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The Prospects for
Export-Led Growth:
Global Imbalances and International Reforms
Terry McKinley
Director, Centre for Development Policy and Research,
School of Oriental and African Studies
Conference on ‘Export-Led Growth
as a Tool for Financing Development’
Carnegie Endowment for International Peace, 29 June 2009
1
The Starting-Point: The Debate
on China & Global Imbalances
Is the Export-Led Growth Model of East and
Southeast Asia (especially China)
responsible for Global Imbalances?
Has China been the principal ‘driver’ of global
imbalances?
 CDPR Policy Brief #2: ‘Will Pinning the Blame on China Help Correct
Global Imbalances?’ www.soas.ac.uk/cdpr
Has the US been driven into running huge currentaccount deficits because it is the pre-eminent
reserve-currency country (‘the deficit of last resort’)?
Are such deficits a precondition for
developing-country success in future exportled growth? (Hopefully not)
2
The China ‘Export-Led’
Success Story
1.
a.
2.
b.
c.
China’s current-account surplus started a sharp
upward trend around 2002-2003
By 2005, this surplus had reached $161 billion and
by 2008 had reached $440 billion. Figure
By 2008, China’s Reserves reached $ 2 trillion
(two-thirds to three-quarters invested in US
securities)
Where China’s reserves are invested is an
independently important question—perhaps more
important than how (or why) China achieved large
current-account surpluses
Need to look at Export-Led Growth from the
Financial angle as well as the Trade angle
3
China and US Current-Account Balances
1990-2008 ($ billions)
600
400
China
US
0
-200
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
US$ billions
200
-400
-600
-800
-1000
4
The China ‘Export-Led’
Success Story
1.
2.
3.
4.
By some standard measures, China’s development
success has been spectacular
Its income per person (constant prices) increased
over ten-fold, from $807 in 1980 to $8,539 in 2008
Between 1981 and 2005, it lifted 630 million people
out of poverty (WB’s $1.25 line)
Yet the majority of Chinese are still relatively poor
by developed-country standards
Have some of the benefits of the Export-Led Model
passed them by? Has consumption been unduly
restricted in order to generate trade surpluses?
5
Why East & Southeast Asia
Adopted Export-Led Growth
The historical roots are in the successes of
Japan and the East Asian Tigers, and in the
bitter lessons of the Asia Financial Crisis
The countries that had liberalized their trade
and capital flows learned from the 1997-98
Crisis that they must avoid, at all costs,
current-account deficits (especially if deficits
are financed by short-term external loans)
They were subjected to speculative attacks
on their currencies and recessions, and were
forced to endure a heavy and humiliating
burden of IMF conditionalities
6
What are the Prerequisites for
Such Export-Led Growth?
Afterwards, East and Southeast Asian countries
began to run sizeable yearly current-account
surpluses
And they amassed large stocks of foreign-exchange
reserves
Note 1: The reserves were seen as a necessary form
of ‘precautionary’ savings designed to deal with any
attacks on their currencies
Note 2: The domestic policy corollary of amassing
reserves was the need for tighter monetary and
fiscal policies to contain the potentially inflationary
impact (e.g., resorting to ‘sterilization’)
7
What are the Prerequisites for
Such Export-Led Growth?
Note 3: The government needs the capacity to align the
banking system with its monetary objectives
Note 4: Imports need to be contained relative to
exports (an undervalued exchange rate, import
restrictions, export subsidies)
Question 1: Is it necessary to invest a country’s
reserves in low-yielding, risky foreign assets, such
as US T-bills?
Question 2: Is it necessary for capital to be ‘flowing
uphill’, mostly from middle-income countries and
predominantly to one rich country, the US?
8
Some Simple-Minded
Macroeconomic Accounting
The Net Foreign Surplus = Net Private Savings + Net
Government Savings – Private Investment (Note that
Net Gov’t Savings includes public investment)
If you assume that a country needs sufficient
aggregate demand to reach ‘full employment’, then
export demand is assumed to compensate for
insufficient domestic investment and/or insufficient
government spending
Has China been investing too little? Its Gross Capital
Formation approached 40% of GDP during 1990-2004
and more recently has approached 45%. Figure
China has an exceptionally high savings rate, i.e.,
over 50% of GDP in recent years; and the gap
between savings and investment has widened
9
Investment and Savings in China
1990-2007 (% of GDP)
Gross
Domestic
Savings
Gross Capital
Formation
Difference
between the
Two
1990-1994
1995-1999
2000-2004
2005-2007
41.2
42
41.1
52.4
39.5
38.8
38.7
44.1
1.7
3.2
2.4
8.3
10
Savings, Investment and
Current-Account Surpluses
China has been a high-savings, high-investment
economy for a long time
It has been growing rapidly, channelling its huge
rural labour surplus into the production of higherproductivity tradables, i.e., it has been ‘developing’
Its current fiscal stimulus (5% of GDP) is designed to
continue this momentum during the global recession
It has ample ‘fiscal space’ to expand demand without
creating unsustainable public debt
A Prominent Question: Would seeking to boost
domestic consumption (and thus imports) improve
China’s economic conditions?
11
Rebalancing China’s Growth
Rebalancing China’s growth model by stimulating
more domestic consumption is possible since its
domestic market is large (consumption is already
growing rapidly)
 But striving for ‘consumption-led’ growth makes no
sense (this is a recipe for crisis)
 The transition to a growth model based more on
domestic demand (particularly consumption) would
be a protracted process
 China would still have to find a way to contain its
import bill and continue promoting the production of
tradables (such as through an industrial strategy)
12
Rebalancing China’s Growth
While the exports of manufactures have plummeted
globally, we project that they will recover smartly in
due course as the global economy recovers
China will continue, for a while, to rely on this engine
of rising productivity and growth
Strengthening its import regime is more critical—
namely, securing continuing access to resources
(oil, minerals and metals)
China needs to shift from low-return and risky
reserve accumulation to higher yielding direct
foreign investment in other developing countries
13
Managing the Exchange Rate
Despite the conventional promotion of flexible
exchange rates, many developing countries have
opted for managed exchange-rate regimes
China has moved to a ‘soft peg’ to the US dollar, and
has been accused of ‘exchange-rate manipulation’.
 Since only 16% of its exports were directed to the US market in
2007 (with a falling trend), pegging to the US dollar does not
really look sensible
 It should continue managing the exchange rate but preferably
pegging to a more diversified set of major currencies
 Pegging to the dollar makes more sense in terms of
maintaining the renminbi value of its dollar-denominated
foreign-exchange reserves
 Otherwise, China would incur huge book-value losses on these
assets as the US dollar depreciates
14
The Direction of China's Exports
2000-2007 (% of total)
35
33
33
29
30
% of Total Exports
25
20
20
16
16
16
15
15
10
14
7
5
0
Developing
Asia
Japan
United States
2000
2007
European
Union
Other
15
Widening Fault-Lines in
The International Monetary System
Constraints on Export-Led Growth: the US Dollar no
longer appears to be a reliable ‘store of value’ 
How can it continue functioning as the world’s prime
Reserve Currency?
 Does supplying the ‘world’s monetary needs’ imply that the US




has to run a current-account deficit?
The US has had a pronounced tendency to run such deficits
since the break-up of the Bretton Woods system in 1973
And its current-account deficit has ballooned since the early
1990s, approaching -7% of GDP in early 2006 before recovering
modestly
One contributing factor has been its ability, based on the dollar
as the dominant reserve currency, to borrow cheaply to finance
it current-account deficit
There is thus a continuous net transfer of resources from
developing countries to one of the richest country in the world
16
Widening Fault-Lines in
The International Monetary System
The dollar has been depreciating since 2002 (except
for a reversal between late 2008 and early 2009 when
the dollar became a ‘safe haven’ during crisis)
Recent US domestic counter-cyclical monetary and
fiscal policies have added to the pressure for further
depreciation
Since the US borrows in its own currency, it has
some manoeuvring room: depreciation reduces the
value of its international liabilities
But holders of US-denominated reserves, such as
China, are likely to suffer huge losses. And if they
quickly withdraw such investment, the value of the
dollar will collapse—an inherently unstable situation
17
Reforming the International
Monetary System
Reserve accumulation represents a subtraction from
global purchasing power (Greenwald & Stiglitz 2008)
 The demand for reserves grows as the international
transactions of surplus countries, such as China, grow
As the US increasingly absorbs such reserves
(through its growing current-account deficits), the
world becomes increasingly flooded with dollars
The world economy is subjected to a deflationary
bias because of stockpiling of reserves, which US
debt-fuelled consumption and government deficit
spending attempt to counteract
But the consequent threat of dollar depreciation
poses a destabilizing threat to the global economy
18
Modest Reform of the
International Monetary System
Issue Special Drawing Rights on a substantial and
regular basis (Greenwald & Stiglitz 2008)
 SDRs could be a stable store of value linked to a diversified set
of convertible currencies
Reserves could be credited to the IMF accounts of
member countries in proportion to their IMF funding
positions (note China’s recent funding of the IMF)
Each country would no longer have to ‘bury in the
ground’ some of its purchasing power by
precautionary accumulation of its own reserves
Any country could run a deficit (net importing of
more real resources), which would be equal to its
receipts of new reserves without worrying about
pressure on its currency and ensuing financial crisis
19
20