Questioning Export-led Growth
I am quite looking forward to reading Gordon Brown’s new book and his FT article this morning makes for interesting reading.
He make’s a compelling case for a multilateral solution to the world’s economic ills, a solution I’d be more than willing to sign up to. But as I asked earlier this week, what is the Centre Left’s approach to global economic problems in the absence of international co-operation?
And are we right to hope for export led growth?
Brown is right to note that rising Asian consumption presents the West with an opportunity and the world will a chance to rebalance global growth. As he notes Asian consumption (excluding Japan) will rise from 12% of world consumption before the crisis to 32% by 2020.
But note the time scale – a decade away and there is no guarantee that UK exporters will be able to fill the gap.
George Osborne, as we know, is very keen on “export-led growth” and indeed the OBR forecast are premised on strong export growth coupled with historically low import growth (they see import growth 2011-2015 running at level below its post-1948 or post-1979 average, despite also forecasting a strong increase in business investment, which in the UK typically increases imports as we buy capital goods from overseas).
As the Wall Street Journal has reported, the OBR’s predicted export numbers may well be on the high side:
Yet if one realm of uncertainty stands out it is the strong export growth the OBR is predicting will drive the recovery in coming years.
With many of the U.K.’s major trade partners still suffering economic problems and financial system tremors, it is here that the OBR’s crystal-ball gazing looks most vulnerable to disappointment.
“Their forecast for [GDP growth] next year has been revised down from 2.3% to 2.1%,” said Simon Kirby, economist at the National Institute of Economic and Social Research. “We think their projection for GDP growth next year is still too strong given the weak prospects for Europe.”
In its report Monday, the OBR sees net trade–export growth minus imports–contributing 0.7 percentage point to 2.1% growth in 2011, 0.9 point to a 2.6% expansion in 2012 and 0.7 point to the 2.8% growth in 2013. In its June forecast the OBR gave net trade a slightly bigger role in the U.K.’s expected growth.
Export growth was revised up from the OBR’s last forecast for 2010, 2011 and 2012 at 5.4%, 6.9% and 7.1%, respectively. Offsetting that somewhat–import growth was also seen rising more quickly in 2010, 2011 and 2012 than the OBR had previously estimated.
Stepping back, it is worth asking – what is required to achieve this “export-led growth”? And is an export-led growth model compatible with the type of economy we want?
I find it difficult to understand how exactly “export-led growth” will be achieved. Sterling’s large fall in 2008-09 (as I argued at the time) was certainly helpful, but it is difficult to see this feat being repeated in an age of more aggressively managed currencies.
Or is the Government really planning on adopting the Irish model of reducing costs by driving down UK wages in order to make us more competitive? I don’t see that as politically possible or in anyway desirable. A lesser from of this strategy, embracing a “flexible labour market” is still favoured by some Labour MPs.
Roger Liddle’s summary of a recent Policy Network seminar on “a new political economy for social democracy” is worth reading in this regard.
I’m particularly drawn to Anke Hassel’s reported comments:
Anke Hassel of the Hertie School in Berlin argued for a new “social investment” political economy to build on the partially discredited “social market” paradigm. The key to this is that public spending be seen not just as compensation to correct the inequities of the market, but as economic investment to help shape its outcomes.
I’ve argued myself that the Social Democrat solution to global imbalances is increased domestic investment, with a developmental role for government.
A state backed investment bank to fund business investment, a state backed infrastructure bank to fund large scale projects, a state backed green investment bank to fund the technologies of the future could all be combined with state backed venture capital firms to incubate new firms. All of these measures would have one real purpose – to take the private sector surplus and turn it into real assets that increase employment, create high skilled jobs and ultimately help reduce the deficit.
I also argued, with others, in “Britain’s Broken Economy and How to Mend it” that a sustainable model for the British economy would be based around higher investment (initially state driven by ultimately aimed at unlocking the corporate surplus) coupled with higher wages.
The surest route to a sustainable recovery is a short-term increase in government investment, until such a time as the private sector is prepared to invest itself, coupled with an expansion of the purchasing power of lower- and middle-income families, and a long-term focus on the financial sector supporting the real economy. A macroeconomic policy focused on green and sustainable growth in the real economy, in recognition that the government has an important role to play here, will create greater equality and a more stable economy. It will have direct effects on the lives of low- and middle-income households, who will have less need to borrow. It will provide the foundation for reforms to the jobs market, and to housing, pensions and the banks.
The point here is that such a solution is not necessarily “export-led”, it’s about re-balancing domestic demand and, in the final analysis, being less import-reliant. I do wonder if this might not be more achievable than banking on a export renaissance.