Time for a sceptical look at the export drive

Trying to create jobs by subsidising exports is like keeping lossmaking coalmines open to employ miners
Samuel Brittan: The Financial Times 21/6/00

The conventional wisdom of the postwar era is that exports are unquestionably a good thing. This is an economic howler, fortunately qualified by the fear that official promotional activities will be self-defeating if all governments employ them.

Accordingly, international organisations such as the European Union, the World Trade Organisation and the Berne Credit Union have set rules to limit government support for exports. In addition, finance ministries everywhere cast a wary eye on all forms of government aid to industry.

In the UK, official support for exports comes under three main headings. First, there is export promotion per se, mainly under the auspices of the Department of Trade and Industry. This amounted in 1998-99 to about £275m ($415m). Second, there is the Defence Export Services Organisation, whose net promotional expenditure on sales only amounts to about £20m per annum. Financial support for military sales mostly comes under the third heading of the Export Credit Guarantee Department.

The ECGD covers medium-to long-term capital goods exports from three years' up to 16 years' duration. In a typical year it underwrites about £3bn of cover. The business is concentrated almost entirely on civil engineering projects and military and civil aerospace. The largest recipient is China; and military contracts account for a good fifth of the ECGD's commitments in general.

A report on export credit by National Economic Research Associates (Nera), the consultancy group, is still under wraps. Meanwhile, too much of the argument has concentrated on the side issue of whether the ECGD should be privatised - which Nera is unlikely to recommend.

A more important question is whether the provision of insurance cover should be subsidised. Until 1991, the department showed heavy cashflow losses. It was then instructed to break even in cashflow terms in line with Berne procedures.

But the ECGD is still not required to show the positive return of 8 per cent in real terms normally required on public sector investment projects. One of its own working papers estimated an implicit annual subsidy of nearly £400m per annum. Nera could not find justification for the subsidy, although its first preference is for an internationally negotiated phasing-out.

There is often a misunderstanding in the consideration of reports such as Nera's. Politicians and opinion leaders fear that without export promotion the balance of payments would go haywire, the country would become bankrupt and hundreds of thousands of jobs would be lost. Such arguments are usually dismissed by economic researchers in polite terms as fallacies not worth consideration.

They concentrate instead on lapses from perfection inherent in all markets: matters such as informational barriers facing potential new exporters, and which governments might be able to help overcome by activities such as trade fairs or start-up credits. The terms of reference for the Nera inquiry admit that the importance attached to so-called market failures and the offsetting possibility of government failures depend on "the judgment of individual researchers".

The basic political fallacy is not to realise that exports, like investment, are a cost to UK citizens and not a benefit. The origin of the so-called balance of payments problem was in the immediate postwar years, when sterling was on a fixed exchange rate and was also inconvertible. It was, moreover, a world with strict controls over capital flows.

The most popular argument for subsidising exports is the effect on jobs. It is one that Nera rightly dismisses. The last thing that the overheated British economy needs is extra demand for labour. But even if there were a risk of recession, selective aid to a few heavy goods or arms manufacturers would be an extremely inefficient way of stimulating demand. The argument that jobs derived from exporting weapons cannot be replaced is akin to the argument for keeping open uneconomic coalmines for the sake of employment.

We are up against the myth that full employment means the same employment. In fact, well over 3m people leave the unemployment register each year even in recession periods, more than half of them for new jobs or training. It is almost certainly easier for arms workers, many of whom have a wide range of skills, to find new jobs than it was for miners, whose training was more specific.

International disarmament treaties are indeed valuable in export credits as in other matters. But what if other countries do not go all the way? National resources should still be employed where they enjoy the highest rate of return even if this causes complaints from companies that have been used to taxpayer support.

Western nations are rich enough to waste some resources. But subsidised sales of arms or civil engineering projects have more harmful effects than the simply economic ones. The worst are political and moral. They are illustrated by the Pergau Dam in Malaysia in the mid-1990s, when the Conservative government overturned a publicly minuted reservation by the permanent secretary of the Department of Overseas Development and insisted on supporting credits for the dam.

Business lobbyists have been able to persuade a succession of prime ministers, ranging from ultra-dry Conservatives to New Labour, that if the government does not support them their overseas rivals will win the contracts. We should instead follow the example of General de Gaulle. When he was told that if the French left Algeria the Russians would take their place, he replied, "I wish them much joy of it".

The same applies to the UK or other governments that throw away their national resources on projects that not only do not pay domestically, but which hinder genuine development in poor countries.