Are exports good and imports bad for the economy?
The current deteriorating trade balance in developing countries raises a critical question: are exports still reliable for growth? It is a fact that many developing countries overstate the importance of exports; they put the cart before the horse. The correct view on exports, however, is to see that they are just the means, not the goal.
Indeed, it would be naïve to ignore the experiences over the last two decades, during which only a few countries’ economies have grown quickly without experiencing an increase in the share of domestic output that is exported. China is a good example. Between 1991 and 2011, its per capita gross domestic product (GDP) grew by 9.53 percent. At the same time, its export to GDP ratio (export/GDP) jumped from 16.1 percent in 1991 to 31.4 percent in 2011.
From this kind of evidence we are tempted to conclude that exports generally lead to or stimulate growth. Yet, this would be erroneous logic. The other side of the coin reveals a mirror image. During the same period, only a few countries that experienced a large rise in export/GDP achieved higher than 2 percent per capita GDP growth — taking 2 percent as the benchmark of modest success.
Brazil’s export/GDP jumped 45 percent over the past two decades, while its per capita GDP grew slowly at 1.75 percent. Some even suffered negative growth, like Gabon where a 40.2 percent increment in export/GDP was canceled out by -0.15 percent per capita growth. Here we have provided justification to support the premise: Although countries that grow fast tend to experience rising export/GDP, the reverse is not generally true.
Another misconception about exports may be due to the so-called Bretton Woods’ institutional reports. It has become commonplace in recent economic reports to claim that exports are a source of learning and positive technological externality for the home country that allow domestic producers to learn from the more advanced global markets.
But, what does the evidence show? Many studies find that exporting firms are indeed technologically more dynamic, tend to have larger production capacities that better utilize economy of scale, employ a mix of better-skilled workers, and generally outperform non-exporting firms. In most cases, export firms have a comparative advantage (greater efficiency) in their production processes and they believe that this advantage enables them to profit in offshore markets. This suggests that firms carry out self-selections into exporting activities, i.e. efficient producers are more likely to enter export markets.
A study by Aw, Chang and Roberts ( 1998 ) in Taiwan and South Korea found little evidence that learning from exports had occurred in either country. Specifically, there was no evidence that firms with continuous export experience recorded greater productivity than those firms that never exported. Thus, in general, causality goes from productivity to exports, not the other way around.
What really needs to be emphasized is importation. Don’t get me wrong; I’m not saying exportation is meaningless. However, imports benefit growth in at least two ways: importing ideas and importing investment and intermediate goods.
The new growth theory stresses the importance of human capital in the growth process. In another expression, human capital is often considered as the soul of growth, an idea. From a supply point of view, ideas on organizing the process of production, manufacturing new products, and identifying a latent demand for a commodity are central to economic growth. And this is the beauty of imports; that a home country can “borrow” ideas from others. The wheel does not have to be reinvented in every country. South Korea and Taiwan have been very successful at importing ideas despite wide-ranging trade restrictions throughout the 1960s and 1970s.
The second powerful element of imports is importing investment, goods and intermediate goods. For most successful developing countries, raising the long-term growth rate requires an increase in the investment rate.
However, these countries lack a comparative advantage in producing capital goods. This is also true for intermediate goods, even though the relationship with growth is less direct.
In any modern economy, production of manufactured goods relies on a wide range of specialized inputs, many of which exhibit increasing returns to scale. Again, developing countries most likely cannot rely on a domestic supply of specialized intermediate inputs. Hence, for both investment and intermediate goods, imports are the second-best way to do so, not to mention with minimal import restrictions.
But, this is important. Successful countries like South Korea and Taiwan benefited from imports in quite a short time frame and transformed what they had gained into larger capacity in domestic industries.
An interesting question then arises: Has Indonesian industries benefited from imports in the same way?
Since the first quarter in 2012, Indonesia’s current account has been in deficit. Besides an annoying loss from oil imports, the shrinking global economy seems to have been made the scapegoat.
If the two elements of imports mentioned above had sufficiently strengthened our domestic industries, we could still expect stable growth with a sustainable current account surplus, despite the worldwide slowdown, and solid domestic demand as we now have. That’s the only way for imports to be good.
The writer is a researcher at Bank Indonesia. The views expressed are his own.
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