Changes in production factors used by developing countries probably improved their competitiveness. One of the most misunderstood predictions of economics is that changes in the factors employed in open economies will change the mix of goods produced and exported, rather than the prices of the input factors. Increases in the amount of capital per worker in an open economy can, for instance, be expected to increase the share of output from capital-intensive sectors, rather than depress the return on capital.

In this respect, open economies are much better placed than closed economies, where growth in any factor can be anticipated to depress its price, as the domestic demand for the goods in which it is used intensively becomes saturated. Of course, world markets, too, are finite, and rapid increases in supply can lead to declines in world prices. But world markets are much larger than those of individual countries. The problem of saturation is much less likely to become serious for trade in manufactures, because there is much more two-way trade among developing countries in these goods. It is often postulated that each developing country could be better off if all developing states benefited from manufacturing productivity than if it alone benefited.

Enrichment of Foreign Direct Investment (FDI) is another contributing factor to the changes in developing countries’ participation in trade. FDI grew dramatically in the 1990’s and, not only did it bring capital to emerging nations, augmenting their total supply of capital per worker, but it brought know-how, and connections with other elements in the network of global production sharing. One likely contributor to the observed change in the mix of developing country exports is the rising amount of capital per worker available in some developing nations. In East Asian economies, the annual growth rates of capital per worker have been almost twice those in the advanced industrial countries. Elsewhere, the average rate of growth of marginal capital has been subordinate to industrialized economies, even though some countries outside East Asia have savings and investment levels that match those found in Asia. Increases in the marginal amount of secondary and tertiary education have been much superior for most developing country regions than the industrialized world, albeit frequently from a low level.

To the extent that these resources have been optimized, this deepening of financial and human capital per worker can be expected to encourage a shift away from labor-intensive activities towards more capital-intensive strategies.The relationship between accumulation of factors of production and the export mix is complex, with countries initially expanding their output of labor-intensive manufactures and then, beyond a certain resource level, moving into a different range of products. It seems highly likely, however, that the observed rapid increases in capital and skills per worker have been imperative in numerous cases of successful development and that they are critical to long-term progress. Without large increases in the availability of skilled labor, it would be difficult to explain the rapid increases in the exports of high-technology products from developing countries, especially from low-incomers.

<B>Nitish BENIMADHU

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