The Demand for LDC Exports of Manufactures: Estimates from Hong Kong

Abstract

Exports of manufactures from developing countries are generally believed to be sensitive to changes in the level of income in the developed countries, their major market. This belief is grounded on both casual observation, especially from the experience of recent recessions, and on extensive econometric evidence of low price elasticities and high income elasticities of demand for LDC exports in developed countries. This paper argues that both casual observation and previous econometric evidence are misleading. The aim of the paper is to show the order of magnitude of the bias contained in previous econometric estimates of price and income elasticities of demand for LDC exports of manufactures due to neglect of supply side influences.' Previous econometric work has neglected the supply side of LDC exports for the simple reason that it is difficult to model. It is difficult to model properly the supply of aggregate LDC exports since the determinants of export supply differ from country to country. Even for a single country modelling export supply is complicated since, in addition to foreign demand and domestic supply, exports are determined in part by domestic demand for exportables. Furthermore, in most LDCs the incentive to export is strongly influenced by complex and continually changing industrial and trade policy measures. There is one major exception: Hong Kong, one of the developing world's largest and most successful exporters of manufactured goods. The manufacturing sector in Hong Kong is almost completely specialised, exporting 95 % of output. Consequently, domestic demand plays no part in determining the volume of exports. Furthermore, factor markets and the manufacturing sector are almost completely free from government intervention, the main exception being the textile export restraints imposed at the insistence of importing countries. The voluntary restraint agreements (VRAs) to which Hong Kong is subject no doubt affect the composition of exports, but not necessarily the volume of aggregate exports if resources in the restrained sectors can easily be redeployed elsewhere in the economy. Judging from past export growth rates, the VRAs do not appear to have had a significant effect on aggregate export growth in Hong Kong. The results reported below also suggest that Hong Kong has effectively circumvented the trade barriers it faces. The Hong Kong manufacturing sector in many ways resembles a firm in the