In challenging the conventional wisdom at the time, Singer and Prebisch posited a number of explanations for declining terms of trade of developing economies, including both country- and product-specific factors. Over the past decade, we have begun to witness a simultaneous process of price differentiation within commodities (with the prices of some commodities increasing) and within manufacturing (with the price of many manufactures falling). These price changes may reverse the decline in the terms of trade of commodity producers. The entry of China into the global market has played an important role in this, augmenting the demand for many “hard commodities.” Its role as an exporter of manufactures, coupled with concentration in global buying may undermine the prices of many manufactures.
In 1971, Singer “revisited” the terms of trade, in theory, and with Sarkar, in 1991, through an empirical exploration.20 This revisiting echoed his contention, with Prebisch, in the early 1950s that the key determinants of relative price-performance might be country-, rather than product-specific.21 It began a process of enquiry, picked up by Wood, Maizels and his collaborators, and Kaplinsky and Santos-Paulino which has shown that manufactures are not immune to falling relative prices. There are some categories of manufactures for which relative prices have fallen, and these are predominantly manufactures in which China has become a major exporter. We argued in Section 4 that one explanation for this price performance within manufactures is indeed found, as Singer and Prebisch asserted in the early 1950s, in the composition of the labor force. China and other low-income economies are characterized by a large reserve army of labor, including increasingly of educated and skilled people. Another potential driver of falling prices of manufactures is the growing concentration of global buying power.
Our “revisiting” of this “revisited” discussion of the relative prices of traded products is to move the discussion beyond intra-manufacturing terms of trade, and back to the commodities-manufactures terms of trade. We have suggested that a confluence of factors might lead to a reversal in the historic relationship between the prices of commodities and manufactures. The rising prices of some “soft commodities” and some “hard commodities” occurs at the same time as falling prices of a large number of manufactures. In this case, the real terms of trade will be not so much between commodities and manufactures, but between innovation-intensive products (benefiting from Schumpeterian rents) and non-innovation-intensive products.
In general, this proximates to high-income and low-income economy products rather than to commodities and manufactures. 22 But there are a number of cases in which low-income economies, or rather parts of low-income economies, are able to benefit from these Schumpeterian innovation-rents. Examples include the growing number of science-intensive products being produced by indigenous firms in China; India’s expertise in some areas of software; South Africa’s role as a provider of high-tech medical services; and Costa Rica’s presence in eco-tourism. But in both respects—that is, in the country determinants of declining prices, and the innovation-determinants of rising prices—the parents of terms of trade analysis in the early 1950s were remarkably prescient. It has only been our crudeness over the past five decades which has led us to characterize these relative price trends as resulting from product attributes in general and commodities/manufactures in particular.
We end with a word of caution. In the short-run, that is from the 1990s for the case of manufactures and from around 1999 for the case of commodities, we can observe a change in historic price trends for both commodities and manufactures. We have argued that there are structural reasons why this might be sustained, so that these changing terms of trade may take the form of a shift in the secular terms of trade rather than in shifts which reflect a particular business cycle (Bloch & Sapsford, 2000). However, these are early days in the global expansion of China (and India) and it would be best to posit these changing terms of trade as an hypothesis rather than to draw determinate conclusions on the secular nature of these price trends.
