The ex­port-led growth model comes a crop­per

The Pak Banker - - OPINION - Manas Chakravarty

CHINA'S ex­ports in July did far worse than ex­pected, drop­ping by 8.3% from a year ago. That's the latest bit of bad news about ex­ports from a re­gion that was once looked upon as the star of the ex­port-led growth par­a­digm and as a tem­plate for de­vel­op­ing coun­tries to learn from and em­u­late. Af­ter the fi­nan­cial cri­sis hit, this col­umn had pointed out that the ex­port-led growth model that had served Asia so well was in dan­ger of fall­ing apart. With growth in the rich economies fal­ter­ing, the de­duc­tion was that those economies who re­lied on ex­ports to them would also see find them­selves in hot wa­ter. Un­for­tu­nately, that seems to be com­ing true.

It isn't only lower prices that are re­spon­si­ble for the poor ex­port per­for­mance-vol­ume growth too has been miss­ing in ac­tion. Con­sider the num­bers. The Nether­lands Bureau for Eco­nomic Pol­icy Anal­y­sis com­piles sea­son­ally ad­justed in­dices of mer­chan­dise ex­port vol­umes. Ac­cord­ing to its data, the in­dex for ex­port vol­umes for Emerg­ing Asia, with a 2005 base of 100, was 190.6 in May 2015, lower than its level of 193.3 in May 2014. Sim­ply put, ex­port vol­umes from the emerg­ing Asian coun­tries are lower now than they were a year ago.

This is a very big deal, be­cause the usual pat­tern of rapid growth for the Asian re­gion has been ex­port-ori­ented growth. Faced with a lack of pur­chas­ing power in their own un­der­de­vel­oped economies, Asian economies ex­ported their way to growth. Start­ing with Ja­pan, fol­lowed by South Korea and Tai­wan and then some of the Asean (As­so­ci­a­tion of South­east Asian Na­tions) coun­tries and China, they have all used ex­ports as an av­enue for rapid growth. The Modi gov­ern­ment's "Make in In­dia" slo­gan is part and par­cel of this ef­fort.

But that speedy ex­port growth oc­curred in the con­text of glob­al­iza­tion on the one hand and high global growth on the other. The open­ing up of China and the erst­while Com­mu­nist coun­tries to global trade and in­vest­ment and lib­er­al­iza­tion in In­dia all helped to boost trade.

This was helped by the rapid growth of com­mu­ni­ca­tions tech­nol­ogy and a drop in trans­port costs. World trade vol­ume in goods and ser­vices av­er­aged an an­nual growth of around 7.3% in 1988-97; 6.7% be­tween 1998 and 2007, and 3.1% in 2008- 14, ac­cord­ing to In­ter­na­tional Mon­e­tary Fund (IMF) data.

Dur­ing the boom years from 2004 to 2007, growth in global trade av­er­aged around 9% per an­num. Now, the talk is all of a "new nor­mal" of low global growth, or what economist Larry Sum­mers calls "sec­u­lar stag­na­tion", or in IMF man­ag­ing di­rec­tor Chris­tine La­garde's telling phrase, "the new medi­ocre". The IMF's latest World Eco­nomic Out­look up­date, pub­lished last month, pre­dicts that world trade vol­ume will grow by a mea­gre 4.1% this year and by 4.4% in 2016.

What about In­dia? A large part of In­dia's growth story in the past decade has been due to a rise in In­dia's ex­ports from 9.3% of gross do­mes­tic prod­uct (GDP) in 2000-01 to 16.8% of GDP in 2013-14. But, with ex­port growth turn­ing neg­a­tive in re­cent months, there are signs that the ex­port push is run­ning out of steam.

Of course, one big rea­son why ex­ports are not do­ing well is be­cause prices have fallen dras­ti­cally, es­pe­cially com­mod­ity prices. We, there­fore, need to look at how vol­umes are hold­ing up. Chart 1 shows the growth in In­dia's vol­ume of goods and ser­vices ex­ported since 1990. Note how ex­port vol­ume growth has slumped since 2011.

Note also how ex­port vol­ume growth is now much lower not only com­pared to the boom years be­tween 2003 and 2007, but it's also well be­low the growth notched up dur­ing most years in the 1990s.

Much de­pends, of course, on how soon the US and Europe are able to script a turn­around in their economies.

But the lack of ex­port growth could be a new source of vul­ner­a­bil­ity for China. Chart 2 shows the sharp de­cel­er­a­tion in Chi­nese ex­port vol­umes. With the in­vest­ment growth av­enue closed, with the econ­omy strug­gling to in­crease con­sump­tion and with its fi­nan­cial sec­tor in dis­ar­ray, the Chi­nese author­i­ties will be tempted to use the de­val­u­a­tion op­tion, with dan­ger­ous con­se­quences for all of Asia.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.