Duncan’s Economic Blog

Sources of Growth – Cutting Imports?

Posted in Uncategorized by duncanseconomicblog on September 7, 2010

A quick, possibly heretical, thought.

One of the biggest questions in economic policy at the moment is that of, where will the growth come from?

I’ve outlined before why I think the government in overly optimistic on the UK’s prospects – but I’m left wondering why everyone seems to be ignoring one possible source of growth.

GDP is a fairly simple equation:

GDP = Consumption + Investment + Government Spending + Net Trade (Exports – Imports)

Whilst most observers accept that consumption growth is unlikely (households are repairing their balance sheets and unlikely to spend as much as previously), many on the right hope for a boom in business investment and exports to take up the slack as government spending is cut back and the consumer is taxed. Meanwhile many on the left argue for an increase in government spending, to boost growth until the private sector recovers.

To my surprise, no one seems to be advocating cutting imports – or even slowing the growth of imports as a potential strategy.

Given the growth of imports as a percentage of UK GDP over the past five and a half decades (see below), this is surprising.

Falling imports, or slower growth in imports, boosts Net Trade (and hence GDP) just as much as rising exports do.

I’m not suggesting this (yet), but I am  curious as to why it doesn’t come up more often in debate.

14 Responses

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  1. CharlieMcMenamin said, on September 7, 2010 at 12:05 pm

    You’ve been reading Stuart Holland again, haven’t you?

    The reality, surely, is that our much deeper integration into the EU, compared to Holland and the AES’ hey-day, make import controls a very difficult option. (Some would argue that globalisation per se does as well, but I’m not quite so convinced of this wider point).

    But the politics of (ideally Green) industrial re-generation and import substitution is surely an implicit theme in any strategy not merely for restoring growth, but of progressively dis-engaging from the over dependence on financial services which led us to this difficult place in the first instance. But making this explicit would require a degree of political courage that I struggle to detect in any member of the the front bench of any of the three major parties.

    • duncanseconomicblog said, on September 7, 2010 at 12:20 pm

      I’ve read a lot of Holland recently.

      But yes, cutting imports (or slowing their growth) doesn’t need import restrictions as such. Generating more energy (in a sustainable way) domestically would cut imports, for example.

  2. Tim Worstall said, on September 7, 2010 at 12:50 pm

    Because a 25% decline in the value of the currency will do this very nicely indeed thank you very much?

  3. Bob B said, on September 7, 2010 at 3:32 pm

    Rising average propensities to import and to export are a likely consequence of joining a customs union – such as the European Common Market, which the UK formally joined in January 1973 – where barriers on mutual trade between union members are reduced towards zero. A rise in both import and export popensities is what we would expect to observe as the result of the trade creation effect of a customs union.

    Despite accession to the EU in January 1973 and the later Single European Act of 1986, some formal amd informal trade barriers persist on intra-union trade in the EU, notoriously so in respect of services when Britain has special competitive advantages in the supply of services – Britain is the second largest exporter of services to international markets after the US.

    It would be illuminating to compare a graph of the time series of Britain’s propensity to export for comparison with the posted graph of the propensity to import.

    The trouble with open or covert policies to “discourage” imports is that trading partners are apt to reciprocate. It would imprudent to assume that bureaucrats in other EU countries would be any less diligent in pursuing equally effective beggar-my-neighbour trade policies than Britain’s bureaucrats.

  4. CharlieMcMenamin said, on September 7, 2010 at 5:13 pm

    Our ‘competitive advantage’ as a national economy is supposedly in financial services above all else.

    Tell me, after the Credit Crunch, does anyone think this is an unalloyed good? Or a safe basis on which to proceed into the future?

  5. Bob B said, on September 7, 2010 at 5:13 pm

    As for Stuart Holland, I came upon this reference in Geoffrey Foote: The Labour Party’s Political Thought: A History (Palgrave, 1997) p.311.

    “However it was with the idea of a state planning agency that [Stuart] Holland [Labour MP for Lambeth, Vauxhall 1979-89, political assistant in Downing St to the PM 1967/8, and shadow Financial Secretary to the Treasury 1987-9] hoped to show the new possibilities open to a more just economy. He looked to the Italian example of the IRI (the Industrial Reconstruction Institute), set up by Mussolini and used by subsequent Italian governments to develop the economy. This had, of course, already been tried through the IRC (the Industrial Reorganization Corporation) set up as part of the National Plan [in Britain] in 1966, but the IRC had been too small to have much effect on the British economy. A revamped IRC in the form of a National Enterprise Board would, however, have a major effect in stimulating the private sector through an active policy of state intervention and direction.”

  6. Tyler said, on September 8, 2010 at 9:31 am

    A more positive trade balance would indeed increase GDP. A weaker currency would be the biggest driver in managing this, as exports become more competative and imports more expensive.

    However, given the current structure of our economy, government spending (which leads to greater consumption) will act to increase our trade deficits. We manufacture little, construction/infrastructure requires foreign built plant and machinery, and often is subcontracted to foreign firms. Even the effect of foreign workers sending moeny home is adverse to the trade balance.

    Conclusion is, our economy is not particularly competative, and government spending is not going to have the effect on GDP many of the Keynesian left think it is.

  7. Bob B said, on September 9, 2010 at 8:34 pm

    Never mind the “Keynsian left”, try this quote from the news on 17 November 2008:

    “Dominique Strauss-Kahn, managing director of the International Monetary Fund, called on nations to pump in 2 per cent of their gross domestic product (GDP) in an attempt to stave off a severe global recession. . ”
    http://business.timesonline.co.uk/tol/business/economics/article5168725.ece

  8. Luis Enrique said, on September 14, 2010 at 10:35 am

    growth = change in output
    output = inputs * productivity

    why would cutting imports increase the productivity of the UK?

    (there are some answers why cutting imports would make the UK more productive, or bring about an increase in the quantity of inputs employed, but it’s really not so simple. Of course if we didn’t import X we’d have to produce it domestically. But producing X domestically may involve producing less of Y, and the new economy (now producing X) could easily be less productive than the old one.

    • duncanseconomicblog said, on September 14, 2010 at 10:39 am

      Luis,

      Why, given idle resources, can’t we produce more of X and of Y?

      As I said – I’m not proposing an import reduction strategy, just curious as to why we haven’t heard more about it.

  9. Luis Enrique said, on September 14, 2010 at 1:58 pm

    Duncan,

    oh sure, that’s one answer, but can it be taken for granted that inhibiting imports would bring those idle resources into use?

    For example, presumably the domestically produced good would be more expensive than the imported good. Say we’re talking about T-shirts. We raise the cost of T-shirts, and British T-Shirt factories start up and hire unemployed workers. But millions of Brits face higher T-shirt prices and reduce spending elsewhere, and across the economy firms experience lower demand and some make workers redundant.

    • duncanseconomicblog said, on September 14, 2010 at 2:56 pm

      Luis,

      The trade off between lower prices/lower wages/employment though is interesting – and not as clear cut as many suggest.

      I’m not advocating a policy of cutting imports (hard to square with EU membership anyway) but I am curious as to why no one on the mainstream left, or right, has pushed such an agenda in this crisis.

  10. AB said, on September 17, 2010 at 12:32 pm

    A lot of imports are used to make exports. So cutting imports cuts exports, and you are back where you started.

    And one of the reasons you don’t hear so much about it is that it was extensively tried for decades in south Asia, Latin America and Africa (east Asia was a bit different – that was largely export promotion) and it failed miserably. Brazilian computer industry, anyone?


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