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Import-Led Growth

Posted By Don Boudreaux On February 25, 2013 @ 8:43 am In Myths and Fallacies,Trade | Comments Disabled

Yesterday evening I received an e-mail from Justin Yang, a high-school student in Los Angeles, asking me to elaborate on why I object to government policies designed to promote economic growth through exports.  I made a mental note to ponder how best to respond to Mr. Yang, which I’d originally intended to do only through private e-mail.  But then I cuddled up in bed last night with Chris Wickam’s 2009 volume, The Inheritance of Rome [1].  While Wickham’s work is masterful and deeply enjoyable, I noted that back on page 40 he wrote that the economies of Tunisia and of Syria/Palestine, circa the 5th century A.D., “depended substantially on exports for their prosperity.”

Many people – high-school teachers, celebrated historians, politicians, the list is long – are convinced that nations can grow wealthy through exports.

This belief is nonsense.  Or, more precisely, this belief in “export-led growth” is nonsense without further elaboration in which the benefits of exports are revealed to be the imports they make possible, and exports themselves are explicitly reckoned as, and recognized to be, costs – that is, without further elaboration to make clear that exports are valuable only because they enable people to increase their imports.

But because so many people talk and write endlessly about “export-led growth” or “successful economies built on exports” – and because the economically untutored mind seems to be a natural host for parasitical mercantilist myths in which exporting generally was indeed considered to be valuable in and of itself – it’s worthwhile to explain why exporting per se is no means of growth.  The explanation is simple.  Here are some alternative scenarios.

First scenario: American producers employ labor, capital goods, and raw materials to produce goods that are routinely loaded onto big cargo ships – themselves American-made – and then just as routinely sunk, along with the cargo ships, in the middle of the ocean.  Lots of exports in this case.  No imports.

Does anyone suppose that these exports will lead to growth?  No.  It’s obvious even to the most ardent and misinformed protectionist that a policy of routinely sinking American-made goods into the ocean is a recipe for impoverishment and not for prosperity.  (Caveat: it’s true that some Keynesian economists regard such a policy to be productive during times of slack demand.  But let’s ignore that issue here and focus, not on short-run macroeconomic issues, but on longer-run questions of economic growth.)

Second scenario: American producers employ labor, capital goods, and raw materials to produce goods that are routinely loaded onto big cargo ships.  These ships sail safely to foreign ports.  The American-made goods are unloaded, but Americans refuse to take payment in exchange.  We give these goods to foreigners.  Once again, no one of sense would identify such a policy as one that promotes economic growth in the U.S.

Third scenario: American producers employ labor, capital goods, and raw materials to produce goods that are routinely loaded onto big cargo ships.  These ships sail safely to foreign ports.  The American-made goods are unloaded, and in exchange Americans receive money – Australian dollars, euros, yuan, yen, rubles, you name it.  When this money is sent to America, Americans burn every last note of it to ashes.  I here refrain from speculating on the likelihood that “no one would identify such a policy as one that promotes economic growth in the U.S.” – but, in fact, no one of sense would identify such a policy as one that promotes economic growth in the U.S.”  Goods exchanged for ashes is a poor deal for the ash recipients.

Fourth scenario: American producers employ labor, capital goods, and raw materials to produce goods that are routinely loaded onto big cargo ships.  These ships sail safely to foreign ports.  The American-made goods are unloaded, and in exchange Americans receive money – Australian dollars, euros, yuan, yen, rubles, you name it.  When this money is sent to America, Americans stash every last note into their mattresses, safes, and lock-boxes.  Spending such money, it is reasoned by many, would be harmful to the American economy.

As in the first three scenarios, Americans’ trading practices in this case will only make Americans poorer, not richer.  Such trading practices will not “lead” growth.  Such trading practices – aimed at maximizing exports and minimizing imports – cannot possibly be ones on which to build long-term, sustained, wide-spread prosperity in America.  Giving stuff away and receiving in return only paper (or digital entries in bank accounts) never to be spent impoverishes; it doesn’t enrich.

Fifth scenario: American producers employ labor, capital goods, and raw materials to produce goods that are routinely loaded onto big cargo ships.  These ships sail safely to foreign ports.  The American-made goods are unloaded, and in exchange Americans receive money – Australian dollars, euros, yuan, yen, rubles, you name it.  When this money is sent to America, Americans eventually spend it in Australia, Europe, China, Japan, Russia, you name the foreign location.  The more Americans export, the more Americans can import.  And that – the ability to import – is the point of trade.  In the ability to import lies the purpose and value of exporting.

So when, for example, historian Chris Wickham writes that some late-empire-period economies ”depended substantially on exports for their prosperity,” what he must mean (whether he knows it or not) is that those economies depended substantially on trade for their prosperity.  Trade, not exports.  Mr. Wickham could just as accurately – indeed, more accurately – have written about these economies that they “depended substantial on imports for their prosperity.”  To the extent that exports played an important role in creating prosperity for denizens of those economies, exports played that role only insofar as exports enabled the denizens of those economies to enjoy more imports.  The prosperity is found in the increased consumption made possible by greater imports.

Greater exports are indeed an indispensable means of increasing a people’s consumption through imports.  It is, however, highly misleading – it promotes the worst sort of economic fallacies and, hence, it promotes destructive policies – to speak of exporting as being the source of prosperity.  Trade in such cases is the source of prosperity, not exporting per se.

So to young Mr. Yang – and to everyone – I ask that every time you encounter phrases such as “export-led growth” or “economy built on exports” that you hear or read these phrases in your mind as “trade-led growth” or “economy built on trade.”  The reason, again, is that the economic improvement at home is found not in the sending of stuff to strangers, but in the receiving of stuff from strangers.  Exporting can be a means to prosperity – and an important means, to be sure – but exporting itself is not what makes people wealthy; rather, trade – the receiving of valuable goods and services in exchange for exports – is what makes people wealthy.

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