empirical validity of Cline's 1982 claim that a generalized outward shift in the LDCs' export-supply schedule would be associated with a significant decline in prices and would undermine the success of a widespread export-led strategy. We find that for a representative LDC a large share almost 80% of the benefits of devaluation on export revenues vanish when other LDC competitors pursue similar policies.