Over the last three decades there has been a dramatic shift in the stance of development policy with import-substitution being replaced by the export-led growth. A significant concern with this latter model is that it may risk turning global growth into a zero-sum game. This can happen if one country’s export growth comes by poaching of domestic demand elsewhere or by displacing exports of other countries.
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Rather than focusing on production for domestic markets, countries were advised to focus on production for export. This shift away from import-substitution toward the export-led growth was driven significantly by the economic troubles that emerged in the 1970s. At that time many developing countries, who had prospered under regimes of import-substitution, began to experience slower growth and accelerated inflation.
This led to claims that the import-substitution model had exhausted itself, and that the easy possibilities for growth by substitution had been used up.second factor fostering adoption of the export-led model was the shift in intellectual outlook amongst economists in favor of market directed economic activity. Import-substitution requires government provided tariff and quota protections, and economists increasingly came to portray these measures as economic distortions that contribute to productive inefficiency and rent seeking.
The shift in policy stance was also propelled by the empirical fact of Japan’s spectacular success in growing its economy in the twenty five years after World War II, and by the subsequent growth success of the four east Asian “tiger” economies – South Korea, Taiwan, Hong Kong, and Singapore. All of these economies relied on increased exports.
The problem is that the export-led growth model suffers from a fallacy of composition whereby it assumes that all countries can grow by relying on demand growth in other countries. When the model is applied globally in a demand-constrained world, there is a danger of a beggar-thy-neighbor outcome in which all try to grow on the backs of demand expansion in other countries, and the result is global excess supply and deflation. In this connection, it is not exporting per se that is the problem, but rather making exports the focus of development. Countries will still need to export to pay for their imported capital and intermediate goods needs, but exporting should be organized so as to maximize its contribution to domestic development and not viewed as an end in itself.
Export led growth model prompts countries to shift ever more output onto global markets, and in doing so aggravates the long-standing trend deterioration in developing country terms of trade. This pattern partakes of a vicious cycle since declining terms of trade and falling prices compel developing countries to export even more, thereby compounding the downward price pressure. This vicious cycle has long been visible for producers of primary commodities. However, as a result of the transfer of manufacturing capacity to developing countries who lack the consumer markets to buy their own output, the same process may now be present in all but highest-end manufacturing.
In the 1950′s, Western opinion leaders found themselves both impressed and frightened by the extraordinary growth rates achieved by an Eastern economy, although it was still substantially poorer and smaller than those of the West.
The speed with which it had transformed itself from a peasant society into an industrial powerhouse, and it’s perceived ability to achieve growth rates several times higher than the advanced nations, seemed to call into question the dominance not only of Western power but of Western ideology.
The leaders of that nation did not share Western faith in free markets or unlimited civil liberties. They asserted with increasing self-confidence that their system was superior: societies that accepted strong, even authoritarian governments and are willing to limit individual liberties in the interest of the common good, take charge of their economies, and sacrifice short-run consumer interests for the sake of long-run growth that would eventually outperform the increasingly chaotic societies of the West.
China’s economic growth has averaged 9pc a year over the past 10 years, compared with a paltry 1.9pc for the British economy. Last year, despite the credit crunch, China posted a remarkable growth rate of 10.7pc against a British contraction of 3.2pc.some are extrapolating present trends forward, and proclaiming that China will usurp the United States as the world’s largest economy.
However, in the absence of expanding foreign demand for its exports, it has instead come to rely on a massive surge in domestic bank lending to fuel its growth rate. When measured relative to the size of its economy, the 27pc point jump in bank loans to GDP is unprecedented; at no point in history has a nation ever attempted such an incredible increase in state-directed bank lending.
This appetite for cheap Chinese exports, which had at one point seemed insatiable, means that the West has come to owe China over 2 trillion $. China has become the world’s biggest creditor, but creditor nations running persistent trade surpluses has two historical examples. The US economy in the Twenties and the Japanese economy in the Eighties.
In both of the previous examples a failure to allow exchange rates to adjust to the new reality created a large speculative pool of credit that, in turn, led to overvalued domestic assets and, eventually, an economic crisis.
The banks in China are lending money at breakneck speed, but China’s state planners have favoured investment over consumption. High-speed rail networks, first-class infrastructure projects and the urban migration of 55 million people every year are common explanations for the ability of the nimble Chinese to overcome the frailties of this global economy. But the goal of economic policy, is to maximise households’ wellbeing and consumption. Unfortunately, and China’s share of consumption within its economy has fallen relentlessly, reaching 35pc of GDP in 2008.
In China, investment spending has tripled since 2001 and the consequences are staggering. A country that represents just 7pc of global GDP is now responsible for 30pc of global aluminum consumption, 47pc of global steel consumption and 40pc of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment. Over-capacity inevitably plagues many sectors of the economy and Chinese profitability is already low.
The story in China has been one of imperiled, marginally profitable enterprises relying on generous state-provided incentives for utilities, credit, etc. now having to deal with slowing global demand. The drying up of trade finance isn’t helping, either. The giant stimulus worldwide, and especially in China, helped the world economy for one year but that has now dried up.
Filed under: Asia, China, Energy & Environment, Hong Kong, News, Risk Management, Asia, Asia Strategy, Black Swan, Capital Markets, China 中国, Commodities, Confidence Crisis, Currency, Currency Crisis, Economic Crisis, Financial Crisis, Forecast 2011, FX Foreign Exchange, Hong Kong, Japan, Kenneth Rogoff, Marc Faber, Pronósticos, Real Estate, Risk Management, SinoRock
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