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Cheap and Cheerless

Exports are considered to be the driving force in booming economies. Yet, by focusing too much on growth from outside, economies neglect their most important market: the domestic one.

Somehow, mainstream economic theory cannot move past the 2000s - “competitiveness to boost exports” is still the mantra. The advice to crisis-ridden countries is always the same: reform to reduce labor costs, make credit easier, open your doors to trade, and the path to economic happiness will be all yours. You will always find a market for your production goods – be they fancy German cars or tasty delights from countries sunny enough to grow olives - and eventually you will win a second term in office.

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This has been the recipe for the growth of the BRICS countries and for the success of Asia, Turkey, and some areas in Africa. Yet, what happens if everybody does it? What happens if everybody reforms and reduces labor costs; if everybody makes credit easier and opens its door to trade; and finally, if everybody joins the path to economic happiness? There is no need to wonder or imagine the result - it is already happening. The path towards economic happiness has become too crowded and it has transformed into a street packed with protesters.

I remember my university years in Berlin when a macroeconomics professor - returning from an overseas experience on a neoliberal US campus – demonstrated to us that if Ghana specialized in chocolate production and Germany in cars, trading chocolate for cars would leave both better off. This was in 2000, and I remember most of my peers mumbling in disagreement (I have yet to try the experiment of entering a BMW dealership with some chocolate bars - or the other way around). One need not be a neo-Marxist to see that the students had a point.

Inherent Flaws

There is a consideration to make about the effect that different exports have on savings, but the issue is really more basic than that: the problem that exporting to Mars is impossible. Every country cannot be an exporter, and every export will not have a market capable or willing to buy those products. The global game of exports will not be won only by high-levels of quality, but by the ability to make salaries stagnate (see Germany: pricey car, cheap labor). In the BRICS countries and in other rising economic stars, the idea was to make the local and cheap workforce available for international production. This strategy helped people to escape poverty and make political leaders feel great - prompting, in Brazil's case, the decision to do things like host the World Cup and the Olympics. In Turkey, the government decided that the time had come to reintroduce Ottomanism.

It is not by chance that the tide turned at the same time for everybody. One is free to believe that Twitter ignited protests in Brazil, Egypt, and Turkey, but a more conservative explanation is probably a better fit. Exports had created a growing middle class in rising economies, as people began moving from the countryside to the cities. When the economy started faltering, cheap credit ignited inflation and people took to the streets. Possibly, the statistics on inflation given out by emerging economies are not the most reliable - unless we really believe that, because of an inexplicable power, a decade of low central bank credit has not generated inflation.

Contrary to some economists’ dreams and opinions, the limit of the global export system lies in the fact that the export boost failed to stimulate domestic demand. In the end, competition on exports is still competition on production costs, and countries have an incentive to keep labor costs down. Indeed, the very dynamic of increasing labor costs - as a consequence of economic success - is actually the limit of the approach. It became apparent in Italy in the late 1950s, when an economic renaissance was tied to the expanded availability of cheap and relatively-skilled labor force. When Italy became a fully recognized “industrialized country,” production factors had become so costly that the economy started stagnating, resulting in the 1968 protests.

So, export countries do not want their salaries to increase, yet if everybody reasons along those lines, there is no room for additional exports - given that demand depends on salary levels. So, we may welcome with much satisfaction the fact that global exports have boomed: they were at 5.6 tillion dollars in 1999, and are now more than four times that. Somehow, it is a sign that the “chocolate for cars” paradigm is actually working and that the global economy is integrating. But the question remains: who is going to buy all this stuff if demand does not increase?

The Economical Thermometer

Most evidently, lacking enough fiscal income (taxes are kept low to favor exports), booming countries are facing problems with financing their welfare systems. Doctors and nurses are a useful indicator in this regard - sort of the thermometers of national economies. Countries in good shape are able to pay them well - a well-functioning healthcare system is the sign of a country investing in its welfare state. If a country flourishes but the local salaries stagnate, it shows that there is a problem. That is why doctors and nurses joining protests - possibly marching together with teachers - should breed caution. 

In recent times, some “rising stars” of the global economy were faced with healthcare-operators demonstrations. In Turkey, Egypt, Brazil, India, Poland, and Hungary, educated people in white garments paraded in capitals, voicing their dissatisfaction with low salaries and poor or sub-standard working conditions. Even in the richer Western world, such occurrences have become quite common. Italy often pays a monthly salary of merely 1,500 USD (before taxes) to doctors (with six-months contracts); many Israeli doctors and nurses joined the Occupy Tel Aviv movement – and that should be enough to understand their level of frustration.

In the end, the key to solving this problem is an ideological one. Export-led growth leads to economic polarization and to the creation of social classes with reduced mobility (look at the data sets in Germany). The boom years of the emerging economies have been an illusion. The worst mistake that could be made now would be to continue to pursue old-fashioned ideas to solve new problems. Reforms should not be aimed at efficiency and fostering exports, but at efficiency and fostering domestic demand. Welcome to the 2010s.