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Export-led growth?

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Two piece in the Wall Street Journal challenge the idea that export-led growth is the path to economic success. Amar Bhide writes,

The Indian software industry now employs around half a million professionals. Under optimistic projections, the industry will add another half million in the next seven years. But over the same period, 14 million students will graduate from Indian colleges. And of the more than half a billion Indians under the age of 25, most have not, nor ever will, attend college. Even in Bangalore, often called the Silicon Valley of India, nearly two out of three students in primary schools won't even go on to high school.

As with any large country, the long-run prospects for the Indian economy turn on the productivity of its domestic sector. Only city-states like Singapore can export most of what they produce and import most of what they consume. For India, the low productivity of its domestic industry has impoverished it for centuries.

In a review of William Lewis' The Power of Productivity, a book about how Wal-Mart and other retail competitors contribute to productivity growth, Hugo Restall writes,

Retailing is largely overlooked in countries like Japan and Germany, which suffer from a producer mentality, ignoring the value added between assembly line and store shelf. In Japan and Korea, regulation stymies efficiency gains by preventing large-scale stores from driving the mom-and-pops out of business. When Russia opened up, Carrefour and Wal-Mart didn't even bother entering the market because they knew high tariffs and taxes meant that they couldn't compete against local retailers who flout the laws. Britain's retail industry is becoming more efficient, but only slowly, because restrictions on redevelopment make it difficult for the big stores to find space. In America people gripe about Wal-Mart, but by and large government allows it to roll on.

...Competition is unlikely to take off in poor countries until the scourge of big government is brought under control. Mr. Lewis notes that governments in Brazil, Russia and India spend more than 30% of GDP, while the U.S. and European countries, at a similar stage of development, spent less than 10%. High tax rates lead to a large informal economy, which means that an even heavier burden falls on legitimate businesses.

For Discussion. Why is export-led growth likely to prove more popular politically than its economic value would warrant?

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COMMENTS (5 to date)
amcguinn writes:

Not an answer, but a related question: why is Foreign Direct Investment more popular politically than domestic investment?

DSpears writes:

I think a lot of this mentality is a relic of the old gold standard. Back then, when you sold an export you received gold in return, gold which could be kept and spent in your home country. Essentially the country is richer. On the flip side there was no reason that gold sent overseas to buy imports would ever come back. The Universal convertability of gold was the reason.

In the world of Fiat currency the only way for a foreigner to utilize his dollars that he received from exporting his goods (selling them to an American for instance) was to either exchange them for his currency, which could be profitable or un-profitable depending on the exchange rate, buy a good or service in return denominated in dollars, or invest in an American security.

One way to look at America's "trade deficit" is that foreigners are investing in America's long term productivity instead of simply consuming goods from American producers. The exchange rate and the relative health of the economies of America and it's various trading partners, and the relative attractiveness of American investment returns vs. our trading partners will all affect this balance.

America's "trade deficit" simply reflects the fact that our economy is growing at a faster sustained rate than our trading partners, American investments are viewed to be more profitable over the long haul (mainly due to our growing economy).

Another factor is the relative amount of trade protection that our various trading partners give to their industries through tariffs, quotas, and regulations vs. the lesser amount given to American industry. What this essentially means is that the governments (and thus the taxpayers) of these nations are essentially paying us to buy their goods. In return, they invest in the long term productive capacity of America's workers and industries.

The domestic price competition from these imports keeps prices down in the US, allowing for greater economic growth with less inflation and lower market interest rates that accompany low inflation.

So why would we want to change that? Some people argue that exporting of manufactured goods is the only way to create real economic growth. But that's the same argument made about agriculture in the 18th century, when manufacturing was looked at as "un-productive".

Look at the many countries around the globe who employ mecantilist policies like Japan, and most of Europe. Europe hasn't created any net employment in decades and Japan is just coming out of 10 years in the wilderness where everything they tried to increase inmports couldn't save them. Japan's biggest export market, America, was booming during the 1990's and Japan was exporting massive amounts of goods to the US with an ever growing trade surplus. But it didn't lift them out of their depression. Far from it. The mercantilist restraints they put on their domestic productivity in order to favor their export industries was the cause of their depression, not the way out.

Lawrance George Lux writes:

No serious economic study has examined the gross and net higher costs of Export goods over domestic goods. We are talking about Transportation costs which exceed in larege measure domestic goods transport costs. There is the enlarged Distribution and networking costs of Retailing foreign goods. There are the adaption costs for foreign goods to sell in a domestic market. The above all diminish the economic value of Export-led growth. lgl

Yasser writes:

"Why is export-led growth likely to prove more popular politically than its economic value would warrant?"

Governments focus on export-led growth because the alternative - namely, trying to boost the domestic economy - would entail dismantling the very socialist structures the government and the electorate are bent on preserving.

Moreover, domestic-based growth often involves running a trade deficit - and therefore borrowing from abroad. That would place the country at the mercy of foreign investors, many of whom may not look kindly on statist policies that lead to low future growth. There would also be the possibility of capital account dislocations, a major issue for a sclerotic economy running a current account deficit.

Naturally, a government that is unwilling to shed the socialist mantle would not countenance the above. Promoting export-led growth and aiming for a current account surplus is therefore the most viable option, as the government can then pursue its statist agenda unmolested by foreign investors.

sUDHIR writes:

Govts have got it all wrong. In the ultimate analysis, social welfare maxes deriving the largest proportyion of its value from local/ domestic economic microcosms. All this export thing might simply be overrated. As long as you haven't saturated employment in your local microcosm, you can always create more value within that space before trying to invest surpluses outside.

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