Published: Monday, Aug 17, 2009
August 17, 2009
For the first time in many decades, exports around the world got clobbered by the decline in consumer demand due to the worst global recession in decades. The weakness in exports is expected to last through 2010, according to most analysts. The World Bank (WB) forecasts a decline in global exports of 9.7% in 2009; International Monetary Fund (IMF) predicts a contraction of 15% for advanced countries and 6.5% for emerging market economies this year. Both institutions project a slow recovery in 2010 - the WB being more optimistic with a forecast of 3.8% growth, compared to IMF's projection of anemic recovery at 1.4%. However, there is greater consensus on a decent turnaround in export performance come 2011.
Yes, these are tough times for economies dependent on trade in general, and exports in particular. China, for decades the export powerhouse of the world, appears to have been the hardest hit by the global recession. With 22% decline in its exports during January-June 2009, the economy could lose as much as one-half billion dollar of potential exports in 2009. Make no mistake, China is in good company. Countries we know as strong export performers of the world saw their exports plummet by over 20% during the first six months of the year. This includes India (-29%), Thailand (-22%), Malaysia (-23%), Vietnam (-24%). Sobering as these statistics might be, if you think it is time to write the obituary on export-oriented development or what is popularly described as export-led growth, think again.
History is replete with evidence to show that export success leads to high growth as well as poverty reduction. East Asian Tigers (S. Korea, Thailand, Indonesia, Hong Kong) soundly beat poverty and achieved decades of 8.0 per cent plus economic growth by riding on a wave of export success during the 1970s and 1980s. That experience was a triumph of both economic theory and policy. It demonstrated the superiority of export-oriented development over inward-looking growth strategy represented by import substituting industrialisation (ISI). The latter approach which was popularised by the Prebish-Singer hypothesis of the 1960s preached "export pessimism" for poor countries which, according to this hypothesis, were destined to export only primary commodities in exchange for relatively higher-priced industrial goods of developed countries.
Patterns of trade and development in the subsequent decades have proved that hypothesis wrong as not only did developing countries become exporters of manufactures, success stories of the import substituting approach to growth were few and far between. This approach, which required the creation of high protective walls and trade barriers, bred inefficiency and resulted in enterprises becoming uncompetitive in the world market. The best example of the ISI approach, of course, is India. After clinging to this idea for fifty years, India realised that in a globalized world, though its firms were producing almost everything under the sun, few of its products were of high quality. For those fifty years, India exported little, and grew at an anemic rate which their leading economists dubbed as the "Hindu rate of growth". All that has changed now, as India came out of the shackles of high protectionism in the late 1990s, to embrace greater trade openness and increased orientation towards export markets. India has been experiencing double digit export growth in this decade with GDP growth reaching giddy heights of 8.0-9.0%, until it was hit by the current global economic crisis.
China's export dependence has become legendary ($1.4 trillion exports in 2008 and 37% of GDP). Its trade surplus ran into almost $500 billion in 2008. Although the global crisis has been a major setback for China, I hardly think it is left with any option other than resuming exports once the world economy is on the mend. Where China and India - two economies with sizable domestic markets - have chosen to look outwards for their own prosperity, can Bangladesh do otherwise?
Since the early 1990s, Bangladesh has opted for greater trade openness. Its trade-GDP ratio has risen from under 20% in 1990 to 43% today. Exports were only $1.3 billion or 5.0% of GDP in 1990; now they are $15.5 billion or 17.7% of GDP. In the past year, the global slowdown of trade as well as exports has raised doubts in many minds, elsewhere and in Bangladesh, as to whether export dependence is a good idea, and whether it would be prudent to reduce such external dependence. Voices are being heard in seminar circles to the effect that it is time to shift focus from exports to the domestic market.
Before we begin to lose sight of the wood for the trees, let me put forth at least two cogent arguments why it is really not a matter of choice between the domestic and export markets. First, the size of any domestic market - even that of India or China, and certainly that of Bangladesh - is miniscule compared to the world market for goods and services. Imagine, what would happen if RMG industry were to focus only on the domestic market for its growth. It could not have sold $12 billion worth of garments and employed 3.0 million workers, not to mention the 10 million people who depend on their livelihood on this one sector and its compliments, namely, packaging, courier services, shipping and banking services, and of course cosmetics. As yet, we have only captured a small part of the global RMG market of $410 billion.
Second, while the vast world market is out there, the key to getting access into that market is to be competitive, in terms of both cost and quality. Being geared to the export market creates the drive to achieve competitiveness. Competition is fierce and there is no protection for intending suppliers. The idea of looking inward to the domestic market might be appealing in times of a global crisis, but the limits of the domestic market in creating jobs and income ought to be kept in view. Every year, two million people are added to our workforce. Since 2000, we have been sending nearly 200-300 thousand migrant workers, on average, every year to the Middle East and other countries. That still leaves large numbers of job seekers at home who can't find meaningful employment. Competitive export production could be the answer to solving our unemployment and under-employment problem.
While there is nothing wrong in suggesting activation of the rural non-farm sector and small & medium enterprises (SMEs), it is important to keep in mind that if we adopt a strategy of shielding these activities from external competition, we will have created non-competitive enterprises of the future, which are bound to fade away. We might have to end up protecting or subsidising them in future just to keep them alive. Instead, the strategy should be to offer only time-bound protection to enterprises, whether they are SMEs in urban or rural non-farm sector. Thailand, China and Taiwan have internationally competitive SMEs (rural or urban) and we need to draw from their experience on how to produce export quality products I small enterprises.
So, it is really not about choosing between the domestic and export markets. The central point is to ensure that enterprises are competitive on a global scale, even if they cater to the domestic market. Otherwise, as global competition gets even more fierce, we will be left with a host of enterprises that will need nursing in perpetuity.
(Dr. Sattar is Chairman, Policy Research Institute of Bangladesh. Research support was provided by PRI's Nurul Hoque. The writer can be reached at e-mail: firstname.lastname@example.org)
Last Updated on Thursday, 06 January 2011 05:45