The End of Export-Driven Growth

Noah Smith makes a pretty strong case for industrial policy (in the South Korean sense):

In any case, back to the master narrative: Real national wealth does not come from theft. It comes from reorganizing society into a more productive form. As South Korea did. As Japan did before that. As Mexico is hopefully doing right now. The nations of the Global South were late to the industrialization party, but I think they are finally here.

We both agree that “manufacturing-export capitalism” plays a large role in educating the masses into productive employment. We don’t need to go so far as South Korea, or even Mexico, to see this. There was a time, not so long ago, when Detroit was the Venice of the 20th Century, leading the world in per capita income and wealth generation. You might say that the city-state of Detroit efficiently brought its people into gainful employment creating completely new model of development.

But I think it’s pretty simplistic to suggest that something like that will come close to working. As Noah sees it, South Korea grew predominantly with export of cheap goods, becoming basically as rich as Japan is today:

How did South Korea pull off that trick?

Well, no one knows exactly what worked and what didn’t; all we see is the overall result. But in general, South Korea followed a blueprint outlined by America, Germany, and Japan. That blueprint is called, for lack of a better term, “manufacturing-export capitalism”. We don’t really know what countries can do to get rich, but the really successful ones all seem to do something that looks like “manufacturing-export capitalism”. And it’s basically what Mexico is doing right now.

But the world has changed – dramatically – since. South Korea basically hit the jackpot of growth between 1970 and 1990:

There are two points to take from this graph. First, South Korea had remarkably robust growth for the last quarter of the 20th Century. Second, South Korean growth was hugely dependent on the American economy. Aside from the Asian Crisis in the 1990s, the only severe declines in growth happen during American recessions (see the grey columns). 

The “Tiger” economies grew during a time when rich countries (basically America) were willing and able to absorb the cheap manufacturing exports from Asia. There are two dynamics that afforded South Korea its “miracle”. For one, America had pretty solid growth of 3-4% through that period of time. Though dwarfed by Korea’s growth rate, Americans not only were richer to begin with, but the real growth itself was higher:

This graph basically shows the factor by which total American growth outdid South Korea. This figure, roughly, estimates the extent to which America can run a trade deficit to finance international growth. All said and done, because America was so rich in the 20th Century, it didn’t need huge growth rates to import like crazy. The only blip in the graph is, of course, the 1980s recession. 

On a per capita bases, this graph bodes very well for South Korea. Once it hits one, it means both countries have the same total increase in welfare, but South Korea, obviously, distributes that across a much smaller base. It won’t be long before the graph converges at some below-zero point, indicating equal per capita growth rates. 

I totally agree that all growth isn’t “theft” or, as a fancy economist might say, after the colonial pillage, most countries like America, South Korea, and India have grown with “inclusive” rather than “extractive” institutions (this is a broader point, but speaks to the same sentiment, in my eye). But manufacturing isn’t the free lunch it once was, and Mexico isn’t a good example to the contrary.

Mexico shares a special physical and cultural relationship with the United States. It makes very strong political sense for America to keep Mexico sufficiently rich. While I would argue we benefitted tremendously from NAFTA, it can definitely be parsed as America willing to run large and unnecessary trade deficits to finance Mexican growth. Most poor countries don’t have the luxury of being America’s little brother. 

The picture in the 21st Century will be very different from that in the late 20th. There used to be a booming America financing the growth of a handful of people (forget countries, South Korea and the other Tigers are dwarfed by India and China). Today 50% of the world is “booming” and America is not. Last year, India – the “weak” BRIC – grew by $100 billion. If America grows at 3%, that would represent almost 25% of its total GDP. China grew by over a trillion dollars, or two times America’s total growth. Even if you dash China off as a relatively rich and booming economy (not to mention geopolitical giant), there are many countries like India eagerly waiting for the West to import their goods. But this is not happening.

Recently, China became the world’s biggest trading partner with a majority of countries, a position held by the United States for a long time. This isn’t too surprising to anyone. But, for the first time, trade between developing countries and developed countries (“developing-developed” trade) fell short of trade between developing countries (“developing-developing” trade).

These are all huge, qualitative factors that South Korea did not face during its ascent. And they are realities Mexico is largely shielded from due to its position. There are also fuzzier agents at play. The latter half of the 20th Century, the heyday of American dominance, was defined by a growing respect for free trade, banking, and capitalism. Today there are populist, anti-trade impulses in both major American parties, forget Europe. We’ve (wrongly) convinced ourselves that a trade deficit is a bad thing and political rhetoric frequently borders on currency protectionism.

As the rich world slouches from recession to stagnation, export-driven growth isn’t going to be the answer to the development India and its friends desperately need. The Fabian spirit of Nehruvian beginnings leaves India with a very strong domestic industry and its growth is sufficiently infused with both technological progress and domestic consumption. While China is the gold standard model child for growth today, India might offer a more sustainable alternative in principle (India has huge, non-structural – unless bad politics are structural – problems that need fixing). 

While I’m not advocating for import-substitution, I do believe there is a strong case to be made for mining new avenues of growth. For most countries this means: 

1. Find alternatives for oil and coal. When we hit reach peak oil/coal/whatever, America and company will pay extraordinary prices for energy crowding out the poor world from natural resources. (Or forcing huge trade deficits that will definitely tempt a balance-of-payments crisis).
2. Focus on a domestic services industry that requires literacy but not much more serious education.
3. Don’t trade a good terms-of-trade for a weak currency.
4. Target areas highly-specific industries and devote huge sums of research to develop a comparative advantage. For India, I believe thorium-powered nuclear research is a candidate. While the rich countries are the general choices for research and development. If poorer countries invest enough in very specific projects, they can develop a niche.

Development for the “Global South” isn’t looking apocalyptic. But South Korea, Mexico, and any other wild tigers are not the answer.