9 January 2018

The export-led growth fallacy

by Donald Boudreaux

Originally published by CapX.

A fruitful discussion this morning with my Mercatus Center colleague Dan Griswold prompts me to observe that “export-led growth” makes no more or less sense than does, say, “yellow-things-led growth” or “rectangular-things-led growth” or “things-that-grow-in-the-ground-led growth” or “things-the-French-language-names-of-which-start-with-the-letter-‘T’-led growth.”

X-Led Growth Is Not a Thing

Economic growth occurs only when, and only as, there are increases in the amounts and qualities of goods and services available for ordinary people to consume. (Individuals are wealthy the better able they are to consume. If individuals are wealthy the better able they are to toil with as little consumption as possible, then history’s wealthiest individuals would be chattel slaves.)

Yet because in a market economy we generally increase our abilities to consume by producing greater amounts for others to consume – others who, in exchange, give to us what we wish to consume – each of us “grows” economically by producing more stuff (measured in value) for our trading partners to consume, for only then will our trading partners do for us what we ultimately seek from them – namely, give to us more stuff for us to consume.

Some of us produce goods that are exported. If we receive, in return for our exported goods, more goods and services that we value as consumption items – more than we received in exchange for whatever it was that we previously produced – we are made better off. We “grow” economically. But the same is true for yellow goods. Some of us produce goods that are yellow. If by producing yellow goods we receive in exchange, for our consumption, more goods and services than we received in the past when we produced (say) red goods, we “grow” economically. Ditto for switching our efforts into producing rectangular things.

What matters, ultimately, is what we receive for our consumption in exchange for what we produce. If those consumption goods and services come from abroad – as, in practice, many will – fine. But there is absolutely nothing remotely special, better, or economically meaningful about “export-led growth.” All growth is production-led – but only insofar as that which is produced is exchanged for goods and services to consume. (Here are links to earlier Cafe Hayek posts on “export-led growth“.)

A Note on Economies of Scale

In the comments section, Craig Walenta makes a valid point about economies of scale. As Adam Smith and others have recognized, the division of labor – i.e., specialization – is limited by the extent of the market. The larger the market, the deeper the division of labor – and the deeper the division of labor, the greater the total output. Because international trade expands the size of the market, international trade deepens the division of labor and, hence, increases total output.

So I amend my point: greater opportunity to export does have a real economic advantage that, say, greater opportunity to produce yellow-colored things generally doesn’t. But this advantage is reduced, perhaps to the point of nullity, if the greater exports do not exchange for more imports. (If Henry Ford produced lots of Model-Ts on his assembly line, but refused to take any goods and services for him and his company in exchange, the lower per-unit cost of production made possible by the large-scale production would have been pointless.)

And if government artificially promotes exports, it no more promotes genuine economic growth than if it were to artificially promote the production of yellow-colored things.

Seizing opportunities to produce at greater scale is indeed an advantage if economies of scale are available and if they are market-driven.* And a global market has a greater number of such opportunities than does even the largest national market. Yet it must be remembered that any genuine economic growth that thereby occurs is found not in what’s being exported. The growth remains in what is imported. Producing more exports for the sake of exporting more is no more a workable recipe for economic growth than is producing more yellow-colored things for the sake of producing more yellow-colored things.

* By “market-driven” I mean that there is a genuine consumer market for the outputs produced on a large scale. If, say, the Ford Motor Co. returned to its old policy of producing only black cars, then that policy – by taking advantage of greater economies of scale in the painting of automobiles – might well reduce Ford’s per-unit cost of producing each car. But if enough consumers would prefer to pay higher prices for cars of colors other than black, then this ‘economy of scale’ would not be market-driven.