Exports No Longer Sole Path to Economic Rescue

The global economy is in flux. Emerging economies await signals of an improving US economy and for Federal Reserve plans to pull back from bond purchases on the order of $85 billion per month. Anticipating an end to those capital flows, investors began withdrawing capital from emerging markets, prompting currencies to fall in nations like India and Indonesia, explains trade analyst Will Hickey. Reliance on exports no longer offers an easy answer for the emerging economies as the United States and many European countries with aging populations and high debt reduce spending. Hickey urges countries to address corruption, education systems mismatched with job needs, outdated infrastructure, bloated pubic sectors and bureaucracies – all of which can stifle innovation. Good economic policy builds upon education and the use of skills in adding value to products and services. – YaleGlobal

Exports No Longer Sole Path to Economic Rescue

Exports, the great catch-all for emerging economies, may offer less promise
Will Hickey
Thursday, October 24, 2013

Exporting problems: Indian citizens complain about falling rupee (top); Indonesia hopes to strengthen rupiah by ramping up exports

DAEJEON: Amidst the gloom over rising capital outflow and falling currencies, some emerging economies see a silver lining. If capital is heading back to the United States because that economy is improving, then a rise in US export orders may not be far behind. Yet the countries that rely on exporting raw materials like oil and coal or low value-added products such as t-shirts or fertilizer may soon discover that value-adding activity, rather than cheap currency, is the economic requisite in the new era.

Recent months saw an exacerbation of capital flight from emerging economies such as India and Indonesia due to the perception that the days of cheap money from US easing policies may be coming to an end. This caused steep declines in Indian and Indonesian currencies. Respective finance ministers, Palaniappan Chidambaram and Chatib Basri each proclaimed they would turn to the old export machine playbook – namely low value-added products and raw materials, more aggressively to resurrect collapsing exchange rates. Exchange rates, 11,270 rupiahs per dollar or 62 rupees per dollar, need immediate attention. Argentina, despite a currency rout of 5 ARS to the dollar and domestic inflation over 30 percent, has also been slow to change its thinking, fervently expecting agricultural exports to pick up someday.

Other exporting countries such as Sri Lanka, Thailand and Vietnam are also enduring various current account deficits. The playbook of “exporting their way out through competitive devaluation” will be seen for what it is – financial weakness due to incipient structural problems. These countries may not be able to resort to old methods of devaluation and interest-rate hikes against massive headwinds of aggregate competition from developing Asia with hungry, youthful populations.

Likewise, some officials argue that tapering of US Federal Reserve bond purchases might actually be a blessing for emerging economies if that conveys US economic recovery. A stronger United States would then spell stronger demand for exports from emerging economies. These ministers are eager to attract dollars to bolster their flagging economies, but struggle to get past the playbook of exports as salvation.

Western governments have aging populations, unrealistic social spending programs and high consumer debt loads, especially in EU periphery states like Spain and Greece. A return to the standard North-South playbook of Western countries taking undervalued resources and cheap labor off developing countries and then reselling them as branded finished products may no longer be in the offing. During the August  Federal Reserve meeting in Wyoming, Carmen Reinhart, co-author of This Time is Different, warned that “It could get very ugly” for countries in the developing world deleveraging from the cheap credit boom that has fueled quick growth due to hot money inflows and unrealistic currency valuations.  The flow of stimulus money and credit has allowed policymakers to ignore structural problems for too long.

Brazil, Indonesia and India represent a quarter of the world’s population. They and similar countries are in a quandary. They expect to “export” their way out of economic problems more quickly due to cheaper currencies, without addressing rampant corruption that undermines the value of written contracts, low levels or mismatched education, poor infrastructure like rutted roads and intermittent electricity supplies, producer and consumer fuel subsidies, bloated public sectors causing yawning current account  deficits and over-reaching bureaucracy that stifles entrepreneurship and innovation.

These countries are digging themselves deeper into a hole by failing to fully understand the needs of a knowledge economy world. Those who refuse to change will be marginalized or worse off than before by trying to return to the past.

Milton Friedman's Chicago School ideas, whereby free markets and monetarism create competitive factors under a limited government, may be irrelevant today. Essentially, Friedman sought to give to the central government absolute control over macroeconomic areas to manipulate the economy for social ends while leaving individuals to fend for themselves. This may have been plausible three decades ago; at that time, communist nations in Asia and Eastern Europe with a significant share of the world’s population were not integrated with the rest of the world. Labor pools available to the developed world were finite, as were the number of rich countries creating demand for the goods they produced. Automation, sweatshop labor and overcapacity have changed that paradigm radically. Despite the claim that free trade is a “win-win,” consumption economics puts people and nations on a collision path against one another. While not necessarily bad, the competition may reinforce inequality – with  large numbers of“losers” offset by a few take-all winners. The losers are victims of poor education, scant water and power services, and bad economic policy, and the trends lead to ever widening rich-poor divides.

Thus, currency devaluations as a way out of current account deficits don’t fool anyone and are all about passing on these macroeconomic problems to the lowest common denominator – the poor – through higher costs and stagnant wages. Recently, maids and construction workers from Indonesia and India working in Singapore and Hong Kong were rushing to remit their meager expatriate wages back to rupiah and rupees, anticipating that their families could buy more goods and services before the exchange rates shot up again. The reality is that prices of goods will rise,  due to being imported or made with imported components that also cost more than before. The markets are not fooled. The real costs of a weakening currency are passed along to others and quickly.

As is often the case, devaluations course quickly through a system, and usually leave the currency user worse off than before in terms of nagging inflation. Imports and energy supplies priced in US dollars quickly erase short-term devaluation gains.

Whether or not exchange rates rise again, inflated prices don’t usually decrease. In the end, it’s a Faustian bargain, or ultimately a zero-sum illusion. No country has ever devalued its way to prosperity. Devaluations tend to be an economic slippery slope, with the poor consistently hammered.

Cheap paper money, semi-skilled, nonunionized labor, repressive totalitarian governments – all of these contribute to low- to middle value-added products in the so-called export economies. Exports without significant value-added inputs such as found in Germany or Switzerland may no longer be the great catch-all for a nation’s economic success. Education then becomes key. The failure to use the boom to develop relevant education and know-how initiatives for an export capacity upgrade – as China, Malaysia and Saudi Arabia are doing – will damage the future for many young people for lack of good policy.

Economic policy then, in today’s information age, must focus on know-how and skills acquisition and empowerment of those skills. It’s the only path to advancement, underpinned by the critical aspects of the enabling environment towards developing human capital: quality universities, vocational and training institutes that create can- do people. History has shown that value-added activity through strategic skills development has created better jobs and lifted incomes by creating better domestic demand for products and services and attendant higher value-added export activity.

 

Will Hickey was most recently an associate professor and chair of global management at SolBridge University in South Korea.

Copyright © 2013 The Whitney and Betty MacMillan Center for International and Area Studies at Yale

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