Treasury Staff Insights: Rangitaki article by Mario Di Maio
The New Zealand Government is targeting an increase in the ratio of real exports to GDP to 40 percent by 2025. To shed some light on what drives these transitions we looked at episodes to export increases in developed economies to see if there are common factors at play. The results should be read with caution – the sample sizes are small and the experiences are dominated by the experience of small European countries during a period of economic integration.
Why do we think exports are special? There appears to be broad agreement among international economic institutions and a series of New Zealand governments that better export performance would lead to higher productivity. Although exactly how special exports are is a matter of debate (see OECD Survey of New Zealand 2013 or this NZ Treasury paper Real economy and the exchange rate).
Setting aside the magnitude of the economic impact, there is a question of what policies would deliver the sort of increase in export intensity targeted by the Government. We looked at the nominal export to GDP ratio for developed economies from the 1960s to 2010 and identified around 18 episodes where the ratio increased by 10 percentage points in a sustained manner over 10 years (See table 1). We choose to use nominal exports to GDP on the basis that large changes in export intensity are unlikely to be driven by price movement alone. We accept that this may not be the case for oil exporting nations and these countries are excluded these from our sample.
Looking across the experiences in the (admittedly limited) sample suggests that during export take-offs:
- GDP growth generally exceeds potential and there are signs of pressure on domestic resources.
- While it was common for a real exchange rate depreciation to proceed an export take-off it does not appear to be necessary.
- Real exchange rates remain remarkably stable despite a sustained period of higher exports and higher current account surpluses.
- Fiscal deficits are higher in advance of an episode and fall as the export take-off proceeds.
- Higher national savings accompany export transitions but there is no investment boom that ‘creates’ the export take-off (there are few signs of capital deepening).
To better understand the policy and environmental factors at play we looked in a little more depth at the factors driving the transition in Ireland (1983), Finland (1988) Canada (1991) and Korea (1983) and provide a description of the economic adjustment, policy changes and external environmental changes. While this sample is limited it might help shed light on the policy and environmental factors at play.
- Most of this narrower set of export take-offs were accompanies by exchange rate adjustment in the early years (with the exception of Ireland). The exchange rate adjustment has been attributed to a loss of fiscal control (Canada) and lax monetary and credit policy (Finland and Korea). In the early phase of the take-off broader economic weakness accompanies the weaker exchange rate. Although export performance improved rapidly subsequent to exchange rate adjustment, unemployment was high and growth was subdued for an extended period. Weak domestic balance sheets lowered domestic consumption and increased savings.
- Figure 1: Real Effective Exchange Rates (t= start of export take-off)
- Source: Bank for International Settlements
- The initial exchange rate depreciation was sustained despite a decade (or more) of rapid export growth and sustained current account surpluses. In the case of Finland and Ireland, the change involved moves towards a common currency with Europe. In Canada, the sources of sustained depreciation involved sustained fiscal consolidation and weak commodity prices through the 1990s. In Korea, macroeconomic and capital account policies were set to lean against exchange rate appreciation.
- Fiscal deficit reductions played a role in restraining pressure on domestic resources in three of the countries. However, these countries did not make major changes to the role and scale of the state sector. Canada was the exception as the export take-off was preceded by a wide-ranging program of macroeconomic and state sector reform.
- Broad microeconomic reform programs did not precede the export take-offs, although all countries made progress on some key elements of microeconomic reform. With the exception of Korea, most countries’ microeconomic reforms sought greater competition in their domestic economies through a mix of lower trade barriers and lower subsidies. Korea achieved effective ‘competition’ by actively directing resources towards externally-orientated industries competing on international markets and winnowing support to those that failed to meet export targets.
- All of the case study countries experienced substantial structural change in composition of economic activity (and exports). This included the emergence and rapid growth of new sectors and industries. Although each country experienced growth in slightly different sectors, a common experience was the increase in elaborately transformed manufacturing and information technology (with the exception of Canada).
- Figure 2: Ireland percent of merchandise export trade
- Source: OECD
- Two key environmental changes played a critical role in these countries’ experiences; economic integration and technological change. The deepening of European integration (and collapse of the Soviet Union in the case of Finland) played a role in the export take-off experiences in the case of Ireland and Finland. For Canada, greater trade integration with the United States was critical to the increase in exports. The emergence and strong growth of the ICT and consumer electronics played an important role in greater trade intensity in Finland and Korea during its take-off experiences.
- Although new sector growth very rapidly innovation and technology investment do not appear necessary in advance of an export take-off. In the case of Finland and Korea substantial private investment in research and development followed better export performance and accompanied the development of world-leading ICT companies. In the case of Ireland and Canada the sources of technology remained largely external and accessed through foreign ownership and trade links.
- The role played by foreign capital is also quite different across countries. Foreign investment was an important part of improved export performance in Ireland and Canada. But in Finland and Korea external capital was much less important. In Korea, an important policy objective was the continued Korean ownership of large export firms.
- The role of the state in influencing, supporting and directing economic activity also varied. In Korea, state involvement in economic development was a critical part of the policy mix and played a central role in the export orientation of the economy. In Ireland, the state successfully positioned the country as a destination for foreign investment that drove some of the lift in export performance. The Canadian export take-off was accompanied by a general liberalisation of economic regulation.
The diversity of the case studies cautions against drawing simple policy lessons from other countries for any New Zealand strategy to lift trade intensity. The diversity of approaches and circumstances means any single policy (or policy mix) would be misleading.
|Exports to GDP
prior to episode
export to GDP*
Source: World Bank and author’s calculations
* Over average of the previous 10 years; this is the average of the different episodes for countries with more than one transition
-  Hausmann (2004) and others took the approach of looking at economic growth by focusing on sustained accelerations. Researchers at the World Bank (Fruend and Peirola, 2009) apply this approach to export accelerations in developing economies and find that large and sustained depreciations of the real exchange rate, to a level that is considered undervalued, precede export surges in most cases.
-  Singapore’s increase in trade intensity (and volatility in trade and GDP) is such that on a gross basis it meets export transition criteria in multiple years and with a 10 percent threshold could include the years 1969, 1974-1981, 1989-1990, 2000 and 2003-2006.
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Treasury Staff Insights: Rangitaki
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