Symposium: Can export-led growth succeed indefinitely?

Symposium: Can Export-led Succeed Indefinitely?

Growth

H. PETER GRAY

Professor Klein (1990) argued that export-led growth may have been a prescription which has served some East Asian nations very well indeed, but that the strategy may have less validity for succeeding generations of would-be “new Japans.” l Identifying three vital characteristics of successful export-led-growth development as quality manufacturing, quantity manufacturing, and export-led growth in quality manufacturing (referred to in this symposium as ELG strategy), Klein discussed the possibility that the ELG strategy may not be as easily available or as useful to future generations of developing nations because of reduced access to the markets of the industrialized world. The four articles which constitute this symposium seek to develop different aspects of the problem and assess the difficulties which may face developing nations pursuing an ELG strategy in the last decade of the twentieth century. This article suggests that the undoubted success of the ELG strategy may have been predominantly due to two causes which are improbable features of the future world economy: (1) the degree of openness of markets in the United States; and (2) the small cumzhtive pressure built up on the industrialized nations by the ELG process. The future potential for success of the ELG strategy can be curtailed by three different phenomena: (1) any lack of demand in the industrialized world for imports of high-quality and competitively priced manufactured exports from developing nations; (2) the volume and rate of growth of imports which must occur if the strategy is to succeed for a new generation of would-be Japans (i.e., the rate of change of output mix imposed on the industrialized importing countries by the rate of growth of exports mandated by the ELG strategy);* and (3) the questionable future ability of new ELG countries to supply high-quality manufactures more cheaply than these goods can be produced within the bloc of industrialized countries. It is argued that each of these is likely to be a more binding constraint on the success of an ELG strategy in the future than in the past. These dimensions of the problem are examined sequentially, and the main hypothesis is reassessed in the final section. However, an ELG strategy that allows the foreign exchange market to find its own level and

H. Peter Gray

l

Economics and Management, Rensselaer Polytechnic Institute, Troy, NY 12180

JournaI of Asian Economics, ISSN: OKNI-OoOa

Vol. 2, No. 1, 1991, pp. 145-152.

145

Copyright e 1991 by JAI Press, Inc. All rights of reproduction in any form reserved.

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rationalizes interaction between the domestic economy and that of the rest of the world will provide significant economic gains in terms of the efficiency of internal resource allocation with consequent benefits for the developmental process.

WILLINGNESS

OF INDUSTRIAL NATIONS TO ACCEPT OF QUALITY MANUFACTURES

IMPORTS

This issue has two sides: the growth rate of net imports from ELG countries by the industrialized bloc, and the rate of change of output mix imposed on the bloc by growth rate of exports by the ELG countries. This section addresses the implications for ELG policies of potential reductions in global aggregate demand in the light of efforts by some industrialized nations (the United States, in particular) to eliminate current deficits. The history of international trade and payments flows in the 1980s was one of substantial current deficits, with the United States acting as the global locomotive economy allowing the world to recover from the deep recession of 1981-1982 (Gray, 1989). Much of this deficit was absorbed by surpluses of Japan and West Germany, so the industrialized countries as a bloc did not run large deficits with the ELG countries. However, the multilateral pattern of trade allowed Japan and Germany to achieve a proportion of their current surpluses through trade with ELG and other Third World countries and oil-exporting nations (i.e., the ELG countries made it possible for Japan and West Germany to run current surpluses well in excess of the bilateral surpluses with the locomotive country). As is shown in Tables 1 and 2, it was the locomotive power of the U.S. current deficits which allowed ELG countries and other developing nations to operate in an international economy which was relatively unconstrained by balance-of-payments concerns. The importance of this factor is emphasized by the desired of ELG countries to

TABLE 1. Growth in Imports of Manufactures Countries

as a Percentage of Apparent 1976/1977 to 1982/1983

from Developing Consumption,

Importers European Economic Community

North America

Japan

42

74

25

Major exporters of manufactures Remaining countries

30 12

60 14

17 8

Total

21

42

9

Exporters Developing countries, excluding major petroleum exporters

Source:United

Nations Conference on Trade and Development, Supplement 1986-Handbook of In~naand Development S~atisrics (United Nations publication, Sales No. E/F. 86.11.D.4).

rional Trade

Symposium: Can Export-led Growth Succeed Indefinitely?

TABLE 2. Change in Trade in Clothing,

147

1980-1985

(Millions

of Dollars)

Importers Level (1980)

Increase (1980-1985)

European Economic CommuniQ

United States

Japan

Total clothing imports

38,091

7,811

- 1,664

8,966

524

Imports by developed from developing countries or areas Total

16,369

8,593

-101

8,459

570

5,926

4,818

3,455

252

Item

Excluding Hong Kong, Republic of Korea, Singapore, and Taiwan province

source:

Dean Spinanger. The Impact on Employmrnt Kid: Institute of World Economics. 1987.

and Income

of Structural

730

and Technologicul

Change

in rhe Clothing

Indusrry

run current surpluses in goods in which they enjoy a competitive cost advantage with the industrialized bloc. This has been a feature of the development pattern of Japan, Korea, Singapore, and Taiwan because all of these countries are resource poor and inevitably ran bilateral deficits with suppliers of energy, primary commodities, and food. Moreover, the most obvious candidates for the next wave of the “new Japans” (Brazil and Thailand) are resource poor at least in terms of energy.3 There are three major importing blocs: North America; the European Community (EC); and Japan and the newly industrialized countries of Korea, Singapore, and Taiwan. North America (predominantly the United States) has been the open door for imports from all countries. This willingness to accept imports and to run bilateral deficits derives from the traditional emphasis of the United States on liberal trade. This policy stance was accentuated during the eight years of the Reagan Administration, whose economic philosophy was maximum reliance on the unimpeded play of market forces, and whose (possibly unintentional) assumption of the role of global locomotive (Gray, 1989) allowed the dollar to become overvalued in the sense that the current balance fell into a substantial deficit. The open-door policy and the overvaluation of the dollar facilitated the process of establishing new foreign-based firms as competing suppliers in the North American markets. The relative importance of the United States as a market for exports of ELG countries is shown in Tables 1 and 2. Whether this policy was in the best long-run interests of the United States may be questionable, but there can be no doubt that the United States provided the greater part of the demand that permitted ELG countries to find export markets in the industrialized countries. This process took place at the same time that the U.S. capital goods industry was losing competitiveness as a result of laggard technology and an overvalued dollar.4 Thus, the policy of open markets led to substantial U.S.

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current-account deficits with the other industrial nations, even though the ELG countries did not themselves run spectacular current surpluses in the early 1980s (i.e., the ELG countries and their suppliers of primary goods served as intermediaries between the international surplus units-mainly Japan and West Germanyand the large deficit unit-the United States). The eventual elimination of the U. S . current deficit is inevitable because there is a limit to the degree to which non-Americans will finance U.S. spending (Howard, 1989). The elimination will reduce the willingness of the industrial bloc to absorb ELG exports in that the most liberal (least protectionist) market will necessarily undergo a substantial expenditure reduction: There is no painless way. There can be little expectation that the other industrialized nations will replace the lost aggregate demand: Such behavior would require one country deliberately to run a deficit on current account, and this is (the current behavior of the United States excepted) a rare occurrence in peace time (Gray & Gray, 1988). This likelihood is heightened by the new freedom of Western multinational corporations to invest in Eastern bloc countries. By the same token, the outreach in the form of offshore manufacturing by European (and other) multinationals is likely, for some time at least, to be directed toward the Eastern bloc rather than to Third World countries seeking to follow an ELG strategy.

CUMULATIVE

IMPOSED

CHANGE

IN THE OUTPUT

MIX

Cumulative imposed change, compatible with successful development of newcomer ELG countries, can generate reallocation strains in industrialized countries as resources are pushed out of declining industries. These strains can cause or reinforce protectionist pressures within the industrialized bloc: This is particularly probable in North America, where the social and economic costs of reallocation have been severe and have already aroused a strong antagonism against imports.5 Protectionist pressures are transmitted through the political system but derive mainly from economic costs imposed by pressure from foreign firms. Rapid growth of cost-competitive export capability on the part of ELG countries constitutes a as generating an initial “push disturbance” in industrialized economie&-defined decrease in aggregate demand and displacing factors from importing-competing industries.7 The inevitable unemployment of these factors of whatever duration, plus any waste of product-specific capital, constitutes the social costs of an open-trade stance and, in the short run, counters the gains achieved from the new pattern of trade. Both losses (but particularly the loss of industry-specific capital on the part of a local community) of employees and stockholders will generate political opposition to increased imports. The most serious aspect of ELG strategies for the industrialized world is that the effect is cumulative: The costs associated with growth of imports of manufactures can be reinforced by domestic developments such as new technologies that lead to a displacement of low-skilled workers. It is useful to conceive of the severity of a disturbance defined in terms of the amount of retraining

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Can Export-led Growth Succeed Indefinitely?

needed and the loss in income experienced by displaced workers. Negligible severity exists when human and physical capital are not industry specific (as in models with homogeneous factors of production) and when large elasticities of factor substitution ensure a rapid return to full employment with relatively small changes in income shares. Severity increases as workers released from the declining industry require not only new skills to be employed in the expanding industries but also higher levels of skills. Any required upgrading of skill levels will increase adjustment costs through (1) the use of resources in retraining; (2) the relative inefficiency of such programs unless conducted at the firm level within a large conglomerate where management has direct knowledge of the needed skills; and (3) the higher likelihood of dropout or failure on the part of older workers. Severity will increase with the duration of the import pressure. For the first wave of pressure from ELG countries, workers with potential capacity for skill upgrading will leave the declining industries quickly as more promising job vacancies emerge. As the process continues, workers with greater seniority in the industry and less facility for absorbing new skills and skill levels will be displaced. The political pressure in the United States was kept within manageable proportions during the 1980s by the remarkable rates of growth of service industries and the ability of these industries to provide a significant proportion of nontechnical jobs. When the United States confronts the need to eliminate its current deficit, the buoyancy of the U.S. domestic economy will be reduced and any further displacements by imports (or technology) will be likely to generate more severe protectionist pressures. Moreover, as import-substitute industries develop in consequence of a weaker dollar,* the new productive capacity will undoubtedly rely heavily on high-technology, capital-intensive production systems, so the problems of those not equipped to cope with modem technology will not be solved.

COST COMPETITIVENESS

IN QUALITY

MANUFACTURING

The essence of a successful ELG strategy was to capitalize on the availability of intelligent, conscientious, easily trainable, well-disciplined, and relatively cheap labor. This labor, uppropriatelq combined with (imported) technology and modem capital goods, was able to overcome transportation costs and man-made impediments to exports and to beat North American and European production in terms of both price and quality. 9 It is useful, in context, to distinguish between countries which are labor rich and are plentifully endowed with labor of the quality just described and the more traditional concept of a developing country which is labor plentiful and has a relatively large endowment of cheap, unskilled, ill-educated labor. While there would be new Japans which are relatively labor rich, they may not be able to rely on the cost-competitiveness of their manufactured exports. The new technologies which have revolutionized production of many goods and have resulted in the creation of a myriad new products may have reduced the cost advantage of ELG countries.

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The new technologies seem to work against an ELG development strategy. Ohmae (1985) suggested that the labor content of traditional fabricating industries has dropped from 25% to between 5 and 10% of value added in about 10 years. A relative advantage in the money cost of labor, efficiency wages, becomes pro tunto less important as the role of labor in the productive process declines. Thus, proximity to market, with all such proximity entails in terms of cost saving in transportation as well as in supplanting impediments to international trade (overt, covert, and frictional), will become relatively more important. lo Current developments in international trade also suggest an evolving regionalism in economic interdependencies. The European Community has admitted two more Mediterranean labor-plentiful (even labor-rich) economies, l l and there are suggestions that the United States (which has recently signed a free-trade agreement with Canada) may propose a similar arrangement with Mexico. i2 These official linkings of industrialized areas to specific labor-rich and labor-plentiful countries suggests that being labor rich will be less of an advantage for excluded nations. Add to these integrations of product markets the possibility of large legitimate flows of migration from developing into industrialized countries, and the probability of being labor rich serving as the basis for a successful ELG strategy becomes further diminished.

CONCLUSION The likelihood of success for a labor-surplus (even a labor-rich) country which will seek to achieve economic development by means of an ELG strategy seems to be low for several reasons. The passive (almost ideological) acceptance of imports of quality manufactured goods (by the United States) which were allowed to displace the output of domestic industries is unlikely to prevail in the future. The United States cannot forever simply accept (net) imports in exchange for financial liabilities of its own citizens. When the United States seriously addresses its own trade deficit, the question of the level of global aggregate demand and the likelihood of recession becomes vital. The cumulative pressure of the surge of imports has created strains in the U. S . and other industrialized economies, as industries which use low-skilled labor intensively have been squeezed unmercifully. These forces have generated protectionist pressures which must be near the point of overcoming internationalist values. The events in Eastern Europe in the second half of 1989 are sure to generate substantially more competition in the markets in industrialized countries for quality manufactured imports from labor-plentiful countries. This pressure to export from many countries will impose severe adjustment pressures on the industrialized countries and can be expected to provoke some protectionism. Finally, the benefits of being labor rich are now diminished as new technologies substantially reduce the share of labor in value added. None of these gloomy prognostications should be taken as suggesting that an inward-looking strategy of development suddenly becomes desirable. Rational use

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of and reliance on the foreign sector must remain an integral feature of economic development plans: Changed circumstances have reduced the advantages of the ELG strategy and may have closed the window of relatively easy opportunity.

NOTES 1. While the next generation of would-be Japans is dominated by Asian countries, there is nothing which precludes countries from other continents following an export-led growth strategy. (Lorenz, later in this issue, considers the question of erstwhile members of the Eastern bloc following this strategy.) 2. The first point refers to a lack of aggregate demand, and the second point to a lack of demand for imports from ELG countries due to protectionism. Both points were treated briefly in Klein (1990). 3. Malaysia has large amounts of oil. 4. Gray, Milberg, and Perez-Hemandez (1990) posited that the overvalued dollar may have contributed to a profit squeeze on U.S. industries and through this to lagging technological competitiveness on the part of U.S. corporations-particularly with respect to Japanese firms. 5. This is much more so than is implied by the frictionless neoclassical two-factor models in which countries slide gracefully over their production-possibilities surfaces (Mussa, 1978; Neary 1982). Note that the effect of enforced reallocation on protectionist sentiment is likely to be an increasing function of the amount of displacement experienced. Protectionist pressure will also be positively related to any recessionary tendencies in the northern bloc. 6. This material is presented in greater detail in Gray (1982, 1988). 7. Push disturbances are contrasted with pull disturbances in which factors of production are pulled out of industries destined to decline by expanding sectors. There is no reason for pull disturbances to bring about serious protectionist pressures. 8. McKinnon (1990) suggested that there will be serious difftculties in achieving a policyinduced depreciation of the dollar given the dominance of private capital movements over official resources. 9. It is possible to argue that, in its early days, an ELG strategy was compatible with the factorproportions model and with its assumption of an even availability of technology-possibly through multinational corporations but largely through licensing agreement. Impediments to trade were reduced through the Generalized System of Preferences (GSP), but this effect was less than spectacular: for example, Huay and Hock (1990) reported that in 1987, duty-free imports of GSP goods by the United States were only 12.1% of total GSP imports and only 3.8% of total imports. Of these, almost 60% were supplied by the four Asian newly-industrialized countries. 10. Impediments to trade (including transportation costs) become proportionately more important 11. Spain is a large economy. There is also the possibility (indirectly referred to by Lorenz, later in this issue) that erstwhile Eastern bloc countries will seek admission to the Community (the German Democratic Republic has already entered) or, at least, seek access to the Community’s markets on an equal footing (zero tariffs) with other European nations such as members of the European Free Trade Association. 12. This is considered in Sanderson’s article later in this issue.

REFERENCES Gray, H. Peter. 1982. “Adjustment Burdens, Potential Protectionism and the Vulnerability of ExportLed Growth,” Journal of Economic Development, 7~7-20. Gray, H. Peter. 1988. Towards a Theory of Adjustment Policy, Rensselaer School of Management working paper no. 36, Troy, NY.

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Gray, H. Peter. 1989. “The Mechanics of International Economic Locomotion,” in Khosrow Fatemi, ed., International Trade: Existing Problems and Prospective Solutions. New York: Taylor and Francis. Gray, H. Peter, and Gray, Jean M. 1988. “International Payments in a Flow-of-Funds Format,” Journal of Post Keynesian Economics, X1:241-260. Gray, H. Peter, Milberg, William S., and Perez Hemandez, Pedro. 1990. Profits as a Determinant of International Competitiveness. (Mimeo: Rensselaer Polytechnic, School of Management, Troy, NY). Howard, David H. 1989. “Implications of the U.S. Current Account Deficit,” Journal of Economic Perspectives, 3:153-166. Huay, Ow Chwee, and Hock, Ow Chin. 1990. Economic Implications of Graduation from U.S. G.S.P.: The Case of Singapore. (Mimeo). Klein, Lawrence R. 1990. “Can Export-led Growth Continue Indefinitely? An Asia-Pacific Perspective,” Journal of Asian Economics, l(1) 1- 12. McKinnon, Ronald I. 1990. “The Exchange Rate and the Trade Balance,” Open Economies Review, 1(1):17-38. Mussa, Michael. 1978. “Dynamic Adjustment in the Heckscher-Ohlin-Samuelson Model,” Journal of Political Economy, 86:775-791. Neary, J. Peter. 1982. “Intersectoral Capital Mobility, Wage Stickiness, and the Case for Adjustment Assistance,” in Jagdish N. Bhagwati, ed., Import Competition and Response. Chicago: The University of Chicago Press. Ohmae, K. 1985. Triad Power. New York: The Free Press.

Received July 1990, revised November

1990.