Could exports be the key to development?

Should a country’s development strategy include special attention to exports? After all, exports have nothing to do with satisfying basic needs such as education, health care, housing, power, water, telecoms, security 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 those who believe that all industries should be treated equally – want to know. While there are no right answersto 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 it is about greed – a system in which those involved care only about themselves. 

However, 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 where 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 the 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 it is a neighbourhood, town, state, province or country. Every town has grocery stores, beauty parlours, gas stations and movie theatres that serve the local community. Economists call these non-tradable activities because they are not undertaken with distant customers in mind.

Still, the town’s residents would also want access to things that nobody there knows how to make. For example, most municipalities do not produce food, cars, gasoline, medicines, TVs or films so they need to import them from elsewhere. To pay for what they want from out-of-towners, they must therefore sell them some of the things they 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 given place can sell to non-residents have a disproportionate impact on its quality of life – and even on its viability. A mining town becomes a ghost town when the mine closes because the owners of the grocery store, pharmacy and movie theatre no longer have the capacity to acquire the imported food, medicine and films they want.

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

One way to raise 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 remain competitive. If employment in the export industry is significant, as it is in most places that do not rely on oil revenues, the wages 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, 97% of Thailand’s 1963 export basket was composed of agricultural and mineral products such as rice, rubber, tin and jute. By 2013 those commodities 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 advancement of a given 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 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.

Life is more complicated than that. 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 expertise found elsewhere on the planet, thus making them more sensitive to foreign investment, migration and international professional links.

To survive and thrive, societies must therefore pay special attention to 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 may be 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.