Sun, Sep 14, 2008 page8

• Rethinking export-led economies

  • By Dani Rodrik
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  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 1960s, Southeast Asian countries like Malaysia, Thailand and Singapore in the 1970s, China in the 1980s and eventually India in the 1990s.

  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 US are both entering recession and fears are mounting that the financial meltdown accompanying the subprime 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 US$631 billion last year, split roughly equally between Asian countries and the oil-exporting states. This amounts to 4.2 percent of their collective GDP. The US alone ran a current-account deficit of US$739 billion (5.3 percent 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 percent 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 the US 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.

  Dani Rodrik, professor of political economy at Harvard University’s John F. Kennedy School of Government, is the first recipient of the Social Science Research Council’s Albert O. Hirschman Prize.

  COPYRIGHT: PROJECT SYNDICATE
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