73rd International Atlantic Economic Conference

March 28 - 31, 2012 | Istanbul, Turkey

Trade surpluses: The development strategy of developing countries

Saturday, 31 March 2012: 5:25 PM
Giacomo Saibene, B.Sc. , DIG, Politecnico di Milano, Milano, Italy
The current debate about ‘global imbalances’ comprises many different views and there is lack of accordance on both the causes and the consequences. The mainstream view individuates in saving and investment behaviors worldwide the main source of the pattern of international capital flows that in turn cause the imbalances. However, to explain low interest rates in the major deficit country, the mainstream view bases its conclusion on an alleged preference towards its financial assets, which rather seems a dismal disequilibrium outcome rather than a long-lasting global equilibrium. Instead, when approaching the problem from the perspective of developing countries, current account surpluses might be considered a development strategy. Indeed, some authors argued that the undervaluation of the real exchange rate both generates current account surpluses and plays a role in fostering economic growth. Not surprisingly, empirical analyses have associated current account surpluses to fast-growing developing countries (the “allocation” puzzle).

The aim is to present an analytical framework for the analysis of trade imbalances, in which developing countries specifically benefit from trade surpluses. The production process is described as a continuum of tasks and international specialization is determined by comparative advantage. Dynamic external economies of scale affect productivity: the greater the amount of tasks performed over time in a country and the higher will be labor productivity. The difference between advanced and developing countries is in how deep the comparative advantage is rooted in each country: an advanced country has already a huge past experience, hence its productivity can increment only marginally, contrary to the gains in productivity that a developing country can obtain. Given sticky prices and a tendency for cost-minimization over the global production process rather than on keeping balanced trade balances, a misalignment in the nominal exchange rate can affect international specialization also in the long term — in developing countries. Indeed, once new tasks are in-shored in the developing country, productivity significantly increases over time, eventually reversing the comparative advantage in those new tasks. Moreover, the more productivity increases and the greater becomes the price variation required to restore the trade balance equilibrium. Hence, persistent trade imbalances might be a sign of a long-term shift in international specialization. Therefore, developing countries can acquire permanently new production tasks by keeping their currencies undervalued. Indeed, getting locked in the initial observed comparative advantage might not be the best choice: producing textile equipment forever, in line with initial observed comparative advantage, might not be beneficial in the long term — better to acquire other complex tasks that can grant productivity growth also in the long term.