Domestic demand alternative to export-led growth

Planners all over the world ignore the experience of 1990s and persist in following policies which are proven failures

Dr Asad Zaman September 20, 2015
The writer is vice-chancellor of the Pakistan Institute of Development Economics

With the fall of Russia, it became clear to all that the communist paradigm for development has failed. All over the globe, nations leaped on board the only alternative — the capitalist, free market paradigm. The Washington Consensus was a collection of standardised strategies and recipes for development, which became widely adopted. After a decade of experience, several evaluations by different sources came to the same conclusion: it failed miserably. Even John Williamson, who invented the term, acknowledged that the results of implementing the Washington Consensus had been “disappointing”. The central message of the World Bank report entitled ‘Economic Growth in the 1990s: Learning from a Decade of Reform’, “is that there is no unique universal set of rules … We need to get away from formulae and the search for elusive ‘best practices’.” Nobel Laureate Joseph Stiglitz ridiculed the Washington Consensus, stating that “one size fits all policies are doomed to failure. Policies that work in one country may not work in others.” He contrasted the success of the East Asian economies — which did not follow the Washington Consensus — with the failure of those that did.

Unfortunately, it remains true “that men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach”. Planners all over the world ignore the experience of the 1990s and persist in following policies which are proven failures. Going one stage further, Stiglitz cautions that even the proven success of the policies which led to the East Asian miracle may not be transferable to other times and places. The spectacular success of East Asian economies has been attributed to export-led growth. Detailed examination shows that export promotion was only one ingredient of a complex constellation of coordinated and well-sequenced policies. It happened to suit the time, catching the tide of accelerated growth of global trade for the three decades up until the global financial crisis. Following the crisis in 2008, there was a sharp dip in the volume of global trade. Even though there has been a recovery, global trade figures remain stagnant, so that an attempt to increase exports now would require swimming against the tide.

While most planners stubbornly persist in pursuing the mirage of export-led growth, Chinese planners have shown far more wisdom. Chinese economists like Wang Mengkui have explicitly focused on expanding domestic demand as a driver of future growth. They have recognised that the vagaries of the global market mean that an export-dependent strategy would lead to a highly erratic economic performance. Furthermore, China has a huge captive domestic market and does not need to rely on exports for expansion.

There are many reasons why current circumstances in Pakistan call for a shift in focus towards a domestic demand-driven strategy, which is radically different from export promotion. Increasing exports requires producing goods of world-class quality in a market with cut-throat competition. We have neither the skilled labour force, nor the technology or industry to do that effectively. Even if we succeed in creating a specialised enclave which boosts exports, this would be a tiny sector, incapable of providing the large-scale employment essential for our future. On the other hand, goods attractive to our rural population would be cheap and crude, and easy to manufacture. There would be no danger of competition. Mass manufacture of products that are lower on the technology chain can provide employment to large numbers of low-skilled workers, and also generate the income required to boost domestic demand. It is the potential volume which makes the strategy attractive. Foreign mobile companies sell cheap SMS message packages by the millions to our low-income population. There are many more types of low-cost goods of low quality, which would be popular with the masses. While dreaming of unrealistic strategies to compete with high-tech industries, we show disdain towards the low-tech route, which was adopted by Japan and China on their way to their current achievements. Older readers would remember cheap Japanese goods of low quality, produced in initial phases of industrialisation. For almost a decade, Nadeemul Haq has been a voice in the wilderness, trying to attract our attention to the low hanging fruit of domestic commerce, ripe for picking. Let us pay attention, before it rots on the branches.

Published in The Express Tribune, September 21st,  2015.

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whitesky | 6 years ago | Reply Increase in domestic demand will come with increase in purchasing power. -- how to get this purchasing power? Author assumes that " On the other hand, goods attractive to our rural population would be cheap and crude, and easy to manufacture. There would be no danger of competition. " sorry to say you can not escape competition. you can't stop the import of better quality but cheaper products from the globe. So competition is a must . this will compel us to improve the quality of our products to match with competitors. solution lies to Attract improved technology and also the capital .
Salman - SK | 6 years ago | Reply These are wonderful pieces of lessons in Economics written by Dr. Asad Zaman, primarily because these are written from the perspective of prevalent economic conditions in Pakistan. Secondly, they are broken down to the level of common folks, like me, instead of esoteric and erudite discourse in the science of economics only understood by a few. Through these words I wish to thank Dr. Zaman for his writings. Having said that, I also want to add that no sane economic theory and planning can replace the political will of a nation to change their own conditions. Corrupt, inefficient, and selfish political leaders can never ever work towards improvement of economic conditions for the masses. This, however, is in no way an endorsement of, or invitation to, interventionist escapades by the usual suspects.
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