Ricardo Hausmann
Ricardo Hausmann, a former minister
of planning of Venezuela and former Chief Economist of the
Inter-American Development Bank, is Professor of the Practice of
Economic Development at Harvard University, where he is also Director of
the Center for International Development. He is Chair of the World
Eco… read more
CAMBRIDGE
– 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.
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.
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