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July 23, 2003

The case against export-led growth



Exports are good. After all, we are competing against the world's best and winning. In software services, for example.

Ajit Balakrishnan, CEO of Rediff.com, however cautions against ready acceptance of this "Export and succeed" mantra. Writing in BusinessWorld, Balakrishnan point to the boom and bust of Bombay's textile mills.

According to him, the 1850s textile boom in Bombay was built on spinning yarn from Indian cotton and exporting it to China. However, then the Japanese stepped in with superior technology and took away the Chinese market. The Indian mills were unable or unwilling to invest in new labour-saving technology and once competition stepped in, were soon unable to pay even the low wages that they were providing their workers. The result: labor trouble and eventual demise of the mills.

"Many of India’s future growth dreams are built on a strategy similar to that of the 1850s Bombay entrepreneurs. Wait till the West loses interest in some work process (garments, software code conversion, back-office accounting, call centres), relocate the process to India to be worked on by cheap Indian labour and make booming profits," Balakrishnan says.

So, if exports based on cheap labor is bad, what then is the answer?

Productivity and competitive domestic markets, Balakrishnan says quoting the World Economic Forum's Global Competitiveness Report (2002-2003 edition).

Competitive domestic markets make domestic buyers sophisticated, forcing local companies to upgrade their products and increase their productivity. “True competitiveness rests on productivity, Productivity allows a nation to support a strong currency and with it a high standard of living. Productivity is the goal, not exports per se,” management guru, Micheal Porter says in the WEF report (as quoted by Balakrishnan).

An export- led growth strategy is built on two pillars: cheap Indian labour and a constantly depreciating rupee. According to Balakrishnan, the contstant depreciating rupee has taken a toll in terms of the country's productivity. If the rupee had been stronger, more Indian businesses (and even government departments and schools) would have been able to afford tools like PCs and become more competitive, he argues. “Devaluation causes a nation to take a collective pay cut by discounting its products and services in world markets while paying more for the goods and services it purchases abroad. Exports based on low wages or cheap currency then do not support an attractive standard of living,” says Porter in the WEF report.

Click Here to read Balakrishnan's full review of the WEF report.