The writer is a professor at Ashoka University and former chief economic adviser, government of India. Josh Felman also contributed to this article
Developing countries have been given new marching orders by western economists: your successful export-led model of growth is dead, please find an alternative. If their counterparts in the developing world follow suit, the consequences are clear: without open markets, developing countries’ prospects will shrink.
Consider some important history. The new export pessimism is, of course, not new at all. In the 1960s, Raúl Prebisch and Hans Singer invoked it to argue for industrialisation through import substitution. They noted that developing countries tended to produce commodities, and argued that commodity prices inevitably trend downward. So they insisted that an export-based development strategy would simply not work. Many developing countries consequently focused on their domestic markets — and fell further behind the west.
Meanwhile, the east Asian tigers — Singapore, Hong Kong, Taiwan and Korea — ignored the fashionable consensus and promoted their manufacturing exports. When they succeeded, China followed, using exports to catapult itself from underdevelopment into a superpower in one generation. The hyperglobalisation of the late 1980s brought golden years for developing countries: for the first time in centuries, the poorer countries as a group started to catch up.
This historic progress is now under threat. China’s success has spawned a populist revolt against globalisation, convincing western intellectuals that the advanced world’s political capacity for open markets has been exhausted. This is the claim that developing countries are being asked to accept. Call it export pessimism, mark two.
But there are at least three reasons why developing countries should not succumb to export pessimism. First, the reports of globalisation’s demise have been greatly exaggerated. It is true that world exports of goods have declined to about 21 per cent of world gross domestic product from about 25 per cent before the 2008 financial crisis. But global exports of services have continued to increase, rising to about 7 per cent of global GDP from 6.5 per cent.
Covid-19 could accelerate the growth of services exports. After all, the pandemic is encouraging distanced activities, as opposed to those that require physical contact. Physical shops are being replaced by ecommerce, which can be designed and serviced in developing countries. Similarly, if western companies are going to allow employees to work permanently from home, they can as easily — and more cheaply — be located in developing countries.
Even if global manufacturing exports continue to stagnate, exports of most developing countries can still grow rapidly, as long as they gain market share. This is quite feasible: China’s wages are rising as it becomes richer, causing it to lose competitiveness in low-skilled work. Already, its share of global low-skill exports has declined, allowing other exporters to fill the gap.
How much space will be created for developing countries? Shoumitro Chatterjee and I recently calculated that China still over-exports “low-skill goods” such as textiles, clothing, leather and footwear. One indicator is the enormous difference between its share of the developing world’s exports of such goods (over 45 per cent) and its share of the developing world’s supply of unskilled labour (25 per cent).
China will continue to cede space for geopolitical reasons. Multinationals are slowly exiting the country, insuring themselves against the risk it could be isolated by its trading partners. As a consumer, China could also become a bigger market for low-skill consumer goods. In effect, it would do for poorer countries what the west did for China — provide a ready market for its goods. This, of course, would require Beijing to become less protectionist.
Is there any guarantee that any of these factors will actually lead to export success for poorer countries? No: they will still have to do the hard work of creating the conditions for businesses to compete effectively in global markets. But the opportunities are there.
Western economists, academics and policy advisers must keep those opportunities alive, pushing their own countries to sustain open markets, arguing against protectionism globally, and nudging China in the right direction. At the very least, they should not be purveyors of this export pessimism disguised as pragmatic resignation. If this intellectual dereliction of duty leads to tragic consequences for the poorer parts of the world, they will bear some responsibility.