Forget about export-led growth. The global economy has changed everything. Leaders of countries locked in the economic doldrums need to understand that they never experienced “miracles,” nor can they count on one to resolve their problems. Quite simply, they must undertake radical restructuring of their domestic sectors. And the sooner the better if they wish to stabilize their economies as a prelude to recovery.
What will be the clearest sign of recovery? Do not look at export data. The best early sign is when imports begin to rise, indicating a strengthening of domestic spending.
Contrary to the conventional wisdom of previous decades, the new slogan should be “import to grow!” There has been an illusion that the advantages of trading derived from exporting. This view should have gone out of fashion with mercantilism. Instead, trade is advantageous in allowing producers and consumers to buy from the least-cost provider, thus enhancing efficiency as a basis for growth.
And this advice is not limited to emerging economies. The key to understanding this point of view is to look back at the impact that the high growth in exports from the East Asian economies had on U.S. industry. As it turns out, economies that were put on an export-led development path were damned by their good fortunes. Many were also distracted with high-growth targets instead of sorting out fundamentals to support their participation in the global market economy.
The logic of import-led growth is that allowing in foreign products will impose the pressures of competition upon domestic producers. In order to survive, domestic enterprises must become more efficient. When these improvements lead to gains in labor productivity, there will be higher wages that will eventually provide the basis for higher consumption. Productivity gains will also lead to lower unit costs that provide the basis for growth in profits that, in turn, enhance shareholders’ wealth, providing another boost to consumption.
And then, ironically, the benefits begin to extend to the international sector. Allowing inputs or intermediate goods to be imported for the export sector leads to lower operating costs. As costs fall and productivity increases, the ability to export rises. Rising profits allow domestic multinational enterprises to shop around for overseas production facilities and better sources of raw materials. Interestingly, these steps describe the U.S. economy and experience of American enterprises in response to the wave of competition that originated in East Asia during the 1980s.
So why were people misled in thinking that export-led growth was the best model for emerging economies? Quite simply, there was a misreading of the underlying causes of the successes of the East Asian “miracle” economies.
At the risk of sounding uncharitable, the East Asian experience of super-charged growth was a mixture of happenstance, circumstance and luck. In the first instance, their ability to export was based upon privileged access to uncontested markets in the mature economies in North America and Western Europe. In part, this openness was due to the realities of the Cold War. There were strategic reasons for wanting these key partners in Asia to become economically strong. In all events, their export volume was initially small and the quality was low so they inspired little opposition from trade unions and producers in receiving countries.
Besides finding ready markets for their goods, many of the East Asian economies relied upon an increasingly free flow of global capital that began with the recycling of petro-dollars in the early 1970s. At the same time, emerging economies had ready access to off-the-shelf technology that was changing at a relatively slow pace.
Now comes the hard part for emerging economies everywhere. Not only are neighboring countries locked in fierce competition, and often with the same type of goods, but other regions of the world are eagerly entering the fray of global competition. And the pace of change is quickening. Unlike in the past, where changes in technology or regulation came slowly, comparative advantage can now be lost in the wink of an eye.
Clearly the easy part is over for the economies of East Asia. Countries facing rigid conditions in their domestic economies, such as those imposed by Japan’s Ministry of Finance, have found their comparative advantages slipping away while traditional export markets become increasingly contested.
The sharp downturns from St. Petersburg to Sao Paolo to Seoul were caused by the purgative effect of global capital in discerning weak points in these economies. As weaknesses became conspicuous, there was a crisis of confidence in the stewardship of their respective governments to provide sustained economic growth, or perhaps even political stability.
A short-list of the underlying problems are: restrictions on imports, limits upon foreign ownership of domestic banks and enterprises, thinly traded and underdeveloped capital markets, bank lending motivated by policy rather than market-based risk assessment, inappropriate exchange-rate regimes and so on. Adding rigid labor markets to the above list provides a pretty good description of much of Europe. The implication is that there is likely to be some bad news ahead for the continent’s advanced economies. (And only time will tell if the already weakening euro was a wise move.)
Indeed, as the saying goes, global capital does not sleep. It will continue to test the economic structures of all countries around the world. Those with weaknesses will be subject to net capital outflows and will pay the price of economic slowdown. Only those economies with healthy and open domestic sectors will survive the tests. Policymakers in developed economies would do well to understand that the rigidities introduced by industry policy generate long-run costs in the form of slower growth and rising unemployment due to declines in productivity.
So, if you want to know which of the emerging economy(s) will recover the fastest, look to the one(s) with the most vibrant, open domestic sector and the fewest rigidities in their markets. And it will not be the ones that are trying to use government spending to boost domestic demand. As in the past, these measures are doomed to eventual failure.
Unfortunately, there are fewer candidates for rapid recovery than there are candidates that will suffer economic upheaval. Hold on to your hats for more turmoil in global markets, perhaps beginning in Europe by mid-1999.
Oh, and you can forget about seeing the sort of super-charged growth that some emerging economies experienced in the past. The best that most can hope for in the short term is for them to begin to stabilize before moving to a more modest long-term growth path — sometime later in the next millennium.
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