Faddish Export Promotion Is a Heavy Burden for Any Economy

Exports are all the rage this season. Cries for adjustment of global imbalances become disputes over who has to "shoulder the burden" of reducing their current account surpluses; the collapse of the Doha trade talks makes every World Trade Organization member acutely aware of barriers to their export success; and the integration of China and India into the global labor force raises "competitiveness" once again to prime status as the policy goal on politicians' lips.

Yet export competitiveness has little beyond being fashionable to recommend it as an objective for economic policy. Like today's again trendy platform shoes, pursuit of competitiveness gives one a temporary boost that is unstable, untenable and, with repeated use, unhealthy. A dozen years ago Paul Krugman, the US economist, famously called competitiveness "a dangerous obsession" among US policymakers. In fact, in every decade, in all advanced economies, a focus on export competitiveness tends to erode living standards and distracts policymakers from a more beneficial emphasis on productivity.

If governments want to increase their economies' share of global production in high-value-added sectors or, better still, create new such products and sectors, then the policy goal should be to increase competitive pressure upon an economy's own businesses. In spite of the frequently cited examples of export-led growth for some developing countries, there is mounting evidence that the benefits to growth of countries' engagement in trade are attributable to openness. These include the direct benefits of importing lower prices and greater variety; the efficiency gains from challenging (rather than protecting) domestic businesses; and policy choices that contribute to a broadly liberal and market-oriented framework across the economy. Exports taken on their own, the usual narrower target of competitiveness policy, are not correlated with average per capita income growth.

A focus on export competitiveness usually leads to actively harmful policies, beyond simply wasted resources and rhetoric. If exports are the public criterion of economic success, policymakers can meet that goal only by self-destructive means: depreciating a country's currency, thus eroding the purchasing power and the accumulated wealth of citizens; depressing wages in export sectors, either directly or through relative deflation vis-à-vis trading partners, thus cutting real incomes and domestic demand; subsidizing or protecting exporting companies, thus distorting investment decisions and locking in old technologies and businesses at the expense of new entrants; or promoting national champions, thus increasing both wasteful public spending and the costs to domestic households and businesses.

The only constructive way to increase exports is for the total value of exports to rise as the side effect of productivity growth raising the country's terms of trade. So, to the degree that there is a strategic choice for governments of advanced economies about competitiveness, it is analogous to that of many businesses: Does one compete on price or on quality? In other words, does the economy increasingly specialize in high-value-added sectors where wages and technological requirements are high, or does it concentrate on high-volume commodified products where cost efficiencies are the key to success? The integration of China and India into the world economy only increases the starkness of this choice by putting more price pressure on the low end but does not fundamentally alter it.

No example better illustrates the costs to an economy of distraction by export competitiveness than Germany in recent years. In fact, the very parts of the German economy that are most protected by over-regulation, publicly subsidized financing and unaccountable corporate governance-the much vaunted Mittelstand-use the export success of some of their companies to justify those protections. Yet, for all their exports, the resulting lack of consolidation or technical change in these sectors drives down productivity growth and returns to capital throughout the German economy.

Consequently, Germany's successful export industries remain largely the same ones as 40 years ago, while global technological progress means these sectors have moved down the value chain. The dysfunctions of Germany's corporate sector also mean almost no German companies have emerged in today's growing high-technology and service sectors. By focusing on export totals rather than productivity growth, the country has brought about arrested development in its corporate sector.

The costs of such policy-encouraged corporate inertia are not just long-term economic decline. The focus on competitiveness also damages medium-term macroeconomic performance. Since adopting the euro Germany has had an inflation rate well below the eurozone average, with the con­sequence that it has suffered real wage deflation compared with its European trading partners. In the business press, this has been deemed cause for cele­bration, not suffering: It was trumpeted that Germany would have an export-led recovery. The German corporate sector successfully eluded reform by suggesting that the reduction of relatively excessive wages would suffice for growth.

A year later, exports have risen. But, as recent Bundesbank and International Monetary Fund studies show, that rise is due to growth in Germany's export markets, not to improvements in price competitiveness.¹ Furthermore, this export boom was not enough to overcome the drag on German consumption from several years of relatively declining wages and purchasing power. Nor was it sufficient to induce a significant increase in long-pent-up corporate investment. Now that the export cycle has peaked, the country has little to show for it: Unemployment remains over 10.5 percent; growth will be lower in 2007 than in 2006; and declines in wage declines have been substitutes for innovation, entry into new sectors or corporate reform.

Real wage compression in Germany has proved no more a sustainable path to growth today than the nominal devaluations pursued by the United Kingdom and Italy intermittently from the 1970s through the early 1990s. In contrast, both the United States and Britain have grown strongly since the early 1990s by generally encouraging strong currencies, foreign competition for and investment in the corporate sector, openness to imports and private investment in research and development-all of which was only possible with a healthy disregard for export performance and the fortunate absence of an explicit competitiveness policy. Whatever adjustment of international imbalances financial markets demand over the next couple of years, no advanced economy should follow German fashion and get caught up in a revival of the export promotion fad.


Note

1. K. Stahn, 2006, "Has the Impact of Key Determinants of German Exports Changed?" Bundesbank discussion paper; and C. Allard, M. Catalan, L. Everaet, and S. Sgherri, 2005, "Explaining the Differences in External Sector Performances Among Large Euro Area Countries," IMF country report.