The export-led growth model comes a cropper
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.