The im­port of ex­ports - curse or ne­ces­sity?

Financial Mirror (Cyprus) - - FRONT PAGE -

Should a coun­try’s de­vel­op­ment strat­egy pay spe­cial at­ten­tion to ex­ports? Af­ter all, ex­ports have noth­ing to do with sat­is­fy­ing their peo­ple’s ba­sic needs, such as ed­u­ca­tion, health care, hous­ing, power, wa­ter, tele­coms, se­cu­rity, the rule of law, and recre­ation. So why give prece­dence to sat­is­fy­ing the needs of dis­tant for­eign con­sumers?

That, in a nut­shell, is what many op­po­nents of free trade and eco­nomic glob­al­i­sa­tion – as well as many on the right who be­lieve that all in­dus­tries should be treated equally – want to know. But there are no right an­swers to wrong ques­tions. It is pre­cisely be­cause gov­ern­ments care about their own peo­ple that they should fo­cus on ex­ports.

To see this, con­sider what a mar­ket econ­omy is all about. Some, in­clud­ing Pope Fran­cis, would say that it is about greed – a sys­tem in which ev­ery­body cares only about her­self.

But a mar­ket econ­omy should be un­der­stood as a sys­tem in which we are sup­posed to earn our keep by do­ing things for other peo­ple; how much we earn de­pends on how oth­ers value what we do for them. The mar­ket econ­omy forces us to be con­cerned about the needs of oth­ers, be­cause it is their need that con­sti­tutes the source of our liveli­hood. In some sense, a mar­ket econ­omy is a gift-ex­change sys­tem; money merely tracks the value of the gifts we give one an­other.

As a re­sult, a mar­ket econ­omy en­cour­ages spe­cial­i­sa­tion: We be­come very good in a nar­row set of skills or prod­ucts, and ex­change them for mil­lions of other things we have no clue how to do or make. As a con­se­quence, we end up do­ing re­mark­ably few things and buy­ing ev­ery­thing else from oth­ers.

This ob­ser­va­tion is as true about an in­di­vid­ual as it is about a place, whether the place is a neigh­bor­hood, a town, a state or prov­ince, or a coun­try. Ev­ery town has gro­cery stores, beauty par­lors, gas sta­tions, and movie the­aters that serve the lo­cal com­mu­nity. Econ­o­mists call th­ese “non- trad­able ac­tiv­i­ties,” be­cause they are not un­der­taken with dis­tant cus­tomers in mind.

But the town’s peo­ple would also want ac­cess to things that no­body in the city even knows how to make. For ex­am­ple, most towns and cities do not pro­duce food, cars, gaso­line, medicines, TVs, or films. So they need to “im­port” th­ese goods from else­where. To pay for what they want from out-of-town­ers, they must sell them some of the things that they do know how to make.

Of course, the out-of-town­ers have the op­tion of buy­ing from some­where else. This is why the goods and ser­vices that a place can sell to non-res­i­dents have a dis­pro­por­tion­ate im­pact on its qual­ity of life – and even its vi­a­bil­ity. A min­ing town be­comes a ghost town when the mine closes, be­cause the gro­cery store, the phar­macy, and the movie theater no longer have the ca­pac­ity to buy the “im­ported” food, medicine, and films they need.

In con­trast to non-trad­able ac­tiv­i­ties, a place’s ex­port ac­tiv­i­ties need to be pretty good to con­vince out-of-town cus­tomers – who have am­ple other op­tions – to buy from lo­cal pro­duc­ers. That means that ex­ports must have an at­trac­tive qual­ity/cost ra­tio.

One way to in­crease this ra­tio is to im­prove qual­ity and pro­duc­tiv­ity. An­other is to lower wages. The higher the pro­duc­tiv­ity and the qual­ity of ex­port ac­tiv­i­ties, the higher the wages they can pay and still re­main com­pet­i­tive. If em­ploy­ment in the ex­port in­dus­try is sig­nif­i­cant, as is true in most places that do not rely on oil rev­enues, the wages that the ex­port sec­tor can af­ford will af­fect the wages of ev­ery­body in town. Ev­ery­one thus has an in­ter­est in im­prov­ing their ex­port sec­tor.

Be­cause they are sub­ject to greater com­pe­ti­tion, ex­port ac­tiv­i­ties tend to un­dergo faster tech­no­log­i­cal and pro­duc­tiv­ity im­prove­ments than other parts of the econ­omy. They are con­stantly un­der threat from in­no­va­tion and new com­peti­tors that could dis­rupt their busi­ness. Con­sider the iPhone’s dev­as­tat­ing im­pact on Fin­land’s once-dom­i­nant na­tional cham­pion Nokia, or the ef­fect of the shale-oil revo­lu­tion on OPEC.

Suc­cess­ful places tend to move from a few tech­no­log­i­cally sim­ple in­dus­tries that are com­pet­i­tive enough to ex­port their prod­ucts to a greater num­ber of in­dus­tries that are in­creas­ingly com­plex. For ex­am­ple, in 1963, 97% of Thai­land’s ex­port bas­ket was com­posed of agri­cul­tural and min­eral prod­ucts such as rice, rub­ber, tin, and jute. By 2013, th­ese rep­re­sented less than 20% of the to­tal, while ma­chin­ery and chem­i­cals ac­counted for 56%.

A sim­i­lar trans­for­ma­tion can be seen in ev­ery suc­cess­ful non-OPEC de­vel­op­ing coun­try. The suc­cess of a place is very much re­lated to its peo­ple’s abil­ity to ac­com­plish this trans­for­ma­tion, as ex­em­pli­fied by places such as Sin­ga­pore, Tur­key and Is­rael.

So what should coun­tries, prov­inces, and cities do? Skep­tics might say that they should just fo­cus on fix­ing the things that lo­cals care about, such as ed­u­ca­tion or in­fra­struc­ture, or im­prove ev­ery­body’s “busi­ness en­vi­ron­ment.” Ex­ports will take care of them­selves.

But life is more com­pli­cated than this. The needs of ex­port ac­tiv­i­ties are of­ten quite dis­tinct. The spe­cific rules, in­fra­struc­ture, skills, and tech­no­log­i­cal mas­tery that ex­port ac­tiv­i­ties re­quire tend to be dif­fer­ent from those needed for the non-trad­able ac­tiv­i­ties that usu­ally gen­er­ate the bulk of a place’s em­ploy­ment. While di­ver­si­fi­ca­tion into new ar­eas is al­ways chal­leng­ing, it is par­tic­u­larly dif­fi­cult for trad­able ac­tiv­i­ties, which have to face for­eign com­pe­ti­tion from the start. By con­trast, pi­o­neers in non-trad­able ac­tiv­i­ties start with a cap­tive mar­ket. More­over, ex­porters need par­tic­u­larly strong con­nec­tions to knowhow found else­where on the planet, thus making them more sen­si­tive to for­eign in­vest­ment, mi­gra­tion, and in­ter­na­tional pro­fes­sional links.

To sur­vive and thrive, so­ci­eties need to pay spe­cial at­ten­tion to those ac­tiv­i­ties that pro­duce goods and ser­vices they can sell to non-res­i­dents. In­deed, the need to act on new ex­port op­por­tu­ni­ties and re­move ob­sta­cles to suc­cess is prob­a­bly the cen­tral les­son from the East Asian and Ir­ish growth mir­a­cles.

Non-trad­able ac­tiv­i­ties are akin to a coun­try’s sports leagues: dif­fer­ent peo­ple like dif­fer­ent teams. Those en­gaged in trad­able ac­tiv­i­ties are like the na­tional team: we should all root for them – and or­gan­ise our­selves to make sure they suc­ceed.

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