Author: Hafiz Noor Shams

The Economist reviews economist Dani Rodrik’s latest work:

The financial crisis of the past nine months is stirring a new export fatalism in the minds of some economists. Even after the global economy recovers, developing countries may find it harder to pursue a policy of ”export-led growth”, which served countries like South Korea so well.

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This strategy is one reason why the developing world’s current-account surplus exceeded $700 billion in 2008, as measured by the IMF. In the past, these surpluses were offset by American deficits. But America may now rethink the bargain. This imbalance, whereby foreigners sell their goods to America in exchange for its assets, was one potential cause of the country’s financial crisis.

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If this global bargain does come unstuck, how should developing countries respond? In a new paper, Dani Rodrik of Harvard University offers a novel suggestion. He argues that developing countries should continue to promote exportables, but no longer promote exports. What’s the difference? An exportable is a good that could be traded across borders, but need not be. Mr Rodrik’s recommended policies would help countries make more of these exportables, without selling quite so many abroad.

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As countries industrialise and diversify, their exports grow, which sometimes results in a trade surplus. These three things tend to go together. But in a statistical ”horse race” between the three—industrialisation, exports and exports minus imports—Mr Rodrik finds that it is the growth of tradable, industrial goods, as a share of GDP, that does most of the work.

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Policymakers need a different set of tools, Mr Rodrik argues. They should set aside their exchange-rate policies in favour of industrial policy, subsidising promising new industries directly. These sops would expand the production of tradable goods above what the market would dictate. But the subsidy would not discourage their consumption. Indeed, policymakers should allow the country’s exchange rate to strengthen naturally, eliminating any trade surplus. The stronger currency would cost favoured industries some foreign customers. But these firms would still do better overall than under a policy of laissez-faire. [Fatalism v. Fetishism. The Economist. June 11 2009]

Rodrik suggests that stronger currency will help the expansion of exportable or tradable. That will be especially true if that tradable has a lot of foreign input.

Within Malaysian context, the following question requires answering: is there a large demand for such tradable locally?

I think the lack of such large demand will continue to fuel export-led model.