WAS IT WORTH $2.4 TRILLION?
The Italian maverick Marxist, Antonio Gramsci, once wrote: “The old is dying and the new cannot be born; in this interregnum all manner of morbid symptoms appear.”42 He could have well been writing about the post-liberalization world.
As we saw, there are many very good reasons why resources tend to be sticky, especially in developing countries, and breaking into export markets is hard. One consequence of this fact is that trade liberalization anywhere may not be as much of a slam dunk as is often implied by economists. Wages may go down instead of up, even in labor-abundant developing countries where workers should benefit from trade, because everything that labor needs to be productive—capital, land, managers, entrepreneurs, and other workers—is slow to shift from the old job to the new one.If machines, money, and workers continue to be used in the old sectors, there will be many fewer resources moving to the potential exporting sectors. In India, the effect of the 1991 liberalization was not a massive and sudden change in import and export volumes. Between 1990 and 1992, the openness ratio (the sum of all the imports and exports, as a percentage of the GDP) only increased a little bit, from 15.7 percent to 18.6 percent. But eventually both imports and exports went up, and India today is actually more open than China or the United States.43
Resources eventually moved and new products started being produced. And since existing producers benefitted from being able to import what they needed more easily, what they produced was of better quality and more saleable outside. The software industry, for example, benefited from the ability to import smoothly the hardware they needed, and software exports boomed. Indian firms were quick to switch to imports when they became cheap. Moreover, they also eventually introduced new product lines (for domestic and international use) to take advantage of those cheaper imports.
But it took time.44There is some evidence for the view (held by many policy makers) that the best way to speed up this process is to adopt “export promotion policies,” that help exporters export more. All the East Asian success stories of the postwar era—Japan, Korea, Taiwan, and most recently China—have used one strategy or the other to help exporters speed up their expansion. Most observers believe China, for example, systematically undervalued its exchange rate throughout the 2000s (until about 2010) by selling renminbi and buying foreign currencies to keep its products artificially cheap against the competing products sold in dollars.
In 2010, Paul Krugman called China’s policy the “most distortionary exchange rate policy any major nation ever followed.” It was not cheap: China already owned $2.4 trillion in reserves and it added $30 billion to it per month.45 Given how good the Chinese were at exporting and just how frugal Chinese consumers are, China has a natural tendency to sell more than it buys, and this ought to have pushed the exchange rate up and choked off export growth. The policy prevented this from happening.
Was the promotion of exports good economics? It is possible that it did help the exporters by raising their profits in renminbis (if you sell your shoes for the same number of dollars, the lower the exchange rate, the more local currency you get for them). This made it easier for them to afford to keep the dollar price of their exports low, which encouraged foreigners to buy Chinese, and thereby helped build the reputation of Chinese products. It also helped the exporters accumulate more capital and hire more new workers.
On the other hand, it was at the expense of Chinese consumers who paid for those overvalued imports (this is the flip side of having a weak currency). It is not easy to say what would have happened if the policy had not been adopted. First, the Chinese government also adopted a range of other policies that also favored exporters. China continued to remain competitive when it stopped manipulating its currency after 2010. Second, even if exporters had expanded more slowly, the domestic market might have grown faster and absorbed the surplus. China even today only exports about 20 percent of its GDP; the rest goes to local production.
Even if export promotion did work for China—and it could have—the same strategy is unlikely to work for too many other countries, at least in the near future. The problem in part is China itself. Its success and its enormous size make it harder for others to succeed. The sheer fragility of the process of acquiring a reputation, the critical importance of the right connections, and all the breaks needed to succeed also make us question whether trying to break into international trade is the way forward for the average poor country.