The dangers of export dependency

This short article on the BBC website is a really useful one for students revising their international trade economics. For years many of the ‘dynamic globalisers’ in far east Asia have built their turbo-charged growth around exporting to developed economy markets. Huge increases in investment and a clear focus on creating the capacity to drive exports higher have worked in the sense of rising per capita incomes, ballooning trade surpluses and an increase in global economic influence. In contrast domestic demand is many Asian economies is limited by low per capita incomes and a very high household savings rate. This in turn is partly the result of the absence of social safety nets in terms of state pension and welfare provision.

But there are dangers in growth being export dependent. For countries heavily reliant on exporting commodities, the volatility of world prices provides an obvious risk. But even with manufactured products whose prices are more predictable, export-driven countries risk suffering when there is a downturn in global demand leaving huge amounts of spare capacity.

The President of the Asian Investment Bank Haruhiko Kuroda is quoted as saying

“Over the longer term, developing Asia is starting the process of rebalancing growth from excessive dependence on external demand to greater resilience on both consumption and investment.”

Many countries are starting this process. The Chinese fiscal stimulus is a good example - The Wall Street Journal reports that “A growing number of companies, from tire and excavator makers to fast-food chains, are benefiting from China’s $585 billion stimulus program, which has quickly funneled money into everything from bridges to consumers’ pockets.” This superb piece from the WSJ offers some ideas for the types of stimulus policies that might work in China to permanently raise the income of the poor and provide a stronger floor of domestic demand for the Chinese economy.