Thursday, October 30, 2008

On export - led growth and the risks of large trade surpluses

Today in class we discussed whether a trade surplus is 'good' and the discussion drifted into the idea of export - led growth that many sucessful developing countries have followed during the past few decades.

"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."
The above quote is from an article by Dani Rodrik titled "Is Export Led Growth Passé?".
"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 question is why? Rodrik goes on to explain:
"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."
So, a slow down in the US and Europe implies a decrease in the import absorbing ability of these countries and thus slower export growth for the developing nations group. In addition,
"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."
Notice the sentences in italics. This is exactly what we said in class this morning.

All IB economics students (higher and standard level) should read the whole article carefully and it can be found here.

Dani Rodrik's homepage at Harvard is here. Click on the Commentary link on the left hand side of the page to read interesting and (to some extent) accessible stuff for our IB course.

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