On Export-Led Growth

Don Boudreaux has another excellent message on mercantilist trade policy at Cafe Hayek. Boudreaux writes

The January 5th edition of The Economist reports that China's recent economic growth is less dependent upon exports than is commonly believed. Reflecting on the widespread mercantilist myth that countries can prosper by exporting as much as possible and importing as little as possible led me to send the following letter to The Economist:

It's no surprise that "Contrary to popular wisdom, China's rapid growth is not hugely dependent on exports" ("An old Chinese myth," January 5). Just as no individual prospers by giving the fruits of his labor to others in exchange only for pieces of paper that he never spends, no group of people - including the Chinese - prospers by such a foolish strategy.

Exports are costs. They promote economic growth only if, in return, the exporters receive goods, services, and assets that improve their living standards and their capacity to produce. Any country that insists on exporting its produce and importing in return as little as possible is on a certain path to poverty.

Sincerely,
Donald J. Boudreaux

Yes, yes. Accumulating money might be a prosperity- enhancing strategy -- but only if that money is eventually spent. If it is never spent, all the exports shipped abroad in order to gather all this money turn out to be gifts given to foreigners. Any people foolish enough to permit their government to enforce such a strategy will enrich others and impoverish themselves.

One must ask why the mercantilist myth is still alive today. After all Adam Smith attacked the mercantilist system more than 200 years ago. As Gavin Kennedy has written,

Wealth of Nations contains a long polemic in the whole of Book IV against what Smith called the mercantile system, a deformed variation of the commercial system characterised by state interveintion in political economy, ostensibly to enrich the people, but really to enrich the State (i.e., the sovereign). (Adam Smith's Lost Legacy, p.162)

Kennedy continues,

Mercantile doctrine begins from the observation that sovereign states fight foreign wars and need the wherewithal to do so. Allegedly, they do this best by accumulating gold and silver in peacetime and spending bullion on their armies in wartime. This led to the spurious policy (futile too, for it only promoted lucrative smuggling trades) of prohibiting the export of gold or silver. To this policy, a balance of trade embellishment was added: export more than you import, because by curbing imports using taxes (tariffs) and prohibitions, and by allowing gold and silver bullion from foreigners to flow into the country to pay for their trade deficits, rather than out of the country to pay for ours, the State grew strong enough militarily to thwart attempts by envious neighbours to encroach on our territory. The mercantile system, in these terms, was a neat but fallacious policy for credulous governments inclined to warfare as an instrument of State policy. (Adam Smith's Lost Legacy, p.162)

And yet we see that such a "spurious and fallacious policy" is in fact all too alive and well in this age, despite the efforts of Adam Smith (and most economists since his time).