Feasibility Of Export Led Growth In Time Of Global Slow-Down

By- Apoorv Srivastav

The engine of the global economy has started to stagnate. One of the biggest arguments that favors this statement is that the export led growth is no more feasible. The export led growth pioneered by Germany and Japan in 50’s and 60’s was further adopted by the Four Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan, before finally getting implemented by China in early 90’s. The export-led growth rose to eminence in the late 70s, replacing the import-substitution model and was a prominent global economic factor for the following four decades.

The fall of export led growth

Currently, US economy is debt saturated and still struggling to recover from the crash of 2008, and Europe is also constrained by fiscal austerity and Brexit. Export has lost its feasibility as buyers themselves are struggling. And the impact of which can be seen from Bank of Japan adopting negative interest rates & European Central Bank (ECB) implementing Quantitative Easing (QE) to increase the domestic consumption by reducing its lending rate 10 basis points to -0.4%.

Secondly, Emerging Market (EM) economies have become a larger share of the global economy, increasing from 39.1 percent in 1980 to 57 percent in 2014 and their collective export is not letting the industrialized economies recover, leading to the economic tension between EM and Industrialized nations.

For EM country, export led growth would have been a safe bet, but the recessionary condition of the US and Euro market is making hard to find buyers. This proves export led model is critically dependent on the global economy, and any global crisis will affect the economy directly.

The competition has increased with many EM countries following the same model. One of such methods is ‘Currency devaluation’ which countries like China and Japan are using to boost their exports and seeking trade advantage over other countries.

Though export led growth proved to be a sound strategy for Asian countries, but it was not the case everywhere. Mexico, whose GDP growth was 6.4% during 1950-80, reducing to 2.6% for 1980-2008 and finally 1.1% in 2013 because of export led growth model.

To conclude, we can say that the export led economy has lost its feasibility for EM and is posing a risk to the global economy. Countries need to recalibrate and shift from the export led growth to the demand led growth, with a greater role of domestic and regional demand.

A Myth: Devaluation helps exports

Author: Nayan Saraf

The conventional wisdom says, “If you devalue your currency, then it will give a boost to your export as it would look cheaper in the global market.” This wisdom has been running through the veins of economists and governments from many decades and played a vital role in determining the government’s economic policies. But over the years, with the increase in globalization and development of the financial market, this wisdom appears to be a myth now.

The first reason is the availability of derivative instruments such as Currency Swaps, Futures and Forwards, which helped importers as well as exporters in hedging the currency risk. This reduces the immediate impact of devaluation.

Second reason is that many exporters import their raw materials from across the world. For example, a car manufacturer imports different parts such as engine from one country, steel from another country and so on. In one way, he might think that his cars would be cheaper in the global market due to devaluation; on the other hand, his input costs have gone up since the cost of imported raw materials would be higher. Hence, he wouldn’t be benefited much from this currency devaluation, as he needs to maintain his profit margins.

Third reason is the increase in the labor cost, due to prevailing inflation in the economy. Currency devaluation leads to higher import costs that will eventually cause inflation. Hence, the work-force have to pay more for the same goods which will reduce their real wages, and soon they will demand for higher nominal wages which will eventually increase the labor costs for a firm.

Devaluation also leads to law of unintended consequences. Suppose China devalues Yuan to make its exports attractive abroad, it might get competitive advantages by doing so, and will help its economy and exporters to grow. But over the time, the manufacturers in other country will largely suffer due to the loss of market share. It will cause closure of plants, layoff, bankruptcy, and eventually, recession in those countries. And due to the spillover effect, a wider recession may result which might cause in declines in the sales of Chinese goods itself because of lack of demand abroad.

At last, other countries might use “Beggar thy neighbor Policy” of competitive devaluation or can put capital controls and other currency restrictions or can provide subsidies to protect their exporters.

All these practical implications don’t allow a country to boost its exports when it devalues its currency. Though there would always be short-term benefits, but in the long term, the country with low labor cost and efficient manufacturing would boost exports.


By Shulin V K Satoskar

Edited by Madhu Veeraraghavan


China’s devaluation of Yuan, last week, represented the largest depreciation of the currency for 20 years and sent tremors down the Dalal Street. The “Kiss of the Dragon” was felt across already subdued economic conditions throughout the world. Notably, Nobel Laureate and renowned economist Paul Krugman described the decision as “the first bite of the cherry” envisaging that more could follow. The World’s largest economy could be weaker than the 7% a year growth that official figures suggest.

In my attempt to explain the slowdown in Chinese economy and a great opportunity for India to bank upon, I have used the concept of business cycles and its impact on economies.

Business Cycle

A business cycle is defined by the fluctuations in an economic activity over a period and covers expansion/recession in any economy. An expansion phase is marked by rising indicators like income, employment, industrial output.

Cyclical fluctuations in economic activity are features of most economies. One of the reasons why nations fail to achieve a sustainable economic growth rate is because the policy makers underestimate economic cycles. Hence, an improved understanding of the economic cycles and policies interaction is imperative in formulating forward looking monetary policy.

Economists are often puzzled by the Growth-Inflation paradox. Most agree

that sustained growth rate cannot be achieved above a threshold rate of inflation; there are no models that accurately estimate on what constitutes the “Threshold”. Figure 1 captures an economic cycle in Indian economy from 2005-10. Inflation rate (depicted by the Green line) and Business Cycle (depicted by blue) further help identify the counter-cyclical nature of Growth-Inflation tradeoff with inflation rate almost mirroring the business cycle at identical turning points. Such an economic cycle (typically over a period of 6 years) is known as a Juglar Cycle or J-Cycle. Indian economy currently finds itself at its peak as indicated by the rising trend of the Juglar cycle in 2015, with lower inflation levels, tailor made for a super normal growth stage. However, Juglar peaks are often short lived (1-2 year, see period 2005-07 and 2009-10) and troughs are relatively lengthier (2-3 years, 2010-13).


There is also a pattern of symmetry around which the cyclical trend oscillates over a period. This is termed as Kondratieff cycle or K-Cycle and usually extends over a period of 42 years. Hence, a K-Cycle typically has 7 J-Cycles. Figure 2 captures a K- cycle in the Indian economy and the breakout started around 1974. A rising trend is indicated by the green trendline below. Such a trend is typical of a robust economy.


Chinese economy, on the contrary, has experienced a slowdown in consumption in the recent years. The J-cycle from 2010 to 2015 accurately captures this falling trend in Figure 3. Chinese economic cycle has not picked up significantly, in spite of recording a lower inflation rate. Recent RMB devaluation and interest rate cuts further confirm the ineffectiveness of policies introduced during the ‘troughs’. Also, the ‘trough’ looks abnormally extended with little signs of recovery.


Summary of Findings

From the CRISIL research reports and World Bank data, it can be inferred that:

• Domestic investment in China has shown signs of saturation and there is little room for stimulus (Investment accounted for 47.2% of GDP in 2010 and 46% in 2014). India has huge room for public investment and can absorb trillions of dollars in infrastructure alone.

• A very popular argument among economists is that China has an ageing population which is expected to drive the labor costs up further by 2020.

• Going by IMF figures of 2013, consumption expenditure 70.4% of GDP in India compared to that of 49.6% in China.

• Chinese debts have risen to alarming levels (101% from 2007 to 2014). India on the contrary is relatively safe at 5% increase.

• With a subdued demand across the world, China can rely on export driven growth strategy at its own peril. India’s consumption driven strategy leaves a good headroom from potential upside.

• Pressures of the property bubble are already felt in China as real estate prices are on a decline.


The Road Ahead

India is now one of the strongest growing economies and remains better positioned compared to its peers. Our country with a stable political environment recorded a sharp decline in inflation and managed to reduce Current Account Deficit (CAD) significantly. prime minister’s foreign visits have managed to win the foreign investor’s confidence yet again indicated by rising FII/FDI inflows. A combination of tactical measures like  the mobilization of NRI deposits, RBI’s success in building forex reserves, restriction on gold imports and slowdown in imports augur well for maintaining sustained growth rate. Currency devaluation war, how- ever, is one major external shock that remains a cause for concern. However, global sentiment still remains bullish on Indian economy on account of the following factors:

• RBI Governor, Mr. Raghuram Rajan has succeeded in building a strong monetary policy discipline that focusses on inflation targeting which in turn strength- ens the rupee.

• With the Land Acquisition Bill, FDIs and GST reforms round the corner, Indian growth story is expected to continue.

• India Inc’s earnings are expected to be 7% this year. Estimated reduction in corporate taxes and GST replacing state taxes will push the earnings upwards.

Major Challenges

• Currency devaluation war is one major external shock that remains a cause for concern

• Subdued global demand can hit India’s exports further impacting the economy

• Impending decision by the US Fed to raise interest rates has the potential to cause volatility in capital and forex markets

          Going by the business cycles and the empirical data on macroeconomic variables, Indian economy certainly is in a good shape compared to its northern neighbour. However, the onus lies on the government to bank on a great opportunity that the ‘peak’ of economic cycle has to offer.


  • CRISIL Research Reports on Indian Economy
  • Science of Monetary Policy: Some perspectives on Indian Economy by M J Manohar Rao
  •  www.worldbank.com

IMG_7666About the author:

The author was a Banking and Financial Service student of batch 2014-16. He is currently Management Trainee at CRISIL Research. His area of interest is economic research,  capital market, stock picking, and fund management. You can contact him at shulin.kamat@gmail.com.


By Nayan Saraf

Edited by Shulin V K Satoskar


There have been many dramatic events in the history of the financial world which have subsequently changed the structure and practices across the world. These practices were mainly intended at getting ahead in the competitive world of trade. And when it comes to trade, all we can talk about is China. Perhaps, China is one of those countries which has tried every possible trade practice to be ahead of other countries. Some of these are unfair. These unfair practices are: Currency manipulation and currency devaluation. But before we go ahead and discuss the impacts of these unfair and regressive trade policies, we first need to understand currency manipulation.

What is Currency Manipulation?

Currency manipulation, also known as foreign exchange market intervention, or currency intervention, occurs when a government buys or sells foreign currency to push the exchange rate of its own currency away from equilibrium value or to prevent the exchange rate from moving towards its equilibrium value. This is basically an act of artificially inflating or deflating the fair value of the currency. In most cases, manipulation is illegal. Usually, the fair value is decided by the demand and supply of that currency in the market. But when a country manipulates its currency, the free market does not remain any free. In that case, the country with trade surplus doesn’t allow its currency to get appreciated, which in self-correcting phenomenon should do. Due to this process, the goods from that country would still cost less than those of other countries whose currencies would be wrongly inflated. This way, the country using currency manipulation attracts more exports and disturbs the free market.

How does China do Currency Manipulation?

      Now suppose, a trade occurs between a US importer A and a Chinese exporter B. After the trade, importer A would transfer its money to the account of Chinese exporter B in dollars. Now, after receiving money in dollars, exporter B would go exchange the dollars in local currency Yuan. But instead of exchanging from its reserves, People’s Bank of China (Central Bank) exchanges it with newly created Yuan. This is equivalent to printing money. The Central Bank thus supplies more Yuan in the market. The Central Bank constantly prints new currency and uses it to buy U.S. dollars and U.S. government debt, thereby flooding the market with Chinese currency and increasing demand for American dollar. This way the supply of Yuan would be more than its demand and would result in lower prices of Yuan. On the other hand, the demand for dollar would be more than its supply and would result in an inflated dollar value.

Proof of China’s Currency Manipulation

We can observe it from the Figure 1 that from 2005-14, China’s export has grown by more than 300% which is 30% growth annually (on average). The monetary value of exports from 2005-14 has grown from $500 billion to $2.3 trillion. But in the same decade yuan depreciated by only 25%, i.e. from 8.26 CNY to 6.37 CNY for a unit dollar.



How is it possible?

It is only possible by manipulating the currency. In the same decade, the Central Bank has increased its Forex Reserve by more than 600% i.e. from $500 billion to $3.7 trillion (Figure 3). This is a clear sign of manipulating yuan by buying more dollars and supplying more Yuan. Figure 4 clearly indicates the increased money supply of Yuan, which is more than 700% in the same decade.



Why is China Devaluing its Currency?

The question which everybody is asking: why did the Chinese government devalue its currency in 2015? The answer is an interplay of many reasons. First, the global economic slowdown in US and Eurozone: The U.S. is slowly recovering from the global financial crisis of 2007-08, but the Eurozone is still in the vicious circle of recession. The export of Chinese goods has reduced due to low demand in US and Eurozone. Inflation in the second quarter of 2015 remained at 2% in the U.S., and abysmally low at 0.2% in Eurozone.

Second, the declining growth rate in China: It also resulted in this devaluation. China has realized that the currency manipulation is not yielding benefits as it did five years back. The exports are declining, which is also resulting in lower demand in the domestic market.

Third, the adoption of quantitative easing by Eurozone: Since the adoption of QE in March 2015, Euro has drastically depreciated against dollar. Now, Chinese government is worried that if this depreciation continues, then their goods would be less desirable in the Eurozone.

At the same time, Japanese government also adopted QE, which resulted in depreciation of yen. The fear of losing this competitive advantage over other countries has forced China to get into this currency war.

Impact on Chinese economy

The recent devaluation resulted in a crash of the Chinese stock markets. Despite the massive stimulus the government unleashed to prop them up the situation remains unchanged. The Shanghai index has fallen by nearly 40% from its mid-June peak. So is this the hour of China’s crisis? Not so likely. Stocks and economic fundamentals have little in common. When share prices nearly tripled in the year till June, it was not a sign of stunning improvement for Chinese growth prospects. China’s growth has been slow for a while but their stock market kept rising.

Furthermore, the property market of China is far larger than the equity market. Housing land accounts for a major chunk of the financial system and thus plays a much bigger role in spurring growth. House prices have risen up nationwide but this crisis has stopped overvaluing the property market. This stabilization has reduced the risk of property market crash – an event equivalent to that of a stock market crash in America.


This is not the first time that any country has devalued its currency. In 2010, the Japanese government moved to depress the value of yen. South Korea also has a habit of intervening in the valuation of its currency. Switzerland pegged its franc to the euro in the beginning of 2011. But a lesson that these countries have not learnt is that the fluctuation in currencies have global impacts.

Earlier this year, when Swiss Central Bank had unpegged their currency, the currency rose from pegged level of 1.12 Euro to 0.82 Euro in just one day. This is the highest appreciation of a currency in the history of the financial world in one day. The corresponding impact was that the Swiss market went down by 12% the same day. Many big hedge funds went bankrupt. And now, when China has devalued its currency, again, there is a market crash. This market crash is far bigger than the Swiss market crash. It eroded nearly $1 trillion of wealth in just one day.

China has always used these unfair practices just to get ahead in the world. But now, it should realize that this world is interconnected, and any volatility would cause global crisis. When China last devalued its currency in 1994, there was a financial crisis in Asian economies just after 3 years. Now again, we are at the verge of another financial crisis as the RBI governor, Raghuram Rajan, predicts. And its consequences would be far more fatal than 2007-08 global financial crisis.



About the author:

The author is a Banking and Financial Service student at TAPMI. His area of interest is mainly economics, banking, and risk management. He is on the editorial board of TJEF and also the member of Literary and Media Committee of TAPMI. You can contact him at nayan.bkfs17@tapmi.edu.in