March 23 : One of the apparently contradictory features of the global economic boom that preceded the financial crisis was the extent to which the benefits were unevenly spread. In the developed world, this boom is generally seen as one in which developing countries made their presence felt
as growing exporters of goods, services and even capital, and therefore suggests a shift in the global distribution of income. Yet, contrary to public perception, most people in the developing world — even those within the most dynamic economic segment of Asia — did not really gain from that boom.
One major reason for this is that the expected net transfer of jobs from North to South did not take place. In fact, industrial employment in the South barely increased in the past decade, even in the “factory of the world” China. (It is worth noting that secondary sector employment in China was broadly stagnant in absolute numbers between 1997 and 2004, despite very rapid increases in manufacturing output in the same period. This reflected technological change associated with rapid per worker productivity increases. Thereafter, while secondary employment has grown, the increases have been well below the expansion of secondary sector output in China.)
What was essentially happening, in China as well as in other buoyant segments of the global economy, was that technological change in manufacturing and the new services meant that fewer workers could generate more output. Old jobs in the South were lost or became precarious and the majority of new jobs were fragile, insecure and low-paying, even in fast-growing regions.
Developing country governments opened up their markets to trade and finance, focused on export-oriented production of both goods and services, gave up on expansionary and inclusive monetary policy (because of increasing focus on attracting private capital inflows) and pursued fiscally “correct” deflationary policies that reduced public spending relative to gross domestic product (GDP). So development projects remained incomplete and citizens were deprived of the most essential socio-economic rights. The persistent agrarian crisis in the developing world hurt peasant livelihoods and generated global food problems. Rising inequality meant that the much-hyped growth in emerging markets did not benefit most people, as profits soared, wage shares of national income declined sharply. In most countries, International Labour Office data indicates that growth in real wages was well below increases in labour productivity in the period 1990 to 2006; and the wage share of national income showed declines in all major regions of the world during the two decades, between 1985 and 2005.
Why did this happen? This broad process is related not only to the shift in bargaining power between workers and capitalists that has occurred in this phase of globalisation, but also because of the choice of economic strategy for growth and development.
Almost all developing countries adopted an export-led growth model, which in turn was associated with suppressing wage costs and domestic consumption in order to remain internationally competitive and achieve growing shares of world markets. Household consumption as share of GDP in some of the more “successful” developing economies declined over this period, in some cases quite significantly, reflecting the strategy of suppressing the home market in order to push out more exports.
This is evident from a comparison of two important indicators from national accounts data: the share of net exports (exports minus imports) of goods and services in GDP, which indicates the extent of focus on the export-oriented strategy; and the share of household consumption to GDP.
China is of course the most well known example of successful export orientation in the world today, and its huge current account surpluses are typically cited as classic outcomes of an essentially mercantilist strategy. It should be noted that large and rising net exports (relative to GDP) are really quite a recent phenomenon in China: the very significant increases date from the early part of this decade. Between 1994 and 2000, the share of household consumption to GDP was largely stable at around 45 per cent, although this was a relatively low level for a developing country with a low per capita income. But thereafter, precisely in the period when net exports started rising very significantly, the share of household consumption has fallen drastically, to only 35 per cent in 2007, which is one of the lowest such ratios ever recorded anywhere in the world, while net exports rose to nearly nine per cent of GDP.
This strategy and this outcome are not unique to China. Similar tendencies, albeit to a lesser extent, are evident in most of the developing economies that are currently seen as successes: Malaysia, Vietnam, Brazil, Chile, to name just a few.
It would be mistaken to think, however, that this is a strategy that was adopted only by developing countries. The case of Germany was relatively unremarked upon until the recent economic crises of other countries in the eurozone that are adversely affected by Germany’s strategy, such as Ireland and Greece and Spain. United Germany started running net export surpluses only from the middle of the 1990s, and they were not significant as a share of GDP until the turn of the decade. For most of the earlier period, Germany’s net exports tended to move broadly in the same direction as household consumption shares. From the early part of the this decade, this has abruptly shifted to very sharp, even dramatic declines in household consumption shares, associated with five-fold increases in exports to GDP ratios.
This reflects the fact that Germany has kept real wages largely stagnant through a phase of increased labour productivity, allowing all the productivity increases to be absorbed by employers and enabling savings surpluses that have also tended to be exported abroad, both inside and outside the eurozone. It is, therefore, obvious that beggar-thy-neighbour exporting strategies (that also involve beggaring workers within the economy) need not be associated with currency manipulation, but can result from other macroeconomic policies as well.
So what of India? While India is currently seen as one of the more successful economies, this cannot be because of net exports, since these have been mostly negative, and increasingly so, over the entire period under consideration. What is interesting, however, is that in India as well, the share of household consumption in GDP has declined quite significantly, especially since the start of the current decade. This reflects domestic income distribution and power equations, of course, but it also reflects the same broader strategy of export orientation that requires suppression of domestic wage costs and mass consumption. The fact that this has been less successful in generating positive net exports does not lead to a reversal of this strategy, but rather its intensification, because of the perceived need for domestic producers to become even more competitive vis-a-vis international producers.
Overall, therefore, an obsession with export orientation has its costs, especially in terms of the suppression of domestic consumption and wage incomes. It is also an increasingly unreliable strategy given that the major stimulus provided by the US as the engine of world demand is unlikely to continue. Therefore there is a clear case for a shift towards wage-led and domestic demand led growth, particularly in countries with economies large enough to sustain this shift. This can happen not only through direct redistributive strategies but also through public expenditure to provide more basic goods and services.
By Jayati Ghosh
