Leveraged Economies

In the past few decades, most of the emerging economies have found their way to salvation through export. Leveraging their comparative advantage, these economies have been able to attain extremely fast growth. With strong government support, the export oriented companies have thrived and created wealth and value for the country and the shareholders. Asian tigers in 90s were clearly an extreme example of public and private partnership.

While its great to utilize export as path to improve standard of living, it is also a treacherous path. The export oriented economies tend to be extremely volatile through the cycles. They also tend to be focused on particular sector causing lopsided impact. For example, Taiwan's dependence on electronics industry caused its economy to decline by 8.6% and 10.2% in last two quarters. Similarly, Korea, Singapore and Japan have been affected severely too. In Europe, Germany has suffered similar plight. Its unprecedented to see double-digit decline in GDP. The economies lost 5 to 10 years of growth. Incredible!

On the other hand, China and India have been able to weather the storm much better. The reasons are not exactly same i.e., China announced their $586B stimulus package last year. Yet, these economies have big domestic market. In other words, these economies have their own demand. The economies such as Japan, Singapore, Germany, Korea, etc. have leveraged demand i.e., global demand. They do get impacted severely by problems of other countries.

I do think trade is extremely valuable part of the economy. However, government policies focused solely on export may not build solid foundation for emerging world. A vibrant domestic market builds the cushion and strong foundation.

Are we going to have leveraged economies in the future? Sure. As long as economies develop specialization through comparative advantage, we will see leveraged economies. Is it a good policy for a country?