The relationship between a country’s exports and the productivity of its firms is one of the most hotly debated issues in economics. From import substitution in the 50s and 60s to the modern consensus on the export-led model of growth, the exact nature of trade’s contribution to economic development remains unsettled. The evidence that we have on whether pushing firms to export bootstraps productivity growth by making them compete and learn in global markets is, at best, inconclusive. For obvious reasons, it is plagued by entanglements in causality: does export improve productivity, or do productive firms export? We don’t really know. As such, the impact of countries’ industrial policies on trade and growth is contested as well. Traditional economic dogma says to disregard the role of the state in developing these markets: governments don’t exactly have a stellar record when it comes to picking winners and losers in business. But the heavy involvement of the state via export promotion incentives as well as direct participation in the growth stories of various East Asian and Southeast Asian economies suggests it’s not that simple. Similarly, when it comes to debating industrial policy vs market liberalisation, the examples of many Latin American countries, where market-friendly policies led to disappointing growth rates are relevant. Let’s focus here on one specific aspect of state involvement: export promotion
Export promotion is a very broad term that’s largely used to refer to all the measures and programmes aimed at assisting current and potential exporters: tax credits, direct subsidy, technical support, preferential tax treatment, border tax adjustment, easing of rules of origin, provision of electricity and water at subsidised rates, etc. The goal of these services is to help firms in general, and small- and medium-sized firms in particular, to become successful exporters. However, the incentives thus given should also ideally generate enough economic activity and employment that justifies the expenditures and shift in regulation.
There may be specific attributes of good industrial / export policy that countries may want to emulate. Joe Studwell, in his book How Asia Works, analysed the success of Taiwan and South Korea, and found that successful industrial policy mainly involves three steps:
Government Support: Government intervention is needed to steer the economy’s resources toward technologically sophisticated industries beyond current capacity
Export Focus: Exports serve not only as expanded markets for domestic production but importantly as feedback mechanisms through the use of market signals from export markets for accountability as well as to swiftly shift firm and state policy
Strict Accountability: Government support shouldn’t be unconditional. Financial and regulatory assistance should be provided to targeted industries and not just individual firms so as to promote intense competition amongst local companies. It’s not necessary to take away support if some level of short term profits isn’t achieved but regular comprehensive assessment of the firms’ performance should be carried out.
His book goes further in assigning the blame for the relative early failure of Southeast Asian state interventions (as compared to Northern counterparts) on the lack of export discipline. Export discipline here refers to a policy of continually testing and benchmarking domestic manufacturers that are given subsidies and market protection by forcing them to export their goods and hence face global competition. Essentially their success in export markets should determine whether they merit support. Without concrete and objective standards to prove their ability to penetrate world markets, local firms end up trying to please and fool the relevant politicians and bureaucrats instead of improving efficiency. This obvious-sounding policy is actually incredibly hard to maintain and is much less common than one would think: politicians involved in framing rules like to maximise their own influence. The influence of any individual politician or ruling party is greater if state support is contingent on personal and subjective metrics rather than just the bottom line. Even firms prefer this over the cutthroat competition since it is easier to convince (see: bribe) bureaucrats than to be successful at business.
He applies similar logic to financial institutions. He finds that banking institutions in developing countries invest in asset bubbles far more than pure math would predict. They also rely a lot more on personal relationships than those in developed countries. He suggests that banks should be encouraged to lend at a subsidised rate to those industries identified for exports. The size of the subsidy should depend on export success rather than other metrics. It forces firms to produce products of far higher quality than they could get away with selling domestically. Foreign consumers aren’t going to buy poor-quality products, but domestic consumers might not be able to afford any better and/or might be forced to buy from a domestic monopoly. The state should actively eliminate underperforming firms since it’s acting instead of market forces.
The success of export promotion policies has been largely heterogeneous. It’s important for developing countries to not repeat the same mistakes that other governments have made and focus on the best practices supported by empirical evidence.
How Asia Works