Cristian Ugarte and Marcelo Olarreaga, ECDPM Great Insights magazine, Volume 9, Issue 2
Export promotion helps reduce unemployment, especially when export promotion agencies focus their promotion efforts on sectors where a country has a comparative advantage. When they focus on sectors with high labour market frictions, unemployment increases.
Most analysis done in the 1980 and 1990s on the effectiveness of export promotion agencies (EPAs) concludes that they were ineffective. Reasons given are lack of awareness by the private sector of the services provided by EPAs, no client orientation, inadequate funding and a strong anti-trade bias in most countries’ trade regimes. Agencies have since reformed and become more responsive to private sector needs, while trade regimes have become more open. In fact, recent evaluations of EPA performance suggest that they have a strong positive impact on export growth. Researchers at the World Bank found that on average a one per cent increase in export promotion budgets was associated with a 0.04 per cent increase in exports.
Export growth can be a valid target for policymakers, but it is seldom the ultimate objective of economic policy. After all, export growth is not very helpful if it is accompanied by a decline in economic activity or higher unemployment levels. EPAs must ensure that by promoting exports they are not hurting other policy objectives.
A recent study from the University of Geneva examined whether export promotion helps or hinders GDP per capita growth. It found that increased export promotion budgets were associated with higher GDP per capita in all of the countries examined. This suggests that by promoting exports, EPAs also promote economic growth. However, the same study found that different export promotion policies can have divergent effects on exports and GDP per capita. A policy like matching grants, for example, may be effective in terms of increasing exports, but may not be beneficial when it comes to increasing GDP per capita.
Trade economists have long known that there is no straightforward answer to the question of whether export growth leads to more or less unemployment. Of course, as exports grow, employment increases in the firms that are producing and exporting more. This is almost mechanical, as output grows employment increases in those firms. But whether aggregate employment increases and unemployment declines is a more complex question. Its answer, in principle, has remained ambiguous since the seminal work of the Canadian trade economist Richard Brecher in the 1970s. To learn whether export growth helps reduce unemployment we need to consider all the economic interactions of firms and sectors in goods and labour markets.
A recent study from the University of Geneva and United Nations Conference on Trade and Development (UNCTAD) found that countries with a comparative advantage in sectors with low unemployment tended to have lower levels of aggregate unemployment. On the other hand, countries with a comparative advantage in sectors with high unemployment tended to have higher levels of aggregate unemployment. The reason is simple. If a country’s comparative advantage is in sectors with high labour market frictions, then more of its labour force will be attracted to these sectors where unemployment is high, and move out of sectors with relatively low unemployment. This leads to increased aggregate unemployment. Thus, whether export growth results in increased or decreased aggregate unemployment depends deeply on the structure of the economy.
The relation between export promotion and unemployment was the subject of a study we recently did for the Horizon 2020 RESPECT project (‘RESPECT’ stands for Realising Europe’s Soft Power in External Cooperation and Trade). A priori if the impact of export growth on unemployment is ambiguous, then the impact of export promotion is also likely to be ambiguous. Like previous studies, we found that countries with a comparative advantage in sectors with high labour market frictions tended to have higher levels of aggregate unemployment. However, once this was accounted for, we found that increased export promotion budgets were associated with reduced unemployment. In other words, export promotion did indeed help to reduce unemployment.
More interestingly, the type of sectors targeted by EPA promotion efforts mattered. Aggregate unemployment was lower in countries where EPAs allocated more of their budgets to sectors with greater comparative advantage. If EPAs spent more of their budgets on sectors with high labour market frictions, aggregate unemployment increased. Thus, unemployment can increase or decrease, depending on how EPAs allocate their export promotion budgets across sectors.
This tells us that in countries where export promotion budgets are largely allocated to sectors with greater comparative advantage, and a small fraction to sectors with high unemployment, we should observe that export promotion reduces unemployment. Countries illustrative of this category are France, Turkey, Belgium, the Czech Republic, Vietnam, Malaysia, and Trinidad and Tobago. At the other end of the spectrum are agencies that spend more of their export promotion budgets in sectors with high unemployment and little comparative advantage. Their efforts would lead to increased unemployment. Examples in this category are Spain, Lithuania, Cyprus, Brazil and Mexico.
The policy implications are clear. Even if the mission of EPAs was to shift from export promotion to reducing unemployment, their export promotion efforts should still target sectors where a country has a comparative advantage rather than sectors with high labour market frictions. By targeting sectors with more comparative advantage, EPAs can boost export growth while also reducing unemployment.
Of course, export promotion remains a second-best policy when it comes to tackling aggregate unemployment. Addressing the labour market frictions in each sector directly is no doubt a more efficient policy.
About the authors
Cristian Ugarte is a trade policy analyst at the World Trade Organization.
Marcelo Olarreaga is a professor of economics at the University of Geneva.
Photo: Onboard shipping containers, Savannah, USA. Photo: Tom Driggers/Flickr
This article was published in Great Insights Volume 9, Issue 2