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Monday, 15 September 2008

Is Export Led Growth Passé?

Dani Rodrik argues in his latest piece for Project Syndicate that changes in the world economy, may be the death of the export led growth model. A disappointingly light treatment by Rodrik, since all it does it tell us what we already knew and offers no deep alternatives. I was also puzzled by the lack of acknowledgement of China's increasing role in creating these export processing zones across much of the African continent, and therefore who actually bears most of the risk of poor market conditions. There's also the issue f the current momentum for regional integration, which is not sufficiently addressed. (See a previous blog on Zambian MFEZs) :

Is Export Led Growth Passé?, Dani Rodrik, Project Syndicate, Commentary :

For five decades, developing countries that managed to develop competitive export industries have been rewarded with astonishing growth rates: Taiwan and South Korea in the 1960’s, Southeast Asian countries like Malaysia, Thailand, and Singapore in the 1970’s, China in the 1980’s, and eventually India in the 1990’s.

In all these cases, and a few others — also mostly in Asia — domestic reforms would surely have produced growth regardless of international trade. But it is difficult to see how the resulting growth could have been as high — reaching an unprecedented 10 percent or more annually in per-capita terms — without a global economy able to absorb these countries’ exports.

Many countries are trying to emulate this growth model, but rarely as successfully because the domestic preconditions often remain unfulfilled. Turn to world markets without pro-active policies to ensure competence in some modern manufacturing or service industry, and you are likely to remain an impoverished exporter of natural resources and labor-intensive products such as garments.

Nevertheless, developing countries have been falling over each other to establish export zones and subsidize assembly operations of multinational enterprises. The lesson is clear: export-led growth is the way to go.

But for how long? While reading the economic tea leaves is always risky, there are signs that we are at the cusp of a transition to a new regime in which the rules of the game will not be nearly as accommodating for export-led strategies.

The most immediate threat is the slowdown in the advanced economies. Europe and the United States are both entering recession, and fears are mounting that the financial meltdown accompanying the sub-prime mortgage debacle has not worked itself out. All this is happening at a time when inflationary pressures hamper the usual monetary and fiscal remedies. The European Central Bank, tightly focused on price stability, has been raising interest rates, and the US Federal Reserve may soon follow suit. So the advanced economies will suffer for a while, with obvious implications for the demand for exports from emerging markets.

On top of this is the almost certain unwinding of global current-account imbalances. Emerging markets and developing countries ran a surplus of $631 billion in 2007, split roughly equally between Asian countries and the oil-exporting states. This amounts to 4.2% of their collective GDP. The US alone ran a current-account deficit of $739 billion (5.3% of its GDP). Neither the economics nor the politics of this pattern of current-account balances is sustainable, especially in a recessionary environment.

The politics is clear to see. Nothing works as potently to inflame protectionist sentiment as large trade deficits. According to a December 2007 NBC/Wall Street Journal poll, almost 60% of Americans think globalization is bad because it has subjected US firms and workers to unfair competition.

If globalization has acquired a lousy reputation in the US, the external deficit deserves much of the blame. US trade policy has been remarkably resistant to protectionist pressure in recent years. But, regardless of who wins America’s presidency, the world should expect closer scrutiny of imports from China and other low-cost countries as well as of outsourcing of services to places like India.

As the US and other advanced economies become less hospitable to developing-country exports, rapidly growing emerging markets, help as they may, are unlikely to take up the slack and thus provide ample fuel for export-led growth. Import tariffs tend to be higher in developing countries, making it more difficult to gain access to them. Moreover, developing countries compete in similar products – consumer goods of varying levels of sophistication – so that the politics of expanded South-South trade looks even worse than the politics of North-South trade. Anti-dumping action against imports from China, Vietnam, and other Asian exporters is already commonplace in developing countries.

So exporting will become an even tougher business. Countries like China that have large surpluses will have to rely much more on domestic demand to fuel their economies. This is not all bad, because China can certainly use more public investment in social sectors such as health and education.

But the impact will extend beyond the surplus countries. If exporters from Brazil, Turkey, South Africa, and Mexico – all deficit economies – were already struggling to compete with China in third markets when those markets were wide open and expanding rapidly, imagine how they will fare under less hospitable conditions.

The impact on growth will almost certainly be negative, even if domestic demand compensates fully for the decline in external demand. The reason is microeconomic, not macroeconomic: you can sell only so much steel or auto parts at home, and labor productivity in service industries does not match that of export-oriented activities. So shrinking export markets will slow down growth-promoting structural change at home.

None of this implies a disaster for developing countries. Long-term success still depends on what happens at home rather than abroad. What is moderately bad news at the moment will become terrible news only if economic distress in the advanced countries – especially the US – is allowed to morph into xenophobia and all-out protectionism; if large emerging markets such as China, India, and Brazil fail to realize that they have become too important to free ride on global economic governance; and if, as a consequence, others overreact by turning their back on the world economy and pursue autarkic policies. Absent these missteps, expect a tougher ride on the global economy, but not a calamity.

7 comments:

  1. What could happen is that as labor costs in China rise, more manufacturing could shift to lower labor cost countries such as Vietnam and even parts of Africa. So there would still be export led growth, but just in different parts of the world.

    http://www.businessweek.com/magazine/content/06_13/b3977049.htm

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  2. Cho,

    Check this out. THis guy is argueing for stimulating the economy by raising wages and preventing workers from competing against eachother around low wages - following the lead of Henry Ford.

    Economics For Democrats

    ReplyDelete
  3. Henry Ford's lead would not work now, because there are too many countries with low paid workers competing for manufacturing jobs. Only when surplus labor is absorbed by economic growth will wages naturally rise because of decreased supply of workers. Which is what is happening in China now.

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  4. Kafue001,

    Henry Ford's lead would not work now, because there are too many countries with low paid workers competing for manufacturing jobs.

    It would work under any circumstance.

    The (corporate) notion is that businesses only compete on the basis of low wages. However, there are a lot of other ways to incentivize business (taxes, location, unique offerings such as Zambia's unique copper and cobalt deposits).

    Also, the presumption is that we can only attract foreign manufacturing companies to set up in Zambia.

    Instead, the government can create manufacturing companies itself, by attracting technical expertise.

    Or it can buy foreign manufacturing companies and move them to Zambia.

    There are so many possibilities outside of the 'we need to attract foreign corporations to Zambia' model.

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  5. Mr K,

    "However, there are a lot of other ways to incentivize business (taxes, location, unique offerings such as Zambia's unique copper and cobalt deposits)."

    True, but labor costs are a major factor. And would other countries not also offer other incentives of their own as well?

    Mr K,
    "Also, the presumption is that we can only attract foreign manufacturing companies to set up in Zambia. Instead, the government can create manufacturing companies itself, by attracting technical expertise. Or it can buy foreign manufacturing companies and move them to Zambia. "

    True, but for that Zambia needs competitive advantage (as opposed to comparative advantage)

    "Lessons for Africa based on Malaysia’s experiences It is a common view of policy-makers in Africa and advisers from donors thatcomparative advantage is an important and essential factor for a country’s eco-nomic development. However, comparative advantage is not the key. It is com-petitive advantage that is the most essential element for development. In simple terms, comparative advantage depends on factors like a country’s naturalresources and location, so the country has no choice in the matter, while com-petitive advantage must be fostered by man to make full use of comparativeadvantage. For competitive advantage to develop, there is a need for maximum coopera-tion, efficiency and incorruptibility among the forces that initially make up aTOH."(triangle of hope)"

    http://www.grips.ac.jp/forum-e/DCDA/Chapter08.pdf

    So if Zambia is able to achieve competitive advantage, then your proposition could succeed. If not, then attracting foreign corporations to Zambia is an alternative method of development, and these corporations may be able to attract capital to Zambia more easily as well.

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  6. Kafue001,

    "Lessons for Africa based on Malaysia’s experiences It is a common view of policy-makers in Africa and advisers from donors thatcomparative advantage is an important and essential factor for a country’s eco-nomic development.

    I would go further than that. Not only should we not be looking at competitive or comparative advantages, we should not use Malaysia (or Singapore, or Hong Kong) as examples at all.

    We should be using Japan, South Korea, China or India as models. These countries are much more similar to Zambia with it's landmass, natural resources, population size and history, than neoliberal exceptions like these tiny trade oriented 'Asian Tigers', which are island or city states.

    Also, I don't think looking at competitive advantage is going to be the key. What we should be looking at is not economic theory, but concrete models that can be adjusted to local Zambian conditions or even just look at past successes in Zambia to understand why certain policies are successful.

    I think we can sidestep any kind of international 'competitive advantage' by focusing on saturating domestic markets. We can protect domestic producers by instituting tariffs to make imported products more expensive than domestically produced products, limiting tariffs to only products that are domestically produced, which would also minimize the effect on inflation. That would also help attract foreign businesses and encourage them to manufacture within Zambia.

    I think we can create domestic markets, by making sure people earn more. To do this, there are lots of options, of which these are a few:

    1) Use money from the mines to create infrastructure

    If we used hundreds of millions in mining revenues to hire the Zambian National Service and Chiefs to pay people (say, $5,- per day, up from the $1,- per day most people live on), to build feeder roads, works that make productive use of rainfall for agriculture and prevent flooding, highways, build thousands of 100 hectare farms, etc. These works projects would both improve infrastructure and put money in people's pockets, which they can then spend on consumer products. This was the idea of Henry Ford, that his workers should make enough money to afford to buy the cars they made. He created a guaranteed domestic market for his own product.

    2) Require a minimum wage from foreign companies doing business in Zambia

    Especially the mines could pay a lot more to their workers. And if you realize that the minimum wage in the US is $5,- per hour, require a US company to pay workers 50% or 80% of their domestic minimum wage. That way, these companies would also not be as tempted to move factories from the West to low wage countries. If this was done in coordination with the EU, NAFTA, SADC and other regional blocs, this would guarantee a good minimum wage worldwide. Corporations would no longer be able to play one country's high labour standards against a country with poor labour standards. This would remove wages as a 'competitive advantage' worldwide.

    3) Create tens of thousands of 100 hectare commercial organic farms

    This would revolutionize agriculture in Zambia and Africa. It would create farmers with an annual income of at least $10,000 per year, evenly dispersed throughout the country, in rural areas. This would give them enough disposable income to pay for services, which would require professionals, etc. There would also be spin-off businesses, in horticulture, agro-forestry, livestock raising. This in turn would create the opportunity for manufacturing companies to make use of agricultural surpluses. Instead of exporting hides, Southern Province (for instance) could export leather products - clothing, handbags, etc. First nationally, then regionally.

    4) Start producing our own energy

    Every time Indeni shuts down, the country is reminded how inefficient it is to rely on a single refinery that works imported fossile fuel that must be paid for in foreign currency. Zambia should be producing it's own biofuel, and switch to solar energy. There already exist solar panels and gadgets that allow you to collect solar energy, turn it into electricity, and feed the surplus electricity generated back into the mains. In theory, this could give households a negative energy bill (they would in fact receive money from the electricity company). This can only increase when photovoltaic cells become more efficient - which is going to revolutionize Africa even more than mobile phones have. PV cells should be built and installed by domestic companies.

    Conclusion

    We should be turning away from the notion of export-led growth, and turn towards production led growth that would involve and benefit the entire population. Producing for local, national and regional markets would also stabilize the economy, reduce effects of differences in exchange rates, reduce Zambia's vulnerability to the global economy (exaggerated from depending on the export of minerals), promote local wealth creation, recirculate the currency many times over before it leaves local communities, etc.

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  7. Mr K,

    "Not only should we not be looking at competitive or comparative advantages, we should not use Malaysia (or Singapore, or Hong Kong) as examples at all. We should be using Japan, South Korea, China or India as models. These countries are much more similar to Zambia with it's landmass, natural resources, population size and history, than neoliberal exceptions like these tiny trade oriented 'Asian Tigers', which are island or city states."

    Actually, Malaysia has quite a big landmass and twice Zambia's population. Also has mineral resources like Zambia and was poor like Zambia is today.

    Mr K,
    "I think we can sidestep any kind of international 'competitive advantage' by focusing on saturating domestic markets. We can protect domestic producers by instituting tariffs to make imported products more expensive than domestically produced products, limiting tariffs to only products that are domestically produced, which would also minimize the effect on inflation. That would also help attract foreign businesses and encourage them to manufacture within Zambia.
    1) Use money from the mines to create infrastructure
    2) Require a minimum wage from foreign companies doing business in Zambia
    Especially the mines could pay a lot more to their workers. And if you realize that the minimum wage in the US is $5,- per hour, require a US company to pay workers 50% or 80% of their domestic minimum wage. That way, these companies would also not be as tempted to move factories from the West to low wage countries.
    3) Create tens of thousands of 100 hectare commercial organic farms
    4) Start producing our own energy"


    Tariffs work in the short term, however in real life they result in smuggling of cheaper products from the many neighbouring countries. Also the lack of competition can lead to inferior products (like in former Soviet Union).

    Cross subsidies such as using money from mines to create infrastructure is possible in the short term, however who will pay to maintain the infrastructure in the long term? Without sustainable industries generating tax revenue, the infrastructure will fall apart.

    Requiring a minimum wage of 50% or 80% of the foreign wage would simply mean the foreign businesses would go to countries without such requirements, since we live in a global competitive economy.

    Creating thousands of organic farms is not the problem, the problem is making them self sustaining in the long run. Unless they are inherently profitable, they will only survive with subsidies.

    In the West, without tax credits, solar firms would not be able to survive.

    So your circular economic theories all require subsidies to be able function. In rich countries such as the Gulf Arab nations, this is possible. However in poor countries such as Zambia, its competitive advantage needs to be developed and market friendly policies need to be established to attract global capital for sustainable industries in the long run, since subsidies from mines may not be sufficient in amount and not last forever.

    ReplyDelete

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