RDP 9310: Explaining the Recent Performance of Australia's Manufactured Exports 2. Manufactured Exports: The Stylized Facts

Figure 1 shows real manufactured exports over the past two decades.^[4] Since 1985/86 manufactured export volumes have grown by 16 per cent per annum. In fact, they now account for more than 20 per cent of total merchandise exports, compared with under 11 per cent in 1985/86. Reflecting increased international integration, imports have likewise trended upward over the period (Reserve Bank 1992).

The timing of major movements in the growth rates of manufactured exports suggests some responsiveness to macroeconomic shocks. For instance, in recent years, there have been substantial swings in Australia's real exchange rate, fluctuations in economic activity and the continued dismantling of trade restrictions. Each of these factors is expected to have impacted on manufactured export growth.

Figure 2 shows the relationship between the real trade-weighted exchange rate and the growth of manufactured exports.^[5] To varying degrees each of the periods of appreciation correspond to a decline in manufactured export growth. Similarly, episodes of depreciation tend to be associated with accelerations in the growth rate of manufactured exports (albeit lagged). Thus real exchange rate movements appear, in general, to be negatively correlated with the growth in manufactured exports. However, since 1986/87, a situation has emerged where export growth has been sustained despite episodes of real appreciation. One possible explanation is that the sharp depreciation of the mid-1980s may have had an hysteretic effect.

^[6]

Similarly, it has been suggested that the recent recession has been a factor contributing to the surge in export growth; the fall in domestic demand may have caused manufacturers to direct production to overseas markets. However, as shown in Figure 3, no such relationship between exports and domestic demand was evident in the 1982/83 recession.

It might also be expected that export growth would be directly related to economic activity in the markets in which they are sold. Much attention has been paid to the growth in Asia and the attendant expansion of potential export markets in that region. Certainly, as shown in Figure 4, there is a broad positive correlation between the industrial production of Australia's trading partners and export growth. However, recent growth in overseas demand has been associated with higher-than-expected rates of export growth.^[7] Growth in overseas demand, particularly Asian demand, does not appear to fully explain the growth in manufactured exports since the mid-1980s.

Finally, increased export orientation may also be a response to the dismantling of trade restrictions. A measure of the effective rate of assistance for manufacturing (based on Plunkett et al. (1992)) is illustrated in Figure 5. The sharp cut in tariffs in 1973 coincided with a fall in exports, whereas the gradual lowering of assistance in the second half of the 1980s was associated with strong export growth.

It is clear that the growth of manufactured exports in the late 1980s is not easily explained by a single cause. However, the graphs have suggested an interesting puzzle. The surge in exports following the mid-1980s depreciation has continued in spite of subsequent episodes of appreciation. Furthermore, the apparent strength of the link between the recent recession and export growth stands in stark contrast to the lack of effect of the 1982/83 recession.

The following sections of the paper explore some potential explanations for these anomalies. Central to the analysis will be a model which allows exporting firms to have sunk costs. That model is now examined.

Footnotes

The definition of manufactures used in this paper excludes some simply transformed manufactures, such as iron and steel and non-ferrous metals. It also excludes processed food and beverages. Further details are provided in Appendix D. [4]

Pitchford (1993) alludes to the controversy surrounding the correct measure of the real exchange rate. This may influence its perceived impact on exports. However, for the sake of simplicity, the measure used in this paper is the real TWI calculated in Jones and Wilkinson (1990). [5]

In this section, all series graphed on an annual growth basis are shifted left by one year to compensate for the phase shift introduced by the transformation from levels to annual growth rates. That is, a growth rate attributed to December 1985 on the graph refers to the year-on-year growth between 1985 and 1986. [6]

The co-movements observed in the series up until the mid-1980s suggest lower elasticities. [7]