Thread: Why is export-led growth considered bad?

I was reading this article China’s export-led growth model, here I am Quoting the author while writing about the Chinese GDP growth:

I hope you can answer my questions:

Export-led growth has also created structural problems that have to be addressed to achieve more balanced growth. The most important problems are high savings and persistent current account surpluses.

Since when is high savings and surplus current account balance a bad indicator?

At a low income level, China has been forced to export its savings to much richer countries.

What does this mean? Chinese people are spending their money elsewhere? are we talking about tourism?

Related to this problem is the slow growth of domestic consumption and the declining share of consumption in GDP. This can be mostly attributed to the slower growth of household income relative to the growth of GDP. The other side of the story is faster growth of corporate income and government revenue.

Why is a low consumption society / high saving society seen as a bad indicator?

Enterprises have reinvested most of their profits and the government has spent a large proportion of its revenue on capital formation. The result is that China is still an investment-driven economy.

why is an investment-driven economy bad? isn't investment in research and development, infrastructure and further expansion a good indicator of a sustainable and healthy economy?

finally,

What is export-led growth considered bad?

I always read that export-led growth has its limits, why?

Originally Posted by justme335

I was reading this article China’s export-led growth model, here I am Quoting the author while writing about the Chinese GDP growth:

I hope you can answer my questions:

Export-led growth has also created structural problems that have to be addressed to achieve more balanced growth. The most important problems are high savings and persistent current account surpluses.

Since when is high savings and surplus current account balance a bad indicator?

At a low income level, China has been forced to export its savings to much richer countries.

What does this mean? Chinese people are spending their money elsewhere? are we talking about tourism?

Ok in tradional economics excessive savings would present a problem in that people are not buying things, this can lead to recession and
eventually depression. In the case of China's economy things work a little differently, firstly because of a massive dichotomy of those
with money and who are able to save and those , mostly living in rural areas, who are struggling to survive and don't have any money to
save. Secondly because of China's export led economy, which means even without internal demand, the public buying things, external demand
is keeping the economy expanding, creating growth.

However, as the old saying goes, nothing lasts forever. The more people save the greater the amount of loan capital is available, with loans
comes a requirement for return on investment, now in a well balanced economy this return would be met through businesses being lent money,
making a profit and repaying their loans and plus interest, the return, however when the balance is not there, as in the case of excessive
saving the demand for return is greater and ability of business to provide this return reduced, due to lack of demand for their products
or services. Now whilst China's returns are currently being met by export activity this cannot continue indefinately, as it is China has
experienced a shortage in it's labour force, despite it's massive population. With rising wages China will find it's competitive edge
slipping against other manufacturing nations, so eventually there will come a point to which it needs to spark internal demand to help
achieve a balanced economy.

We have already seen some of the results of China's internal markets take off sparked by available loan capital in their housing market
which began to spark massive property bubbles, before the government stepped in to reduce the credit available to people and thus cool
speculation and calm the bubbles before uncontrolled crashs took effect.

But the short answer is economies are about harmony and balance, when they become unbalanced, whether by excessive saving or other causes
they start to experience problems. To much saving unbalances the economic cycle.

Related to this problem is the slow growth of domestic consumption and the declining share of consumption in GDP. This can be mostly attributed to the slower growth of household income relative to the growth of GDP. The other side of the story is faster growth of corporate income and government revenue.

Why is a low consumption society / high saving society seen as a bad indicator?

What this means is much of China's money has been invested abroad to ensure secure returns.

why is an investment-driven economy bad? isn't investment in research and development, infrastructure and further expansion a good indicator of a sustainable and healthy economy?

For an economy to be healthy and prosper it needs stability and balance, most economies, just like that of China, are based upon
consumerism. What this means is that it is essential for the people to buy the products and services of it's businesses in order to
generate income and provide employment. To much consumption leads to debt problems, not enough strangley eventually also leads to debt
, lack of government revenues, via recession as the economy shrinks and companies go out of business.

finally,

What is export-led growth considered bad?

I always read that export-led growth has its limits, why?

Generally export led growth isn't considered bad, but as you allude to it has it's limits. It works like this the world is a big
place with lots of countries all competing to provide supply to the demand for products and services. Any countries share of this demand
is never static, it's an ongoing competition meaning you cannot count on fixed export revenue ad infinitum. Where as internal growth is
more easy to maintain and control.

1

Originally Posted by justme335

I was reading this article China’s export-led growth model, here I am Quoting the author while writing about the Chinese GDP growth:

I hope you can answer my questions:

Export-led growth has also created structural problems that have to be addressed to achieve more balanced growth. The most important problems are high savings and persistent current account surpluses.

Since when is high savings and surplus current account balance a bad indicator?

It's unspent money. Unspent money is like favors that haven't been cashed in yet. Let enough of those favors build up and there begins to be some doubt as to whether they ever will be repaid.

If it were all spent at once, it would lead to hyperinflation. There wouldn't be enough goods and services on hand to put up for sale in time.

At a low income level, China has been forced to export its savings to much richer countries.

What does this mean? Chinese people are spending their money elsewhere? are we talking about tourism?

Most people put their savings in an investment like stocks or bonds or something. Exporting savings means most of the money is getting invested elsewhere.

Related to this problem is the slow growth of domestic consumption and the declining share of consumption in GDP. This can be mostly attributed to the slower growth of household income relative to the growth of GDP. The other side of the story is faster growth of corporate income and government revenue.

Why is a low consumption society / high saving society seen as a bad indicator?

Saving too much isn't really a good thing.

If you try to store too much wheat, it will spoil uneaten. If you put cars into storage they become old models.

The economy isn't good at generating permanent wealth, like the kind you can store and store and store. It's good at generating wealth you use almost immediately.

If you don't use it almost immediately, then it simply goes to waste, and waste is a bad thing.

Enterprises have reinvested most of their profits and the government has spent a large proportion of its revenue on capital formation. The result is that China is still an investment-driven economy.

why is an investment-driven economy bad? isn't investment in research and development, infrastructure and further expansion a good indicator of a sustainable and healthy economy?

finally,

What is export-led growth considered bad?

I always read that export-led growth has its limits, why?

These are really good questions, and I'm glad you're asking them.

What they're really saying is there's too little consumption. Too little demand for goods and services at home.

If all of the demand for your products is in someone else's country, then gradually the exchange rate between currencies will shift. One dollar becomes worth fewer and few yuan. Since American consumers are using dollars to buy Chinese goods, if the Dollar becomes worthless that means the price of Chinese goods is going up from their perspective (they're having to spend more dollars to buy a cheap set of earphones.)

Export-led economies are not bad and indeed it is perhaps the only way to escape from middle-income trap. East Asian Tigers all had export-led system. Japan, Germany, France and even in large context, U.S in the past also had similar pratice. It is never bad.

Concerning export-led economies, it all depends on what is being traded.

When one deals with savings, it depends on what is being saved.

Most people invest poorly.

It works if somebody else is buying. Pretty much drains the buyers' economy. If you look at the system as a whole, it's bad overall, but if you only look at one part of the system, then one part is gaining and another part is losing.

Still it only lasts until the currency bubble bursts. In the case of China and the USA, that currency bubble is being sustained by the growing Federal deficit. Both sides of it. The deficit provides money for consumers to spend buying Chinese goods, and gives China a place to put its US dollars so they won't affect the exchange rate.

By taking those dollars they earn by selling goods to the USA and not exchanging them, just immediately reinvesting them as dollars, they prevent the revaluation of their own currency.

Now.... why it's a bubble is for two reasons:

1) - It's fueled by a debt that can only grow so big.

2) - The Chinese companies that reinvest those US dollars are probably writing down the value of those dollars in their ledgers as if they were already Yuan. But the reality is that most of those dollars can never be converted into Yuan. If they were, the Yuan would revalue, and the dollars would be worth less. So they're showing profits that can never actually be made real for them. They're just imaginary "if only" profits. That will only last as long as until someone somewhere calls the bluff. As long as only a few people ever actually trade in their dollars, those few people will get today's exchange rate. If there were ever a run on the currency exchange (like the run on the banks in 1929), the result would be catastrophic.

Thank you all so much for your replies, especially kojax and Ascended. I really appreciate the detailed replies, it made the whole picture related to the consequences of "high savings" and "high export led" economy much clearer to me.

Originally Posted by kojax

It works if somebody else is buying. Pretty much drains the buyers' economy. If you look at the system as a whole, it's bad overall, but if you only look at one part of the system, then one part is gaining and another part is losing.

Still it only lasts until the currency bubble bursts. In the case of China and the USA, that currency bubble is being sustained by the growing Federal deficit. Both sides of it. The deficit provides money for consumers to spend buying Chinese goods, and gives China a place to put its US dollars so they won't affect the exchange rate.

By taking those dollars they earn by selling goods to the USA and not exchanging them, just immediately reinvesting them as dollars, they prevent the revaluation of their own currency.

Now.... why it's a bubble is for two reasons:

1) - It's fueled by a debt that can only grow so big.

2) - The Chinese companies that reinvest those US dollars are probably writing down the value of those dollars in their ledgers as if they were already Yuan. But the reality is that most of those dollars can never be converted into Yuan. If they were, the Yuan would revalue, and the dollars would be worth less. So they're showing profits that can never actually be made real for them. They're just imaginary "if only" profits. That will only last as long as until someone somewhere calls the bluff. As long as only a few people ever actually trade in their dollars, those few people will get today's exchange rate. If there were ever a run on the currency exchange (like the run on the banks in 1929), the result would be catastrophic.

Amazing explanation, Thanks to you now i have a much better understanding. Can I ask some more questions?

How long can this bubble be sustained? It seems to me that a burst of such a bubble would have catastrophic effects on China, right?

US owes China money in US dollars, right? If the US dollar gets devalued, wouldn't China be loosing a big portion of its money? Another big hit is that the Chinese products would be too expensive to be exported anywhere.

How long can this game go on?

This wiki article the problem pretty well. A bubble is a lot like a Ponzi Scheme. (And even the article points that out.) A Ponzi scheme is just someone creating a bubble on purpose. Most of them happen accidentally.

Ponzi scheme - Wikipedia, the free encyclopedia


The crucial element in this particular system is Chinese investors honestly believing their investments in US dollars are real money. That they're going to be able to convert it back into Yuan. If they ever stopped believing that, it would immediately crash. However.....the willingness of those Chinese investors to do what they are doing is the only reason the export driven system ever appeared profitable in the first place.


It may take a long time, but it eventually has to fail because the USA wil stop borrowing. That might not even be their choice. Once the USA hits its credit limit it will have no choice but to stop borrowing.

If the USA stops borrowing, Chinese investors will stop adding money to the bubble because they can't add any more. Then without an outlet, the trade imbalance between China and the USA will start to cause the Yuan to revalue. This is already beginning to happen. In 2005 the government ended up having to allow the Yuan to revalue slightly, and it's been going up little bits at a time.

Renminbi - Wikipedia, the free encyclopedia

If China plays its cards right, it could be a good thing to have its currency become valuable, but the export driven strategy will have to be abandoned in time to avoid a crash.

Originally Posted by gonzales56

Concerning export-led economies, it all depends on what is being traded.

When one deals with savings, it depends on what is being saved.

Most people invest poorly.

Often because they don't look at investments as a long term thing, and wish to make a quick dollar. Doesn't work that way normally.

You do, however, have to be willing to LOSE money to make money!

Nice arguments. I'll try to contribute a little more:

1) If your GDP growth is basted heavily in exports, then the stability of your economy is highly related to exogenous factors. Indeed, a government can not affect international demand by any means. Thus, if there's a demand shock somewhere abroad, then your exports can literally collapse even though the export factor is still high tech, innovative, etc.

2) Also, as it is pointed out above, it depends on what your export product is. For a middle/low income country it's realistic to assume that it will export primary sector's products. As it can be shown, elasticity of international demand for these products can be a limit in growth.
(You can have a look to Prebisch- Singer paradigm for more)

2) In the same case (developing countries) unequal exchange concept, suggests that due to 1) high mobility of Capital 2) low mobility of labour 3) differences in accumulation of capital and wage levels, surplus value is transferred from developing to developed countries. That phenomenon occurs because in international trade it is possible that some products can be traded at a price below their real value.

3) Under some circumstances (eg Germany- Euro area) export led growth means that wages (therefore consumption) are stagnant (at best) in favor of competitiveness. Indeed, Germany may be a success story but, German employees haven't seen significant rises in their incomes.

Originally Posted by kojax

It works if somebody else is buying. Pretty much drains the buyers' economy. If you look at the system as a whole, it's bad overall, but if you only look at one part of the system, then one part is gaining and another part is losing.

Do you suggest that the country which imports, is losing a priori? What's wrong if a country imports (some parts of) machinery and capital in order to increase it's investments and to develop infrastructure?

Originally Posted by Achilleas

Originally Posted by kojax

It works if somebody else is buying. Pretty much drains the buyers' economy. If you look at the system as a whole, it's bad overall, but if you only look at one part of the system, then one part is gaining and another part is losing.

Do you suggest that the country which imports, is losing a priori? What's wrong if a country imports (some parts of) machinery and capital in order to increase it's investments and to develop infrastructure?

It's never a good idea to import more than you export, at least not unless it's only on a temporary basis.

However, importing capital and industrial goods is different from importing consumer goods. The economy isn't really any better if all your citizens have two TV sets instead of one. However, if every factory has two assembly lines instead of one, that makes things a lot better.

Having 2 TV sets in every home is a better standard of living, but not a higher rate of employment, or education, or lower rate of homelessness, and it doesn't really improve a nation's financial stability.

Originally Posted by kojax

Originally Posted by Achilleas

Originally Posted by kojax

It works if somebody else is buying. Pretty much drains the buyers' economy. If you look at the system as a whole, it's bad overall, but if you only look at one part of the system, then one part is gaining and another part is losing.

Do you suggest that the country which imports, is losing a priori? What's wrong if a country imports (some parts of) machinery and capital in order to increase it's investments and to develop infrastructure?

It's never a good idea to import more than you export, at least not unless it's only on a temporary basis.

However, importing capital and industrial goods is different from importing consumer goods. The economy isn't really any better if all your citizens have two TV sets instead of one. However, if every factory has two assembly lines instead of one, that makes things a lot better.

Having 2 TV sets in every home is a better standard of living, but not a higher rate of employment, or education, or lower rate of homelessness, and it doesn't really improve a nation's financial stability.

Actually it may be a bad idea to have 2 assembly lines as well. Capital imports are useful as long as its return is bigger than its cost (lending interest rate).

Trade deficit may cause problems indeed. I am not convinced at all that it's essential to always look for trade surplus. Consumption and well being can be served for a while by low trade deficits, as long as GDP growth rate is high and country has efficient access to foreign exchange. On the long run it would be much much better to use trade deficits as a tool for more and better investments though.

My very personal opinion is that export-led growth is overvalued. It's kinda new mercantilism approach and it hasn't been so efficient as it is presented by media and relative supporters. Growth can be achieved by many ways and I think that import substitution is a more efficient developmental approach. Exports are important as long as they ensure enough foreign exchange (for debt repayments mostly, trade credits, etc). But I don't believe that exports should be a strategic goal, at least not for a developing country. You may have current account deficit for a long time but if you use it wisely you can be just fine.

Historically, major rich countries (USA, UK, Germany, etc) and many success stories (most notably South Korea, India and China) have not used (elusively) exports nor free international trade as their growth policy until the very late decades. All of them have used protectionism, state intervention and government investment projects alongside private investments. Especially China, has used state intervention in a very innovative way in order to obtain high rate of investments for at least 1 decade. It's kinda strange to hear from them prompting free trade/export oriented policies to the developing/underdeveloped countries.

Export led growth is bad due to growth depending on exports!

depends.

In China's case, it's still a third world economy (yes it's large in GDP terms, but living standards are still low in global terms).

So due to its economic development level, it has a large secondary sector built for exporting. This won't last forever, as with increased affluence the export orientation may lessen.

I see no wrong in an export-orientation, but then a country should have a wide range of markets for its goods. The thing is though that China's major export markets are only just now recovering from the Great Recession.

Also a consumption-based economy is no better.

This essentially caused the Great Recession, since whilst there is more insulation from external shocks, this can lead to trade deficits (not bad per se, granted) and high personal and business debt.

Nothing wrong with exporting in a balanced matter.