Wednesday, August 9, 2006

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The trouble with obsessing about exports

Adam Posen has a very good column in the Financial Times today (alas, subscriber only) about the folly that is focusing on export competitiveness. The highlights:

If governments want to increase their economies’ share of global production in high-value-added sectors or, better still, create new such products and sectors, then the policy goal should be to increase competitive pressure upon an economy’s own businesses. In spite of the frequently cited examples of export-led growth for some developing countries, there is mounting evidence that the benefits to growth of countries’ engagement in trade are attributable to openness. These include: the direct benefits of importing lower prices and greater variety; the efficiency gains from challenging (rather than protecting) domestic businesses; and policy choices that contribute to a broadly liberal and market-orientated framework across the economy. Exports taken on their own, the usual narrower target of com­petitiveness policy, are not correlated with average per capita income growth.

A focus on export competitiveness usually leads to actively harmful policies, beyond simply wasted resources and rhetoric. If exports are the public criterion of economic success, policymakers can meet that goal only by self-destructive means: depreciating a country’s currency, thus eroding the purchasing power and the accumulated wealth of citizens; depressing wages in export sectors, either directly or through relative deflation vis-a-vis trading partners, thus cutting real incomes and domestic demand; subsidising or protecting exporting companies, thus distorting investment decisions and locking in old technologies and businesses at the expense of new entrants; or promoting national champions, thus increasing both wasteful public spending and the costs to domestic households and businesses....

No example better illustrates the costs to an economy of distraction by export competitiveness than Germany in recent years. In fact, the very parts of the German economy that are most protected by over-regulation, publicly subsidised financing and unaccountable corporate governance – the much vaunted Mittelstand – use the export success of some of their companies to justify those protections. Yet, for all their exports, the resulting lack of consolidation or technical change in these sectors drives down productivity growth and returns to capital throughout the German economy.

Consequently, Germany’s successful export industries remain largely the same ones as 40 years ago, while global technological progress means these sectors have moved down the value chain. The dysfunctions of Germany’s corporate sector also mean almost no German companies have emerged in today’s growing high-technology and service sectors. By focusing on export totals rather than productivity growth, the country has brought about arrested development in its corporate sector.

This ties into a key political problem in reviving Doha -- the trade rounds are organized in such a way as to magnify the economic importance of exports. Edward M. Graham explained this in a op-ed last month that's worth highlighting:
[T]he notion that benefits come mostly from increased exports while increased imports are a "cost" that trade negotiators must try to minimize remains a lie. Rather, what is true is that the most immediate public benefits from a successful trade negotiation are actually created by import expansion. Such an expansion thus should be treated as a benefit—not a cost. It is via lower import prices and greater product variety that consumers benefit from trade expansion. In fact, the $287 billion of calculable benefits from the Doha Round as noted above come mostly from price reductions of imports. Indeed, almost two-thirds of this figure would result from lower prices of agricultural goods and elimination of efficiency-distorting subsidies to farmers. Much of the rest comes from lower prices of clothing. But to achieve this benefit, the trade negotiators and politicians behind them must be ready to take on the farmers and textile interests who oppose these negotiations. Moreover, the main reason the negotiations are failing is simply that trade negotiators from key "players"—the European Union, the United States, Japan, Korea, and others—are placing the interests of local farmers and textile producers over those of the general public. Farmers worldwide threaten to make noise if agricultural protection and subsidies are reduced. But the public at large seems indifferent to the possibility that a successful negotiation could lead to lower bills at the food store. Moreover, reform of trade in agricultural and textile-based goods could stimulate the export industries of some of the poorest countries.

Alas, in this round, there seems to be no export sector, at least not in the jurisdictions of the "big players," that is prepared to play the role of counterweight to the farmers and other import-competing sectors. So what can be done to reverse this situation? One possibility is that the time has come to end the lie, however useful it might have been historically, and simply tell the public what is really on the line: They stand to lose money because they will not see the lower prices of imports that could be achieved.

UPDATE: Mark Thoma has further thoughts.

posted by Dan on 08.09.06 at 11:04 AM


I disagree strongly with the statement about Germany. Top German export firms are among the best in the world, their engineering is absolutely top notch and they most definitely see a lot of technical change. I don't believe these sectors have moved down the value chain either.

Incidentally, Germany does have SAP which is most definitely a high technology company, and there are others as well.

The problem for Germany is not focusing on export competitiveness. It is probably the reverse in that the companies and company divisions not focusing on export tend to be much less efficient. Nor is it the case that German specialities have moved down the value chain as much as the fact that such meticulous engineering may not be in vogue for most products any more.

posted by: erg on 08.09.06 at 11:04 AM [permalink]

One problem with Posen's argument is that (western) Germany's labor productivity growth (driven in part by the low cost of capital and thus rapid investment) has been rather impressive since the end of World War II:


Germany 6.0%
USA 3.0%


Germany 2.1%
USA 1.1%


USA 1.9%
Germany 1.8%

posted by: Tom Geraghty on 08.09.06 at 11:04 AM [permalink]

I have no problem believing the FT analysis about openness being the key to good performance, but I think it misses the political bargains involved in having export-oriented and sheltered sectors.

Transitionig to an open economy might be beneficial in the long run, but there's a great deal of political costs on the short term. That short term might be longer than 4 years and thus it's very tough for any democratically elected government to sign her own death sentence.

Trying to strike a bargain where an export-oriented sector takes the avant-guarde role in the economy (precisely because it's not sheltered and open to market pressures-after all it's much harder to intervene in the international economy) while a sheltered sector provides the source of political support for the governent has been the basis for growth for many many countries; from Japan and other Asian Tigers to Germany.

Thus, the question isn't to shift from export led growth strategies to opening up the economy, but devising successful political strategies for the economic strategy to work.

If you find an answer, please tell me, I d like to know.

posted by: Nick Kaufman on 08.09.06 at 11:04 AM [permalink]

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