Friday, 24 June 2011

Not All Exports Are the Same

In these days, with mounting sovereign debt problems, most people claim that exports provide the way out. This is right, since one approach to deleveraging is through the sale of assets. What to sell is another question. Should you sell what you want or what you can? This depends on how pressed you are. Ideally, you start by trying to sell what you want but often you have to sell what you can.

Even economists who traditionally disagree about everything else accept this conclusion. However, under normal circumstances many dispute whether a country should value more or promote the export sector. Basically, they claim that one Euro earned exporting is identical to one Euro earned domestically.

This simplistic view may be considered a fallacy if it fails the aggregation test. Let us examine the problem using the analogy of a chamber maid. For this assume that there is a country (Tourist-land) with a single fully-foreign-owned hotel and a population made of maids who can clean 20 rooms a day and charge one Euro per room. The hotel has just one type of room with a standard price and its revenue is made up of domestic sales (paid by national guests) and exports (paid by foreign guests).

At an individual level whether a maid earns her Euro doing the room occupied by a national or a foreigner guest is completely indifferent.

But, if the business is improving and the hotel needs to expand to satisfy an increasing demand the situation of all the maids (the national population) will be determined by the way the owner decides to expand the business. For instance, he may decide to differentiate its supply by splitting the business into two hotels one up-market and the other low-cost. In the up-market hotel maids can now do only 16 rooms per day while in the low cost one they will be able to do 25 rooms per day.

If the owner decided to pay the previous daily wage the maids in the up-market hotel would be making €1.25 per room while those in the low-cost hotel would make €0.8. That is, any rise in national income could only be achieved by employing more maids or by asking the currently employed to work overtime to cater for the increased number of guests. Again, it would be indifferent whether these guests were nationals or foreigners.

However, it is unlikely that the maids employed would remain the same. The up-market hotel would require more sophisticated maids while the low-cost hotel could do with less qualified personnel.

Thus the later might be challenged by competitors with lower skills and lower wages (e.g. migrants) while the first would have a need and an opportunity to invest in new skills with a positive return (e.g. education in etiquette, culture and foreign languages or in clothing and other personal attire). Consequently their wages would need to increase to compensate for such investment (for instance the wage of qualified maids might rise to €1.5 Euros per room while the less qualified could decrease to €0.75.

Now, at the individual level the income of the two types of maid would be substantially affected. But, in aggregate, the national income of all maids might remain the same depending on the ratio between the numbers of guests opting for low-cost or up-market rooms.

Here resides the aggregation problem. If the up-market hotel were to be indifferent between attracting national or foreign guests it might soon run-out of wealthy guests and would employ fewer qualified maids. Thus in aggregate the national economy could be even worse-off than before if the share of less qualified maids increased (even if the low-cost hotel were to export more). On the contrary, if the hotel were to target international clients it would not run out so easily of wealthy clients. As a result, the scope to increase the share of qualified maids would be greater creating the conditions to raise national income.

In sum, it does no matter how many foreign tourists the country attracts but the revenue that they generate. That is, what matters is the income elasticity of demand for both types of maids. Only countries specializing in services or products with a high elasticity of demand will have the conditions needed to obtain higher returns in human capital investment.

Thus, although for an individual maid in the up-market hotel it is indifferent whether she is doing the room of a national or of a foreigner, in aggregate that is not true. That is, not all exports are the same.

No comments:

Post a Comment