Foreign trade and its impact on employment

Foreign trade and its impact on employment

Journal of Development Economics 9 (1981) O-65. North-Holland Publishing Company D lTS IMPACT ON EMPLOYMENT The Mexican Case Santiago LEVY* htituto ...

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Journal of Development Economics 9 (1981) O-65. North-Holland

Publishing Company

D lTS IMPACT ON EMPLOYMENT The Mexican Case Santiago LEVY* htituto

Tecnola’gico Autoitonto de Medico. Me’xico 20, D.F., Mejcico

ReceivedJune 1980, final version received November 1980 This paper discusses the relationship between foreign trade and employment in a small open economy, and carries out some empirical work using Mexican data. It is argued that employment multipliers are not stable if intermediate inputs are imported. Actual employment multipliers will be given by the relationship between effective demand and installed caoacity in each sector. and will depend strongly on whether quotas or tariffs are in operation. 1: is also found that Mexican exports are capital intensive relative to its imports.

1. Introduction

It is by now well recognized that unemployment is one of the most important economic problems of LDC’s. The employment grobzm, however, should be analyzed in the context of an open economy, to capture the effects that the volume and consumption of foreign trade have on the level of employment. The purpose of this paper is to present a theoretical analysis of the relationship between trade and employment for a small open economy. Usually, standard input/output techniques are employed to carry out this type of analysis. We will try to show, however, that for a small open economy the use of these techniques has to be modified to take account of the fact that some intermediate inputs may be imported. We will then illustrate how these modifications can change the results using data from the Mexican economy. As a by-product of the analysis, we present an empirical test of the Heckscher-Ohlin (H-O) theorem. The paper is organized as follows: Section 2 presents the theoretical model. Section 3 briefly discusses the nature of the data used. The empirical results are discussed in section 4. Finally, some conclusions are presented in section 5. *I am gratefill to Banco Nacionat de Mexico for financing this project. David Feldman was a

very able research assistant. The comments of Prof. Schydlowsky, as well as an anonymous referee are gratefully acknowledged. Responsibility for all views expressed is lvholly mine.

03063878/82/ OU@MOU0/$02.‘75 0 North-Holland

S. Levy, Foreign trade and its impact on employment

48

2. The model 2.1. The input/output equations If all imports are competitive (with domestic production) and all goods are traded, the input/output balance equations for an open economy are written as q+m=Aq+d+e,...,

(1)

where =vector of total domestic production (n x l), rn= vector of imports (n x 1 ), A = matrix of input/output coefficients (n x n), d = vector of final domestic demand (n x 1), e = vector of exports (n x 1). q

It is convenient to rewrite (1) as q=(I-A)-‘n+(Z-A)-‘e-(I-A)-‘m,...,

(2’

where I is identity matrix. is known as the ‘Leontief Inverse’, but it is The matrix (I-A)-’ convenient to think of it as a linear operator that vertically integrates each productive activity. [Each column of (I-A)- ’ denotes total input recuirements for a vertically integrated sector - see Pasinetti (1973).] if we now let: I= vector of direct labor requirements per unit of output (1 x n I, then we have: E*=l(I--A)-‘,..., where I* is a vector of sectoral employment multipliers. i.e., each element of z*, q (i = 1,2, . . .,n) measures the total quantity of labor required throughout the economy to produce one unit of commodity i. So, if i,*) 17 we tail conclude that good i is more h.8bor using relative to good j. (Note that the ordering of commodities according to how much labor they use will di depending on whether it is measured by Ij or l:; of course it holds that 47 2 ;9 Vj. ) It will be assumed in what follows that the technology of the economy is of the Leontief-type, with fixed input coeffkients. Hence, matrix A and vector I arc a datum, and only vary as a result of technical change. The advantage of the above assumption is that as long as sourcing is from domestic supply, marginal and average input coefficients are the same.

S. kvy,

Foreign trade and its impact on employmetrt

49

If we now let:

pee = E = total value of exports,. l

. .,

#%r = M = total value of imports,.

. .,

(3

is a vector of prices for export, import, goods respectively, then we can obtain @==Pe,...,

(6)

(8) where N” measures the total quantity of labor required in the economy to produce the exports represented by the vector e. A similar interpretation follows for IV”. The net effect that foreign trade has on the level of employment is measured by (8). If IV”> 1 we can conclude that the structure of foreign trade of the economy is such as to increase the level of employment vis-a-vis the no-trade situation. (The opposite holds if IV”< 1.) Alternatively, we can interpret _V”as a measure of the effect that one peso of balanced trade has on the level of employment. Finally, note that for exports as well as for imports we can obtain

(9) j= 1,2,...,n, (10) 7 are interpreted as sectoral employment multipliers in export and import activities, respectively. 2.2. An importarrt modtfiwtiorl So far we have measured the im act of trade on employment t linear operator (J - A )- *. However, as Riedel ( 1976, p. 443) writes: ‘It should be obvious that the standard measure is inappropriate in an economy which imports intermediate inputs, since the (I -. A)- 1 matrix explicitly assunies that all intermediates are domestically produced.’ To give an example: the analys developed previously assumed that when a car was exported, the steel use as an input was domestically produced and hence the impact on employment of exporting a car was given by adding

50

S. Levy, Foreign trade and 1rs impact on employment

up the workers in the steel and automc bile industry. It is obvious, however, that if the steel used in producing the ci r was imported, no demand for labt>r was generated in the steel indul,try wher. exporting the car. As a result of this, it will be necessary to modify the previous analysis: Let A=Ad+Am,...,

W)

where aii=quantity of good i req.Gred pel* unit of output of good j. (‘UC technologically given input/output t:oefflcient.) U$=quantity of good i, domestically produced, used as input per unit of good j. (I;--quantity of good i imported per unit output of good j. It is obvious that A”20 and A” 20, such that AZ Ad, from which we can conclude that - unless A” = 0 - , (6) and (7) overestimate the impact of foreign trade upon the level of employment.’ As long as sourcing of intermediate inputs is from domestic supply, we will observe that Am= 0, and A = Ad. However, at a given point (see below) some intermediate inputs will be imported. Since the purpose of the analysis is to measure the impact of trade on employment, it is clear that when an input is imported, no further repercussions on the demand for labor will be generated in the economy. Hence it is no longer appropriate to take the input coefficient as the domestic on\:. From the point of view of employment, past the point of importation, the domestic i lput coefficient is zero. To measure the ‘correct ’ impact that foreign trade will have on employment, we need to modify t9e vector of sectoral employment multipliers. Thus we write

where the correct operator to vertically integrate industries is given by (I --Ad)- l, th;tt will give us b:he ‘actual’ employment multipliers, taking into account that some inputs were not produced domestically, but were

‘Strictly speaking, the last statement is not I:orrect. There is a further effect of trade upon employment not captured by our equations. Asz~meeconomy A imparts steel from economy B, but that the coal used to produce steel in economy B was imported from economy A. Now lea economy A export a car, but impart the steei used as an input. The impact on employment is given by the H,orkers in the suto industry plus :.he workers in the cod industry. This last effect, however, is not captured in our equations, Under the assumption that A’s exports of coal :o B are a small part of B’s total supply of coal, hl)wever, we can ignore this last effect. This was pointed out to me by S. Lizondo.

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51

imported. All that has to be done is to substitute I** for I* in (6) and (‘7)to obtain the correct measures. It is important to note, however, that while matrix A is a technological datum, the same does not hold for A” and Ad. 2 The exact values of these last two matrices will be given by, one the one hand, the relationship between installed capacity and effective demand in each sector and, on the other hand, by the different forms of handling the foreign sector (via quotas or tariffs). Assume a small economy that handles its foreign trade via tariffs. Suppose industry j produces inputs for industry i, such that when production of good i increases, the same happens to the demand for good j. In that case we can represent the situation of industry j by means of fig. 1. By inspection of fig. 1 it is clear that imports of good j are determined by then relationship between installed capacity and effective demand. If Dj=Dy the qi ==qy and there are no imports; if Dj= 0; then qj = q) and we will have imports equivalent to the distance qJ--q? The interesting thing is that as

0.

J

mar.

qj

of good j. q,“‘i’r ihg. 1. (r,” = world price 0B goociJ 1. 1, = ad valorcm tariff on import = maximum domestic output >f good j, given installed capacity, Oj = domestic supply of good j, D, = domestic demand of good j ).

‘The following material is pxtly

based on Schydlowsky

( 1978).

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52

marginal supply of good j will be domestic. Conversely, if marginal supply of good j will be foreign. This behaviour of imports will in turn determine, in the margin, the behavior of the coefficients of the matrices Ad and A” as follows:

long as

ma'

Dj
Dj>,y,

if

P;rj>q~

aji

=ff$

Vi.

In other words, the marginal input coefficient - which coincides with the average input coeffkient given our assumption of fixed proportions - is equal to the domestic input coefficient up to the point of full capacity. Past that point, however, the domestic input coefkient is zero, given that the extra output will be imported. The previous analysis, however, is substantially modified in the case quotas are in operation. Assuming that the quota is binding and that thele is perfect competition in the holding of the quota (this last assumption is not necessary), then we can depict the situation of industry j by means of fig. 2. Given that the quota is binding, all imports of good j are intramarginal (equivalent to the distance 0 -of in fig. 2) and hence, when there is an increase in the demand for good j all the extra supply will come from

P j

I Tg. 2

S. Levy, Foreign trade and its impact on employment

53

domestic sources, such that

other types of alternative situations are also possible (like a increasing costs with tariffs and quotas, etc.3). Our aim is just to illustrate e point that the coefficients of A’ and A” are not technologically given, but depend on the relationship between quotas, tariffs, installed capacity and effective demand in each sector. eral, therefore, it is not possible to establish a priori what the Impact yment will be of an mcrease in exports. The relevant employment ven by (12), will measure the impact in each case. However, the ABand Am are not technologically given. As a consequence, the volume as well as the structure of foreign trade for a small open economy will be changing constantly, reflecting changes in demand and/or installed capacity in each sector. Even in the absence of technical change (A(t) = A(O), I(r)= I(O), Vr) it is not correct to use the same multipliers to measure the impact on employment of different foreign trade situations. 2 3. Fuctor intensity and the Heckscher-Ohlin Theorem It is now common, since Leontief’s (1953) famous study, to make empirical measurements of the factor content embodied in the export and import products. Let B be the matrix of capital/output coefficients (n x n), and p the price vector (1 x n). We then have

where tz is a vector that measures the amount of capital used per unit of output in each industry. We:can now define, using (14) ~(h---A)-~e

0 K “I,~“__---_ 0 K ‘=ke

I

“”

vI_----1

I(!-A)-‘4’ a+-A)"%2

-.E

((I -

(16)

A)-.‘rtl’

(17) ‘For the case he relaxed

of increasing

costs, the

of fixed

coefficient5 would have to

S. Levy, Foreign trade and its impact on employment

54

Thus, (15) i:i a measure of the capital/labor ratio in exports, while (16) measures the capital/labor ratio in imports. Finally, (17) is an index of the capital/labor r itios in export ‘Jvs. imports. If d, < 1 exports are labor intensive relative to imports. The opposite holds if (b> 1. The H-O TIheorem is a Proposition on the pattern of trade that would be observed under free trade and perfect competition between two countries.’ in its simplest form, the theorem states that

where the bar over the variables K and L refer to total ‘endowments’ of capital and labor, respectively, and A, B denote two countries. A test of the H-O Theorem therefore implies: (i) knowledge of the relevant variables of countries A and B to be able to make the comparison established in l(N), and (ii:t knowledge of what the pattern of trade would have been between A and 3 under free trade and perfect competition. In the case of Mexico, however, difficulty (i) is easily taken care of, given that around 70 f;, of Mexico’s foreign trade takes place with the U.S.,’ which can be considered a ‘capital abundant’ country relative to Mexico. Hence, we can just look at thi: values of 4MEX.Difficulty (ii) cannot be handled so easily, since trade patterns that are actually observed need not coincide with trade patterns that would have been observed under free trade. As a result, most tests of the H-O Theorem are not ‘rigorous’ tests, given that they are not measuring the factor content of free trade, perfect competition trade flows. From the arguments presented in section 2.2, the question remains whether (15) and (16) are the appropriate measures for calculating 4. or whether we should integrate industries verticuly via (I -Ad)- ’ rather than through (I - _4)- ‘, so as to measure the quantity of capital and labor that are actually incorporated in exports and imports. The problem (can be alternatively stated as follows: the H-O Theorem tries to establish the pattern of trade on the basis of the factor intensity of each good. However, once we introduce trade in intermediate products, there are at least three alternative measures of ‘factor intensity’. Taking industry .j as an example, we have k’. ’ =: I;,j//j, J

k”J’~~j(I-,4),~‘!li(f--;4)j‘-1,

J

1

We abstract in this paper from the thwreticai and methodological prablems associated with the concept of ‘endowment’ and ‘capital/labor ratio’. For an elaboration see Levy ( 1980).

S. h-y.

Foreign

trade

and its impact

on employment

55

where k(l) is the ‘direct’, k(” is the ‘actual’ and kt3) is the ‘total’ capitalJabor ratio. If we want to compare factor intensity in two different industries, say j and i. it is perfectly possible that

Leontief (1953) used kt3’ as a measure of the ver, it is worth noting that there is not complete e on which is the ‘correct’ measure to use. [See 79) for a’iternative views.] We will not, however, use it so haTpens that in the case of Mexico the C#I invariant to the k used. Nevertheless, from a s is an important point for the neoclassical trade o observations more. First, as the reader will note, from (15) and (15), depends not only on the linear operator used to vertically integrate Industries. but also on the structure of the export and import vectors. We saw in section 2.2, however, that the structure of these vectors is a ncrion of the level of effective demand and installed capacity in each sector. At; a result, the calculated Q, will he very influenced by the level of capacity uttlization in each sector at the moment when the statistics on vectors e and 111were collected. For a given k, b, will vary as the structure of vectors e and 18)changes in response to changes in snstalled capacity, etc. This, in turn, could be a partial explanation of some ‘paradoxical’ behaviours of the measure 4. Second, note that for a small open economy trade in intermediate products is of fundamental importance. In this case one has at least three measures of abor’ ratio. While it is true that k(’ I and kt3’ depend solely on the technology, the same does not hold for k12’. If one wants to classify activities by the amount of factors that they ‘actually’ use, k”’ is the relevant measure. However, this measure is not a technological datum and as a consequence the ordering of goods according to their factor intensities will be changing constantly. in response to changes in trade policy and/or sectoral demand and/or installed capacity.

2.4,

on-competitice

imprt~;

mm-truded goods

So far non-competitive imports have been neglected. introduced without afTsting the results. Let:

They can be easily

(19)

S. Levy, Foreign trade and its impact on employment

56

where

= total value of imports, = vector of non-competitive imports, mc = vector of competitive imports, Pc,p”c = vectors of prices of competitive respectively. MT

mNC

We can assume that non-competitive domestic demand as follows:

rnNC = wig,

and non-competitive

imports,

imports are linked to the level of

w

where W is a matrix of non-competitive import coefficients, with \Vij giving the quantity of non+competitive good i imported per unit of output of Since, by defmittion, these goods are not domestically produced, their introduction will not affect the previous analysis (in particular, it will not ‘affectthe deman? for labor). Once 4 is known, mhrCwill be perfectly defined via (20). Similarly, we have assumed that all goods are traded. Non-traded goods are easily handled. Partition all relevant vectors and matrices such that all non-traded goods are put togc~ther,like in matrix A:

By convention, Il+nl( =!I) goods are produced in the economy, out of which h a.re traded and tzt are not. Then all the previous discussion holds, it being understood that it only applies for the h traded goods.

3. Nature of the data

The empirical analysis is based on the 1970 input/output table elaborated by the Bank of Mexico and the Department of Budgeting and Planning (1970). The table has 72 sectors, s\ut of which 13 were considered to be producing non-traded goods All data is expressed in value terms. The numeraire is one million pesos of 1970 at producer prices. The import vector, however, is expressed in CIF prices.’ The following observations are relevant :

5

-The euF\lort vector contains the exports of the Mexican border industries. These arc treated in the cxpo~t statistics as .-- any other export, and are classified according to sector of origin.

S. hwyl

Foreign

trade

and its impact

011 employment

51

(i) The vector 1 was measured using data from wages, as opposed to Leontief’s original study, that measured I in hours per man/year. NO distinction was made, however, for the different types of labor given that no data was available on labor skills inputs into the different sectors? (ii) There is no matrix of capital utput coeficients for Mexico, which, in principle, is needed to perform the H-0 test. We used instead a proxy virriable for the vector tl [see eq. (14)], which was obtained from the vector of value added. Basically, we substracted wages, salaries and taxes from this vector, and considered the residual as profits and interest paid output, which we took as the vector t:. output table used had two matrices of technical coefficients. The first is a matrix of input requirements of domestic origin, matrix Ad. The second is the matrix of imported input requirements, matrix A”‘. [Matrix A was then obtained via eq. (1 li.] When the matrices were compiled, however, no distinction was made between competitive and non-competitive imports, such as that matrix A” implicitly contains the import coefficients from both sources, while in theory it should only contain the competitive imports input coeficients. Hence, matrix A” overestimates the import coefficients, and it will be evident, via eq. (11) that as a result matrix A will overestimate total (domestic plus foreign) input requirements per unit of output. (Actually this problem will be present whenever intermediate products are imported, but the I/O table fails to make the distinction between competitive and non-competitive imports.) (iv) Finaliy. it should be noted that measuring vectors v and 1 using market prices introduces signficant biases in the results. It is generally assumed that factor prices are highly distorted in the Mexican economy, and that these distortions are quite different from sector to sector.’ As a result of @-(iv) above, the empirical results that are presented in the next section should be interpreted with care. The data used is a crude approximation to the variables that we want zJ measure. Nevertfie’css, to correct the data for all pccsible distortions would go beyond the limited scope of this paper. The empirical results should best be seen as an illustration of the points made in section 2, rather than as an exact description of the true situation.

‘Sheahan (1971). however, found that for 1968 Mexican exports were 5 I’,, more skilled labor intensive than imports. If errors of measurement are considered, maybe the bias introduced is not too significant. ‘For example, wages paid by public enterprises are above those paid by private industry for the same quality of labor. Ihus, labor requirements per unit of output are overestimated in those sectors where- public enterprises are prevalent.

S. Lay, Foreign trade and its impact on employment

58

4. Empirical results 4.1. Impact of trade on emphyment

Table 1 lists the sector classification of the 59 sectors considered to be producing traded goods, as well as the c:Aculated employment multipliers. (To economize space in t:le following tables, sectors will be referred to by their numbers only.) The following, notation was used:

ls-“’= lj(l - Ad)J:l,

j=1,2 ,..., 59. li3’= ri(I - A)3 I,

Table 1 Sect oral employment

multipliers.

sector number Classification

Y”

p”

01 02 03 04 05 06 07 08 09

Agriculture Livestock Forestry Fishing and hunting Coal and similar products Crude petroleum and natural gas Iron ores mining Non-ferrous ores mining Stone and clay mining

0.210 0.175 0.317 0.440 0.218 0.343 0.111 0.173 0.37s

0.266 0.279 0.372 o.ss 1 0.33 1 0.475 0.149 0.322 0.428

0.27 1 0.286 0.376 0.560 0.388 0.499 0.156 0.336 0.43 1

i0

18

Other non-metallic minerals Food and meat products Fruit and vegetable processing Wheat milling Corn milling and related products Coffee processing Sugar and related products Edible vegetable oils Feed grains

0.187 0.036 0.13s 0.144 0.047 0.049 0.22 1 0.040 0.075

0.253 0.270 0,325 0.326 0.193 0.238 0.388 0.233 0.241

0.256 0.278 0.337 0.332 0.220 0.243 0.393 0.252 0.264

19 20 21 22 23 24 25 24 27

Other food products Alcoholic beverages Beer Soft drinks Tobacco and related products Soft fabric mills Hard fabric mills Other textile industries Clothing

0.114 0.075 0.131 0.209 0.106 0.178 0.102 0.197 0.138

0.307 0.215 0.275 0.400 0.209 0.363 0,233 0.342 0.309

0.320 0.233 0.290 0.411 0.218 0.388 (I.238 0.364 0.326

11 12 13 14 15 16 17

P3’

S. Lmy.

Foreign

rradt?

and its impact on umploymmt

Leather products

59

Chemical products Fertilizers

0.236 0.197 0.157 0.163 0.245 0.1 13 0.171 0.161 0.133

0.388 0.393 0.313 0.349 0.384 0.409 0.376 0.315 0.310

0.420 0.399 0.324 0.377 0.437 0.43 1 0.402 0.347 0.362

37 38 39 40 41 42 43 44 45

Artificial fibers and plasttcs Medicines nts and perfumes Other chemical products Rubber products Plastic products Glass products Cement Other non-metallic mineral products

0.125 0.217 0.142 0.167 0.179 0.192 0.282 0.1x4 0.198

0.240 0.337 0.306 0.333 O.ZtcX 0.320 0.417 0.366 0.327

0.315 0.403 0.342 0.374 0.33 1 0.365 0.445 0.375 0.345

46 47 48 49 53 51 52 53 54

Bask str ~1and Iron industry Basic non-ferrous metals industry Furniture and metal products Structural metal products Other metal products Non-electrical machinery and equipment Electrical machmery and equipment Home-related electrical products Electronic equipment

tJ.199 0.129 0.209 0.230 0.215 0.244 0.2X 0.208 0.204

0.316 0.319 0.366 0.363 0.359 0.371 0.353 0.342 0.333

0.356 0.350 0.391 0.405 0.399 0.319 0.40 1 0.382 0.404

55 56 57 5s 59

Other electrical machines and equipment Automotive vehicles Automotive parts and accessories Other transport equipment aud materials Other manufacturing industry

0.173 0.11s 0.182 0.247 0.186

0.314 0.268 0.333 0.365 0.313 ____.-

0.352 0.366 0.3x2 0.46 1 0.368 - I__--_

Wood sawing and milling Other wood-related industries Paper and card-boards publishing and printing Oil reiining

Note the following: (i) There is very little difference, in most cases, between ‘actual’ (I”‘) and ‘total’ (f3)) employment multipliers. One can think of I”) and It31 as the minimum and maximum ranges for the actual, I”‘, employment multipliers, that is 1min

1max*

where imin measures multipliers in the case all intermediates are imported, while I,,, applies in the case when there are no imports of intermediate products. Table 1 shows that in the case of Mexico F2) is much ‘closer’ to P3’ than to 1”). The basic reason for this result is that in 1970 total imports were. a very small percentage of total supply. (The ratio imports/GDP for that year was 0.065.) This in turn was mainly due to the fact that in that year quotas and permits were the main tools used to control foreign trade, obstructing the

S. Levy, Foreign trade and its impact on employment

60

free importation goods. (ii) The ordering of goods according to the amount of labor they use will differ depending on the measure used. As an example:

It could therefore by misleading to follow a ‘technological’ ordering of goods (as 1”) or I(“) would be). From the point of view of employment creation and effective demand for labor, the ordering according to 2”’ is the relevant one. This ordering, however, is not stable, since it will be changing as a result of changes in tariffs, installed capacity, etc. Therefore, the impact on employment of an increase in exports cannot be measured using the information provided by the I/O table only. It is also necessary to have knowledge of the levels of capacity utilization in each sector, such that the relationship between matrices A” and A” can be established. Once this is done the proper li2)‘scan be calculated. Table 2 presents the aggregate impact of foreign trade upon the level of employment. It is interesting to note that, independent of which measure is used, N” < I. This result indicates that in 1970 the structure of Mexican foreign trade was such that export: used less labor relative to imports. The quantitative difference varies between 7.7 and 14.4%. From the point of view of what “ ctually’ happened, we can conclude that in 1970 the structure of foreign trade was sulch that it used 7.7 0; ( = l .--0.923) less labor in exports than in imports. It should 'beclear, however, that it is not correct to project this figure to other yea:;*s.The results obtained depend crucially on the structure of foreign trade, and we know that this structure is not invariant through time, Hence

Table 2 Aggregate impact of trade employment.’ _P -P (1)

-_-.-.-

II_

Direct -Y1_--

Actual

Total

0.167

0.314

0.334

0.340

0.383

Total wages in exycrts ---p

-__--

Value of exports

(2)

Total wages in imports --_._-___I_ Value of imports

0.195

(3)

N” = (l-)/(Z)

0.856

“By ‘direct’ it is meant Z-e; by ‘actual’ I(I - A)‘%; same applies for imports.

0.923 0.872 by ‘total’ I(I-A),‘1. The

S. Levy, Foreign trade ad

its impact on employment

61

it is to be expected that N” will vary from year to year, refltcting changes in installed capacity. movements of sectoral demands, etc. Table 3 presents the capital/labor for each of the 59 stctors, using the folk~wing notation :

01

06 07 OX 09

2.85 2.48 1.52 0.54 1.48 0.63 6.26 1.64 1.24

2 65 2.46 1.51 0.70 1.53 0.83 5.32 1.72 1.27

2.63 2.45 1.51 0.71 I .49 0.85 5.15 1.70 1.27

10 11 12 13 14 15 16 17 IH

3.13 2.76 1.68 1.58 5.63 4.71 0.81 6.17 3.18

2.77 2.51 1.85 1.93 3.56 3.07 1.46 2.87 2.72

2.75 2.50 1.84

19 20 21 22 23 24 25 26 27

2.41 4.44 2.26 0.77 1.32 0.87 3.77 1.40 2.16

2.w 2.90 2.10 I .24 1.75 1.48 3.08 1.62 1.97

I .99 2.86 2.08

02 03

04

05

1.92 3.43 3.04 1.46 2.80 2.65

1.25 1.74 1.48 3.05 1.63 I .93

62

S. Levy, Foreign trade and its impact on employment

Table 3--conhued Sector number’

k’;’ ,

28 29 30 31 32 33 34 35 36

091 109 2.11 1.37 0.79 0.88 1.27 1.76 1.46

1.27 1.41 1.97 1.51 1.13 0.93 1.25 1.75 1.62

1.28 1.41 1.96 1.51 1.17 0.96 1.25 1.73 1.63

37 38 39 40 41 42 43 44 45

2.57 0.98 1.52 1.19 1.81 1.19 0.84 1.46 1.84

2.22 1.26 1.72 l.Sl 1.86 1.54 1.07 1.46 1.80

2.03 1.30 1.72 1.52 1.81 1.58 1.10 1.46 1.80

46 47 48 49 50 51 52 53 54

1.50 1.50 1.06 0.91 0.97 0.93 0.93 1.09 1.Ol

1.71 1.65 1.41 1.42 1.32 1.23 1.29 1.41 1.34

1.68 1.65 1.41 1.32 1.35 1.25 1.33 1.43 1.35

55 56 57 S8 59

1.60 1.35 1.23 1.13 1.22

1.73 1.60 1.48 I.36 1so

1.70 1.56 1.47 1.38 1.51

The following observations are relevant

kt2’ 1

k:J’

:

(0 The capital/labor ratios measured by ki2) and kj3) are, as with the case of the employment multipliers, almost identical. Again, this reflects the fact that imports were a small percentage of total supply in that year, thus making Ad almost equal to A. (ii) It cannot be concluded that t I z ordering of sectors according to their ‘direct’ capital/labor ratios (k(“) will coincide with the ordering in terms of ‘total’ (kt3)) capital/labor ratios. The fact that one activity is directly more capital in:!ensive relative to another is no indication of whether it will be totally more capital intensive. Inspection of table 3 provides many examples : k::’ > k\‘J k”” 7 > k\y

but but

k!jj < k:3,,

ki3j <: k\?, etc.

S. Lmy,

trade and its impact on employment

For&y

63

Alternatively, examples of the opposite cases would be k:“> ky

and

k”,3’> k(63),

ky; > kg

and

kb3;’ r kfi

l

(iii) If intermediate products are imported, we know that the ‘actual’ capital/labor ratios will be k (2). Note too that the ordering of sectors according to P2’ and k13) (or P2) and k(’ ‘) can also be reversed. As an example

(in words, even though sector 48 is ‘directly’ and ‘totally’ mere capital intensive than sector 49, trade in intermediate products makes sector 49 ‘actually’ more capital intensive than sector 48.) 4.2. A test of the H-O Theorem Using the same source of data, we estimated

4. The results are presented in the first row of table 4. As usual. the following notation was used:

4(II

veille E-------

v*mfl.m’ v(l-

Ad)-l*e/l(l-

Ad)- le

(b12) = v(l- Ad)- 1-m/f(l- Ad)- ‘m p

=

v(l-A)-‘*e/1(1-A)-‘e u(l-A)-‘=m/l(l-A)-‘m’

Obviously, the interesting result is that, independently of the me: yure used, Q,> 1. In words: in 1970 Mexico’s exports were capital intensive relative to its imports. Subject to the qualifications made in section 2.3, this result

Table 4 Factor content of foreign trade.

l-10

&I-SS

(2)

(3)

Q,(1)

#

4

I .385 1.049 1.166

1.256 1.040 1.189

1.242 1.041 1.175

64

S. Levy, Foreign trade and its impact on employment

indicates that in 1970 the pattern of Mexico’s foreign trade was exactly the oppositr: of what the H-O Theorem would predict. AS a further test, we divided the 59 sectors into two blocks, and repeated the same calculations. The first block consists of sectors l-10 of the I/O table (agriculure, mining, fishing, et;. - see table 1). The second block is made up of sectors 11-59 (the industrial sector proper). The results are found in the last two! rows of table 4. Thus, whether one looks at the whole economy, or only at the industrial sector, it still holds that 4 > 1. If we take +12)as a measure of what ‘actually’ happened, it turns out that Mexico’s exports were 25 9(, (19 7; if we concentrate only in the industrial sector) more capital intensive than its imports. As is well known, Leontief (1953) found that for the U.S. 4 < 1, a result generally known as ‘Leontief’s Paradox’, which has been the subject of much controversy ever since. The result reached in this paper to the effect that > I would seem to confirm the paradoxical results initially obtained by 6 MEX Leontief. Whik: it is not our purpose in this paper to enter into theoretical discussions of the ‘paradox’, we think that the analysis of section 2.2 might serve atI a partial explanation for the results obtained. As w z can see from eqs. (15), (16) and (17), 4 is a measure influenced by the technology of the econom,y as well as by the composition of the export and import vectors. If we take the technology as given, we saw how for a small open economy the vectors of exports and imports reflect, in any given moment, the existence of excess capacity in some sectors, lack of capacity in others, etc. Put differently, $ is a parameter that is highly influenced by short run phenomena, which are then reflected in the import and export statistics. A theory of international trade, however, necessarily has to neglect this type of short-run situation. As a consequence, one might find that, for a given year, 4 has a different value from what the theory predicts. What is being suggested, to say it in a different way, is that it is necessary to analyze the structure of i’oreign trade of a country through time, to eliminate the short-run phenomena that might bias the results. What is needed is a time series of #‘s that ‘follow the track’ of the structural behavior of fcreign trade of a country. The empirical analysis of this point, however, will be the subject of another paper. 5. Conclusions

We have seen that for a. small open economy trade in intermediate products is of fundamental importance. Once intermediate products are introduced, one has at least three alternative measures of factor intensity. Under the assumption of fixed input coefficients it has been shown that the

S. Levy,

F oreign

trade

and its impact

on entplo_w~enr

65

ordering of commodities in terms of their factor intensity depends on which measure is used. Furthermore. the ordering of commodities according to their ‘actual’ factor intensity is not -- even in the absence of technical change -- a stable one, but depends on the relationship between installed capacity,

sectoral demands and the use of quotas and/or tariffs. The same is true, of course, of sectoral employment multipliers. From the point of view of the employment problem in LDC’s I think these conclusions are important. If increasing exports is seen as a way of reducing unemployment, it will be necessary to carry out a detailed analysis of the existing situation in each sector of the economy, to be able to determine in

which activities employment.

export

promition

will have

a significant

impact

on

References Banco de Mixico y Secrctaria de Programacicjn y Prc\upuesto. 1970, Matriz de insumo product0 de Mexico. Der. W.. 1979. Multi-intermediate goods trade: The gains and a Heck5cher-Ohlin analysis. American Economic Review 69, 575 -586. Leontief. W., 1953, Domestic production and foreign tr.ldc, The American capital position reexamined. Proceedings of the American Philosophical Society 97, 332. 349. Levy. S., 1980. Towards a Sraffian approach to the theory of international trade. Unpublibhed Ph.D. Dissertation (Boston University. Boston. MA 1. Pasinetti, L., 1973, The concept of vertical integration in economic analysis, Metroeconomica, 129. R~edel. J.. 1976. Intermediate productb and the theory of International trade: A generalization of the pure Intermediate good case, American Economic Review 66. 441 447. Schydlowsky. D., 1978, Competitive Imports in input output analysis: An endogenouh treatment, Mimeo. (Center for Latin American Dcvelcpment Studies. Boston University. Boston, MA). Sheahan, J.. 1971. Trade and employment: Industrial exports compared to import wbhtitution in Meu~co. Research Memoranda. no. 33 (Williams College, Williamstown. MA).