Trump should heed lessons of devel­op­ing coun­tries

The Star Early Edition - - OPINION & ANALYSIS - Stephan Ritcher and Roge­rio Stu­dart

IN CHOOS­ING a cure to the US’s eco­nomic prob­lems, pres­i­dent-elect Don­ald Trump seems de­ter­mined to ap­ply a well-known Latin Amer­i­can medicine, the strat­egy of im­port sub­sti­tu­tion. He is adamant about purs­ing an eco­nomic pol­icy that gives strong pref­er­ence to do­mes­tic pro­duc­tion over buy­ing goods from abroad.

Al­lur­ingly sim­ple as this sounds, the va­lid­ity of the con­cept has been dis­proved many a times. As emerg­ing mar­ket coun­tries, no­tably Brazil in the 1960s, found out, re­ly­ing on such an ap­proach usu­ally only drives up costs for con­sumers and in­dus­trial end-users, while do­ing lit­tle, if any­thing to im­prove a na­tion’s pro­duc­tiv­ity.

More­over, most of Trump’s anal­y­sis (and hence pre­scrip­tion) ap­pears to be based on com­pet­i­tive­ness prob­lems re­lated to low wage costs and “cur­rency ma­nip­u­la­tion” by China.

Those fac­tors, how­ever, are no longer the main fac­tors ex­plain­ing the com­pet­i­tive gap of China.

Now, other more struc­tural fac­tors are at play: Pro­duc­ers in China and other emerg­ing economies ac­tu­ally ben­e­fit from build­ing a na­tional in­fra­struc­ture and lo­gis­tics that have sur­passed many OECD (Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment) na­tions, par­tic­u­larly when com­pared to the US and its decades of un­der­in­vest­ment in the pub­lic sec­tor.

In ad­di­tion, China as well as other emerg­ing mar­ket na­tions are be­gin­ning to reap the fruit of their in­vest­ments in ed­u­ca­tion and re­search and de­vel­op­ment. Re­ly­ing on a young and ea­ger pop­u­la­tion, th­ese coun­tries are cre­at­ing in­no­va­tion in sev­eral sec­tors of the global econ­omy that are key for over­all com­pet­i­tive­ness.

Chi­nese in­no­va­tion

China may have joined the ranks of the world’s 25 most-in­no­va­tive economies in the Global In­no­va­tion In­dex – pro­duced by Cor­nell Univer­sity, INSEAD and the World In­tel­lec­tual Prop­erty Or­gan­i­sa­tion – only in 2016. How­ever, the pace of its catch­ing up is ex­tra­or­di­nary: China ranked only in 43rd place in 2009/10 and 29th in 2015.

Ac­cord­ing to a re­cent pub­li­ca­tion of the US Coun­cil of Com­pet­i­tive­ness (A Com­pet­i­tive­ness Agenda for the 45th Pres­i­dent of the US, De­cem­ber 2016), China is al­ready sec­ond in the world in sci­en­tists per mil­lion peo­ple.

It has also al­ready be­come num­ber one rank­ing on the 47th edi­tion of the Top 500 list of the world’s top su­per­com­put­ers, with a new sys­tem built en­tirely us­ing pro­ces­sors de­signed and made-in-China.

To be sure, there are some draw­backs and cau­tion notes that ap­ply to such statis­tics. How­ever, once this in­no­va­tion ca­pac­ity is ap­plied to the man­u­fac­tur­ing sec­tor, then lit­er­ally the sky is the limit for China’s com­pet­i­tive­ness.

‘Man­u­fac­tur­ing deca­dence’

While man­u­fac­tur­ing is thus on the as­cent in the emerg­ing mar­ket world, rich coun­tries – from the US to France and Italy to Ja­pan – are cop­ing with a bout of “man­u­fac­tur­ing deca­dence”.

In fact, read­ing that writ­ing on the wall, pol­icy-mak­ers in vir­tu­ally all ma­jor economies were only able to avoid the im­me­di­ate on­set of the de­struc­tive con­se­quences of this “man­u­fac­tur­ing deca­dence” by keep­ing do­mes­tic con­sump­tion ar­ti­fi­cially high.

There were also ef­forts by cor­po­rate giants like GE seek­ing to re­trace their own glory by herald­ing a “man­u­fac­tur­ing re­nais­sance” that ba­si­cally hap­pened in glitzy ads only.

The Fed­eral Re­serve Bank’s pol­icy of money pump­ing and neg­a­tive in­ter­est rates also helped. Jobs were brought back, but gen­er­ally only low-paid ser­vice jobs – and credit was ex­tended mostly only to the bet­ter off, which didn’t help the broader econ­omy. Since struc­tural is­sues were not ad­dressed, the US eco­nomic re­cov­ery con­tin­ues to be a frag­ile one.

En­ter the gam­bler

En­ter Don­ald Trump. Greatly ex­pe­ri­enced in tak­ing risky gam­bles on his cor­po­rate and per­sonal bal­ance sheets, he was pre­pared to call the bluff of eter­nal sooth­say­ing. He sim­ply said that the “em­peror” (ie, the man­u­fac­tur­ing sec­tor) re­ally had no clothes.

While he is cor­rect on the anal­y­sis, what about Trump’s pre­scrip­tions? It is puz­zling to see that he seems will­ing to adopt some poli­cies that very much look like the early im­port sub­sti­tu­tion poli­cies of Brazil.

Tax and other fis­cal in­cen­tives to at­tract com­pa­nies to in­vest and pro­duce lo­cal con­sumer goods

High tar­iffs to pro­tect the “nascent in­dus­tries” and am­ple pub­lic fi­nanc­ing for na­tional com­pa­nies that pro­duced in­puts for the new in­dus­trial sec­tor.

Of all the var­i­ous poli­cies pro­posed by Trump, in­creas­ing the lev­els of in­vest­ments in in­fra­struc­ture and lo­gis­tics seems to be a good way to ad­dress the com­pet­i­tive­ness chal­lenge.

How­ever, with­out sig­nif­i­cant im­prove­ments – and more pub­lic in­vest­ment – in the ed­u­ca­tional and in­no­va­tion sys­tems (and just opt­ing for more school “choice” and pri­vatis­ing pub­lic ed­u­ca­tion cer­tainly doesn’t ad­dress the core of the prob­lem), in­fra­struc­ture im­prove­ments will not be enough.

Of course, Trump can al­ways opt to seek yet more re­course to a “dou­ble wall”. He could build a phys­i­cal one (clos­ing the bor­ders to the south) and a tar­iff one (threat­en­ing the US pro­duc­ers that in­sist on mak­ing the cheap im­ports in places like China).

Sound and fury

Both propo­si­tions are “full of sound and fury”, but in the real world, if suc­cess­ful at all, it would only help to bring back low-wage jobs. Yes, more goods would be pro­duced do­mes­ti­cally, but – as with China un­til now – they would have com­par­a­tively lit­tle value added.

Trump’s sup­pos­edly “pa­tri­otic” ap­proach is thus a recipe for a medi­ocre future for the US man­u­fac­tur­ing sec­tor. It does next to noth­ing about Trump’s pre­sumed real goal – bring­ing back well-pay­ing jobs.

As Brazil­ians and other devel­op­ing coun­tries learned the hard way in decades past, there is no easy way to get to man­u­fac­tur­ing “heaven” – a pro­duc­tive econ­omy that gen­er­ates solid jobs and good in­comes.

What is needed is a long-term com­mit­ment to im­prov­ing ed­u­ca­tion, in­no­va­tion, in­fra­struc­ture and lo­gis­tics. For all the lip ser­vice they like pay­ing to th­ese is­sues, when it comes to au­tho­ris­ing real money, that is a hard agenda for con­ser­va­tive Repub­li­cans in the US to swal­low.

Trump now pre­sides over the world’s largest econ­omy. But he bet­ter heed the emerg­ing mar­kets’ les­son that shoot­ing for im­port sub­sti­tu­tion is (still) fu­tile.

If he doesn’t do so, then Trump’s own warn­ings dur­ing the 2016 cam­paign – that the US in­creas­ingly re­sem­bles a devel­op­ing coun­try – will ring far more true than he could pos­si­bly be bar­gain­ing for.

Stephan Richter, the edi­tor-in-chief, The Glob­al­ist, and Roge­rio Stu­dart, the former Brazil­ian ex­ec­u­tive di­rec­tor at the World Bank. This ar­ti­cle ini­tially ap­peared on The Glob­al­ist. Fol­low The Glob­al­ist on Twit­ter: @the­glob­al­ist


US Pres­i­dent-elect Don­ald Trump speaks to re­porters at the en­trance to Trump Tower in New York on Fri­day. His “pa­tri­otic ap­proach” on man­u­fac­tur­ing is set to fail. What is needed is a long-term com­mit­ment to im­prov­ing ed­u­ca­tion, in­no­va­tion and lo­gis­tics.

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