The global village will have its village idiots. Sir Martin Rees

Cheap and Cheerless

Exports are considered to be the driving force in booming economies. Yet, by focusing too much on growth from outside, economies neglect their most important market: the domestic one.

Somehow mainstream economic theory cannot move past the 2000s: “competitiveness to boost exports” is still the mantra. The advice to crisis-ridden countries is always the same: reform to reduce labor costs, make credit easier, open your doors to trade, and the path to economic happiness will be all yours. You will always find a market for your production goods – be they fancy cars with a German name or tasty delights from countries sunny enough to grow olives – and eventually you will win a second term in office.

This has been the recipe for the growth of the BRICS countries and for the success of Asia, Turkey, and some areas in Africa. Yet, what happens if everybody does it? What happens if everybody reforms and reduces labor costs; if everybody makes credit easier and opens its door to trade; and finally, if everybody joins the path to economic happiness? You can stop wondering and imagining – it is already happening. The path towards economic happiness has become too crowded and it has transformed into a street packed with protesting people.

I remember my university years in Berlin when a macroeconomics professor – returning from an overseas experience on a neoliberal US campus – demonstrated to us that if Ghana specialized in chocolate production and Germany in cars, trading chocolate for cars (sic.), would leave them both better off. This was back in 2000, and I remember most of my peers mumbling in disagreement (I have yet to try the experiment of entering a BMW car dealer with some chocolate bars– or the other way around). You don’t have to be a neo-Marxist to see: the students had a point.

Inherent Flaws

There is a consideration to make about the effect that different exports have on savings here, but let’s focus on something more basic: the problem that you cannot export to Mars (the planet, not the chocolate bar). You cannot expect everybody to export and all the exports to find a market capable or willing to buy your products. The global game of exports won’t be won only by high levels of quality but by the ability to make salaries stagnate (see Germany: pricey car, cheap labor). In the BRICS countries and in other new rising economic stars, the idea was to make the local and cheap workforce available for international productions. This strategy helped people to escape poverty and to make political leaders feel great – prompting them to decide to host a soccer world cup and the Olympics in 2014 and 2016, as Brazil’s former president Lula da Silva proved. In Turkey, the government decided that the time had come to reintroduce Ottomanism.

It is not by chance that the tide turned at the same time for everybody. You are free to believe that Twitter ignited protests in Brazil, Egypt, and Turkey, but a more conservative explanation is probably a better fit. Exports had created a growing middle class in rising economies, as people began moving from the countryside to the cities. When the economy started faltering, cheap credit ignited inflation and people took to the streets. Possibly, the statistics on inflation given out by emerging economies are not the most reliable ones – unless we really believe that, because of an inexplicable power, a decade of low central bank credit has not generated inflation.

Contrary to some economists’ dreams and opinions, the limit of the global export system lies in the fact that the export boost failed to stimulate domestic demand. In the end, competition on export is still competition on production costs, and countries have an incentive to keep labor costs down: the very dynamic of increasing labor costs – as a consequence of economic success – is actually the limit of the approach. It became apparent in Italy in the late 1950s, when economic renaissance was bundled to an enormous availability of cheap and relatively skilled labor force. When Italy became a fully recognized “industrialized country,” production factors had become so costly that the economy started stagnating – and the 1968 protests exploded.

So, export countries do not want their salaries to increase; yet if everybody reasons along those lines, there is no room for additional exports – given that demand depends on the level of salaries. So, we may welcome with much satisfaction the fact that global exports have boomed: they were at 5,600 billion dollars in 1999, and are now above 18,000. Somehow, it is a sign that the “chocolate for cars” paradigm is actually working and that the global economy is integrating. But the question remains unsolved: who is going to buy all this stuff if demand does not increase?

The Economical Thermometer

Most evidently, lacking enough fiscal income (taxes are kept low to favor exports), booming countries are facing problems at financing their welfare systems. Doctors and nurses are the thermometer of national economies. Countries in good shape are able to pay them well: a well-functioning healthcare system is the sign of a country investing in its welfare state. If a country flourishes but the local salaries stagnate, it shows that there is a problem. That is why when you see doctors and nurses taking the streets in protest, possibly marching together with teachers, you should start to worry. In recent times, some “rising stars” of the global economy were faced with healthcare operators demonstrations. In Turkey, Egypt, Brazil, India, Poland, and Hungary, educated people in white garments paraded in capitals, voicing their dissatisfaction for low salaries and working conditions. But also in the “rich” western world, such occurrences have become quite common. Italy often pays merely a monthly salary of 1,500 USD before taxes to full doctors (with six-months contracts); many Israeli doctors and nurses joined the Occupy Tel Aviv movement – and that should be enough to understand their level of frustration, especially if you have ever hung around one of those post-modern hippie-camps.

In the end, the key to solve this problem is an ideological one. Export-led growth leads to economic polarization and to the creation of “social classes” with reduced mobility (look at the data sets in Germany). The booming years of the emerging economies have been an illusion. The worst mistake that could be done now is to keep on pursuing old fashioned ideas to solve new problems: reforms should not be aimed at efficiency and fostering exports, but at efficiency and fostering domestic demand. Welcome to the 2010s.

Read Newest From Column Stefano Casertano: Steady as she goes


comments powered by Disqus

Related Content: Export, Economics






Why Eurozone governments must invest


The wrong medicine

The Eurozone’s remedies against sluggish growth rates aren’t working. The problem: a misdiagnosis of the illness. read more

by Paul De Grauwe
Most Read