Trade and Investment

Could exports be the key to development?

Ricardo Hausmann
Founder and Director, Growth Lab, Harvard University
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Should a country’s development strategy pay special attention to exports? After all, exports have nothing to do with satisfying their people’s basic needs, such as education, health care, housing, power, water, telecoms, security, the rule of law, and recreation. So why give precedence to satisfying the needs of distant foreign consumers?

That, in a nutshell, is what many opponents of free trade and economic globalization – as well as many on the right who believe that all industries should be treated equally – want to know. But there are no right answers to wrong questions. It is precisely because governments care about their own people that they should focus on exports.

To see this, consider what a market economy is all about. Some, including Pope Francis, would say that it is about greed – a system in which everybody cares only about herself.

But a market economy should be understood as a system in which we are supposed to earn our keep by doing things for other people; how much we earn depends on how others value what we do for them. The market economy forces us to be concerned about the needs of others, because it is their need that constitutes the source of our livelihood. In some sense, a market economy is a gift-exchange system; money merely tracks the value of the gifts we give one another.

exportsGDP

As a result, a market economy encourages specialization: We become very good in a narrow set of skills or products, and exchange them for millions of other things we have no clue how to do or make. As a consequence, we end up doing remarkably few things and buying everything else from others.

This observation is as true about an individual as it is about a place, whether the place is a neighborhood, a town, a state or province, or a country. Every town has grocery stores, beauty parlors, gas stations, and movie theaters that serve the local community. Economists call these “non-tradable activities,” because they are not undertaken with distant customers in mind.

But the town’s people would also want access to things that nobody in the city even knows how to make. For example, most towns and cities do not produce food, cars, gasoline, medicines, TVs, or films. So they need to “import” these goods from elsewhere. To pay for what they want from out-of-towners, they must sell them some of the things that they do know how to make.

Of course, the out-of-towners have the option of buying from somewhere else. This is why the goods and services that a place can sell to non-residents have a disproportionate impact on its quality of life – and even its viability. A mining town becomes a ghost town when the mine closes, because the grocery store, the pharmacy, and the movie theater no longer have the capacity to buy the “imported” food, medicine, and films they need.

In contrast to non-tradable activities, a place’s export activities need to be pretty good to convince out-of-town customers – who have ample other options – to buy from local producers. That means that exports must have an attractive quality/cost ratio.

One way to increase this ratio is to improve quality and productivity. Another is to lower wages. The higher the productivity and the quality of export activities, the higher the wages they can pay and still remain competitive. If employment in the export industry is significant, as is true in most places that do not rely on oil revenues, the wages that the export sector can afford will affect the wages of everybody in town. Everyone thus has an interest in improving their export sector.

Because they are subject to greater competition, export activities tend to undergo faster technological and productivity improvements than other parts of the economy. They are constantly under threat from innovation and new competitors that could disrupt their business. Consider the iPhone’s devastating impact on Finland’s once-dominant national champion Nokia, or the effect of the shale-oil revolution on OPEC.

Successful places tend to move from a few technologically simple industries that are competitive enough to export their products to a greater number of industries that are increasingly complex. For example, in 1963, 97% of Thailand’s export basket was composed of agricultural and mineral products such as rice, rubber, tin, and jute. By 2013, these represented less than 20% of the total, while machinery and chemicals accounted for 56%.

A similar transformation can be seen in every successful non-OPEC developing country. The success of a place is very much related to its people’s ability to accomplish this transformation, as exemplified by places such as Singapore, Turkey, and Israel.

So what should countries, provinces, and cities do? Skeptics might say that they should just focus on fixing the things that locals care about, such as education or infrastructure, or improve everybody’s “business environment.” Exports will take care of themselves.

But life is more complicated than this. The needs of export activities are often quite distinct. The specific rules, infrastructure, skills, and technological mastery that export activities require tend to be different from those needed for the non-tradable activities that usually generate the bulk of a place’s employment. While diversification into new areas is always challenging, it is particularly difficult for tradable activities, which have to face foreign competition from the start. By contrast, pioneers in non-tradable activities start with a captive market. Moreover, exporters need particularly strong connections to knowhow found elsewhere on the planet, thus making them more sensitive to foreign investment, migration, and international professional links.

To survive and thrive, societies need to pay special attention to those activities that produce goods and services they can sell to non-residents. Indeed, the need to act on new export opportunities and remove obstacles to success is probably the central lesson from the East Asian and Irish growth miracles.

Non-tradable activities are akin to a country’s sports leagues: different people like different teams. Those engaged in tradable activities are like the national team: we should all root for them – and organize ourselves to make sure they succeed.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Ricardo Hausmann is a Professor of the Practice of Economic Development at Harvard University..

Image: A ship is loaded with containers. REUTERS/David Gray.

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Trade and InvestmentEconomic Growth
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