On Export-Led Growth

by Don Boudreaux on January 6, 2008

in Myths and Fallacies, Trade

The January 5th edition of The Economist reports that China’s recent economic growth is less dependent upon exports than is commonly believed.  Reflecting on the widespread mercantilist myth that countries can prosper by exporting as much as possible and importing as little as possible led me to send the following letter to The Economist:

It’s no surprise that
"Contrary to popular wisdom, China’s rapid growth is not hugely
dependent on exports" ("An old Chinese myth," January 5).  Just as no
individual prospers by giving the fruits of his labor to others in
exchange only for pieces of paper that he never spends, no group of
people – including the Chinese – prospers by such a foolish strategy.

Exports
are costs.  They promote economic growth only if, in return, the
exporters receive goods, services, and assets that improve their living
standards and their capacity to produce.  Any country that insists on
exporting its produce and importing in return as little as possible is
on a certain path to poverty.

Sincerely,
Donald J. Boudreaux

Yes, yes.  Accumulating money might be a prosperity-enhancing strategy — but only if that money is eventually spent.  If it is never spent, all the exports shipped abroad in order to gather all this money turn out to be gifts given to foreigners.  Any people foolish enough to permit their government to enforce such a strategy will enrich others and impoverish themselves.

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{ 11 comments }

andy January 6, 2008 at 10:59 am

Any people foolish enough to permit their government to enforce such a strategy will enrich others and impoverish themselves.

And that is exactly what foreign governments do with the USA by pegging their currencies to the greenback. It begs the question: what happens when they figure it out?

OregonGuy January 6, 2008 at 12:45 pm

"Load the boats, then sink them"?

It is this kind of thinking that has made watching Lou Dobbs impossible.

Pegging to the dollar? My thoughts here.

joe blowe January 7, 2008 at 12:12 am

When China receives the money in exchange for their exports, they have to invest this money in the global economy. It is not put into a mattress…
Should money not be treated as a 'good' traded in the market? I am having trouble visualizing what happens next in the money trail. I'd love to read your comments on that.

andy January 7, 2008 at 4:14 am

When China receives the money in exchange for their exports, they have to invest this money in the global economy. It is not put into a mattress…

They don't have to. Normal people are very likely to invest it/buy something with the money, because keeping it in the mattress doesn't make sense. However, we are not talking about normal market, we are talking about government.

Pegging the currency is roughly equivalent to putting money into the mattress (in this case). If they ceased to fix the exchange rate and the USA would still have large trade deficit then I would agree that your argument is valid. However – they do peg. If you ask why, most people tell you: because they need to export to the USA … which appears to be dangerously close to Don's argument.

thehova January 7, 2008 at 5:19 am

Yes, to us outsiders, Chinese monetary policy appears irrational. But we do live in a stable democracy.

Right now, the Chinese government purchases US bonds as an investment in stability. Many experts ponder if China can continue to grow without a serious political and economic setback. Such a setback will threaten the very foundation of China's future growth.

When one looks at the past 100 years of Chinese history, it's understandable why China desires stability, even at heavy short term economic cost.

andy January 7, 2008 at 1:00 pm

When one looks at the past 100 years of Chinese history, it's understandable why China desires stability, even at heavy short term economic cost.

Maybe we should ask Don to answer this argument for pro-export policy…

Deane January 7, 2008 at 3:04 pm

Just to get your answer to a common argument,

so Right I export something, I get money in return. For things I need and what can be produced in my country(not necessarily more cheaply) I buy it from here and only import stuff which cant be produced cheaply here.

The argument goes on to say, yes even though i loose out on not getting exactly what i want, as a result of my sacrifice my country gets richer because a local producer gets my money instead of someone in another country.

the argument can be extended to say, that even though that particular product i want is expensive here (or of a less quality) than in the world market, given enough time the local producer would reach economies of scale, technological imporvements, so on and be able to produce a better product perhaps more cheaply than the guy in the other country, thus we would have created another industry of stuff we can export to others coz now its more competitive in the world market.

People can point to the Auto industry in India. Because the market was protected from cheap/better vehicle imports from Japan it can have a local auto industry which can be competitive overseas..

how would one respond to this?

i know the cost savings from getting a cheap import is one..

Deane January 7, 2008 at 3:07 pm

in the first paragraph i meant to say "only import stuff which cant be produced here." not "cheaply produced here" as appears in the comment.

John Dewey January 7, 2008 at 7:17 pm

"that even though that particular product i want is expensive here (or of a less quality) than in the world market, given enough time the local producer would reach economies of scale, technological imporvements, so on and be able to produce a better product perhaps more cheaply than the guy in the other country"

Where is the incentive for the local producer to improve his product or lower his price? Why should a protected and profitable industry try to get better?

as a result of my sacrifice my country gets richer because a local producer gets my money instead of someone in another country.

How is a nation richer when its consumers overpay for an inferior good? If the domestic auto producers are not efficient and effective manufacturers of autos, then the nation, and the world, is far better off if they are forced to find something at which they can compete.

Suppose a Japanese or Korean automobile company wishes to open a factory in India and produce higher quality automobiles? Why shouldn't the Indian consumer be allowed access to those higher quality automobiles? That's exactly what has happened in the U.S.

What was the result of Asian competition in the U.S. auto market? GM and Ford were forced to compete with Asian auto makers. Competition forced dramatic improvements in U.S. automobiles. Anyone who has been a driver the past 30 or 40 years knows this is true.

Deane January 8, 2008 at 6:25 am

Thank you John,

Agreed. But there is a school of thought which says that India has (and it does have) a viable auto industry with the ability to compete with Toyota's, Nissan's and so on because they were protected from competition from japan.

Couldn't the incentives be provided by competition in the domestic market?

I agree though, even though the motor-companies benefited consumers buying expensive inferior quality products the consumers lost out.

But its often the case here in the "developing world" that consumers go for MORE expensive imported goods over the cheaper local good of the same commodity because of higher quality in the imported items.

In instances where higher quality doesn't necessarily lead to higher productivity, or the import is not used in production.. say in the case of potato chips or chocolates. Would "buying local" make sense?

For example there was a famous slogan at one election time in India, saying "Yes for Computer Chips No for Potato Chips" referring to imports.

John Dewey January 8, 2008 at 6:16 pm

Deane,

You seem to imply that having a viable auto industry – meaning an Indian-owned automobile industry – is more important than allowing Indian consumers the freedom to buy the vehicles they wish to buy. Why? Wouldn't Indian consumers have benefitted if Toyota, Nissan, GM, and Ford had been allowed to build plants there in the 1950's, 1960's, 1970's, and 1980's?

What's the name of that government-owned Indian manufacturer? Marudi? Did India really have a viable auto industry when they had a majority share? Aren't they now owned by the Japanese anyway?

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