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Wednesday, May 13, 2009

De-globalization and Development

Dani Rodrik says growth in international trade is likely to slow down, but that doesn't have to "spell doom for developing countries":

A De-Globalized World?, by Dani Rodrik, Project Syndicate: It may take a few months or a couple of years, but one way or another the United States and other advanced economies will eventually recover from today's crisis. The world economy, however, is unlikely to look the same.

Even with the worst of the crisis over, we are likely to find ourselves in a somewhat de-globalized world, one in which international trade grows at a slower pace, there is less external finance, and rich countries' appetite for running large current-account deficits is significantly diminished. Will this spell doom for developing countries? Not necessarily. ...

[I]t is no surprise that the countries that have produced steady, long-term growth during the last six decades are those that relied on ... promoting diversification into manufactured and other "modern" goods. By capturing a growing share of world markets for manufactures and other non-primary products, these countries increased their domestic employment opportunities in high-productivity activities. ...

China exemplified this approach. Its growth was fueled by an extraordinarily rapid structural transformation toward an increasingly sophisticated set of industrial goods. In recent years, China also got hooked on a large trade surplus vis-a-vis the U.S. ― the counterpart of its undervalued currency. But it wasn't just China. ...

It is now part of conventional wisdom that large external balances ― typified by the bilateral U.S.-China trade relationship ― played a major contributing role in the great crash. Global macroeconomic stability requires that we avoid such large current-account imbalances in the future.

But a return to high growth in developing countries requires that they resume their push into tradable goods and services. In the past, this push was accommodated by the willingness of the U.S. and a few other developed nations to run large trade deficits. This is no longer a feasible strategy for large or middle-income developing countries.

So, are the requirements of global macroeconomic stability and of growth for developing countries at odds with each other? ... There is in fact no inherent conflict, once we understand that what matters for growth in developing countries is not the size of their trade surpluses, nor even the volume of their exports. What matters is their output of modern industrial goods (and services), which can expand without limit as long as domestic demand expands simultaneously.

Maintaining an undervalued currency has the upside that it subsidizes the production of such goods; but it also has the downside that it taxes domestic consumption ― which is why it generates a trade surplus. By encouraging industrial production directly, it is possible to have the upside without the downside.

There are many ways that this can be done, including reducing the cost of domestic inputs and services through targeted investments in infrastructure. Explicit industrial policies can be an even more potent instrument.

The key point is that developing countries that are concerned about the competitiveness of their modern sectors can afford to allow their currencies to appreciate (in real terms) as long as they have access to alternative policies that promote industrial activities more directly.

So the good news is that developing countries ... growth potential need not be severely affected as long as ... developing countries ... substitute real industrial policies for those that operate through the exchange rate. ...

    Posted by on Wednesday, May 13, 2009 at 02:33 AM in Development, Economics | Permalink  TrackBack (0)  Comments (40)

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