Ha-Joon Chang: “Unless you devalue, you cannot increase your exports”

The economist visited Argentina and talked to the Herald about the IMF, trade policy, and the global economic context

Written by Estefanía Pozzo and Amy Booth

Ha-Joon Chang is a South Korean development and heterodox economist known for his ideas about the role of manufacturing in the economy. He is an academic who can talk at the same time to specialists and to anyone who has an interest in how the global economy works. With simple language, Chang achieves a perfect combination of complexity of analysis and simplicity in communicating his thinking. 

Chang is the author of numerous books on development economics and capitalism, including Economics: The User’s Guide (2014), 23 Things They Don’t Tell You About Capitalism (2011) and Bad Samaritans (2008). He has won awards including the Gunnar Myrdal Prize (2003) and the Wassily Leontief Prize (2005) for his work on political economy and development, and made Prospect magazine’s 2013 list of the top 20 World Thinkers.

In a relaxed conversation at the offices of Fundar, the Argentine think tank that brought him to Argentina for a visit, Chang spoke to Estefanía Pozzo and Amy Booth. 

The Fed implemented an aggressive rate hike because of the inflation problem and that has already had a negative impact on some US banks. What do you think of the global context?

I think that we need to go back in time quite a bit and start with the 2008 global financial crisis, because we are actually still living through the consequences of the crisis. We are basically living in the same kind of institutional arrangements as before the crisis. When the economy failed to pick up, basically they [the US] poured money into the system. They cut interest rates to basically zero. When you think about it, this is the most extraordinary thing because it’s like suspending the function of the capital market. This means that projects that would make 1%-2% returns become acceptable. And that was not enough so they did super quantitative easing, flooding the system with money. And what happened? It led to huge problems in the stock market and real estate market. The best way to see this point is to think about the days during the pandemic when the U.S. GDP was falling by 10% per year and the stock market was at a record high. I mean, this means that the financial system has been basically separated with the real economy. 

So you have basically 12-13 years of unprecedented monetary expansion, which has created that huge bubble. And then COVID pandemic happens, creating problems with the supply chains. There’s war in Ukraine, and now there’s that kind of supply side pressure for inflation, which cannot be easily resolved because of this supply side problem, which I think is difficult to deal with. In the absence of other ways of dealing with it, the Fed and the European Central Bank started raising interest rates, which is now creating a huge problem. You used to be able to borrow money for projects that would make 1% or 2% returns, and now you have to make 6-7% returns in order to survive. So there are a lot of projects that are going to be in trouble. 

The trouble is that we don’t even know where the underperforming assets are. So I think we are in a very worrying situation now. I’m not saying that there’ll be another round of global financial crisis, but we are coming pretty close. This is why American Federal Reserve support is forcing banks to take over bankrupt banks like Silicon Valley bank. I don’t know if it necessarily spreads to growth in the way it did in the 2008 crisis but there are a lot of worrying signs. Some people are talking about the forthcoming crash in the American commercial real estate market later this year, next year.

Do you think inflation is going to be persistent? 

This inflation is created by supply side problems, it is not going to be solved through monetary policy. Well, it will be solved in a sense because if you keep raising interest rates the economy will fall into recession and because of that inflation is going to come down, but then you will have problems with employment and potential financial crisis.  

What challenges do you see for Latin America in this context? 

There are quite big differences between different countries but, in general, the region has been quite reliant on primary commodities and has become even more so in the last couple of decades. Brazil’s export basket has become more reliant on primary commodities like soybeans, beef and iron ore than, say, 20 years ago. Their problem is that they are more sensitive to the sort of economic shocks. Also, it is much less under your control than manufactured products or services. Argentina for example has US$20 billion less exports because of the weather. That’s no human fault. Commodity prices go up and down a lot more than prices of manufactured exports. Even if it gives you the same level of income the variation is stronger so it makes macroeconomic management more difficult. 

In your book “23 things they don’t tell you about capitalism” you talk about the tension between growing through services or through industry. Do you still believe that contradiction remains? 

Yes, by nature, productivity growth is easier in manufacturing than in services. You can increase productivity in manufacturing because of automation and chemical processes. And manufactured goods are much more tradable than services. When you rely on services your balance of payment problem will be magnified because it is more difficult to export services than manufacture goods. In countries where they do a significant amount of research and development, the bigger the manufacturing sector, there’ll be more research and development. Other things being equal, because it’s more research intensive. Even in the US and the UK, where the manufacturing sector comes to 9-10% of GDP, 67% of R&D is done by the manufacturing sector. In countries like Germany or South Korea, with a manufacturing sector accounting for 20-25% of GDP, 80% even 90% of R&D is done by the manufacturing sector. So countries with bigger manufacturing will have more innovation and higher productivity growth. 

Also a lot of increase in services is an optical illusion because engineering, design, consulting or all of these things used to be done by the manufacturing companies themselves. Now they outsource them. You cannot carry the whole economy on services. The Americans have basically implicitly come to operate my view that they need to revive manufacturing. For a few decades I thought that they could just lead on services. Now they realize that without a strong manufacturing sector their position will be threatened. 

Argentina’s currently in a really difficult situation with the IMF. What is your assessment of the Fund’s recipe for Argentina? Do you have any ideas about potential solutions that might be less painful for the country?

The problem, which is true of most Latin American countries, is that it has not increased its ability to export in line with its economic growth. In a developing country, if you don’t export enough, you cannot develop your economy. Because in a developing country you don’t produce machines, you don’t produce technologies. You have to buy them. How do you buy them? You need the foreign exchange. How do you generate foreign exchanges? You have to export. This is why Latin American countries have these cycles of boom and crash, because what happens is that because you are not generating enough exports, as soon as you begin to grow, your economy sucks in imports. And then a few years later you’ll be in a balance of payment crisis and you have to get a loan from the IMF. Then implement recessionary policies, cutting government spending, raising interest rates. And then a few years later you accumulate some reserves and then you begin to grow again. When you are in trouble, like Argentina has been in the last few years, what else can you do? I mean, to borrow money. But the important thing is that once you borrow the money and create some fiscal space you have to invest to increase your ability to export. Because if you don’t do that, I’m sure you in the next two or three years will be a combination of the notes from the IMF, maybe some borrowing from China, some recessionary policies like raising interest rates, cutting government spending, Argentina will restore some kind of macroeconomic balance. But if you stop at that, which is what the IMF basically recommends, you repeat this same thing four or five years later. 

Why doesn’t the IMF see it that way? 

Fortunately it is slowly changing. I think they are beginning to think about industrial policy. I gave a lecture there a couple of months ago, which is a sign that they are becoming a bit more open minded. The trouble is that the IMF is basically mandated to think only about macroeconomic imbalances. So they don’t really care what happens after factoring in imbalances that are restored, which is of course stupid. Macroeconomic imbalances are ultimately linked with your export structure and your industrial capability, your productivity, and so on. So but I mean, this is how they think. These macroeconomic imbalances need to be restored. What the country does after is not their problem. 

The IMF is asking Argentina for a devaluation now…

Yeah, well I mean devaluation, in the short course you have to, I’m not against devaluation. I mean, of course it would create a huge problem for certain people, but unless you devalue, you cannot increase your exports. So, the short term measures are pretty, I mean, clear what you have to do. But the important thing is that you create fiscal space and use it to invest and increase your productive capacity. You export more. Unfortunately, most macroeconomists stop at restoring balances by devaluing and cutting spending and raising interest rates. But because you don’t do the next step by increasing your ability to produce and especially exports, you are going to repeat the same. You are repeating what happened in 2001 and 2002. So this is season 2 and, unless you do these things, you’ll have season 3 in, I don’t know, 2029. 

How do you see that balance between, as you said, Argentina needs to export more, but at the same time not just open markets completely?

The problem is that people think you need to have the same trade policy across the board. This is wrong, because there are some new industries which definitely need protection in the same way that we have to send kids to school. On the other hand, if your kid is 35-40 and still needs you to support them, then there is something wrong. We have to stop that subsidy. There cannot be a policy that says everything is free trade or everything protected. What you have to do is protect a certain group of industries so they can grow up and compete in the world market and become export industries five years later, ten years later, maybe even 20 years later. In the meantime, there will be some sectors where we want to actually lower trade barriers so the industry has some competition from outside and they will try to increase their productivity. So you need that kind of calibrated policy. So if you just open up then a lot of industries will die and you will be forever exporting soybeans. And if you protect everything regardless of how long it has been and whether these industries are making an effort to become more productive, then it’s like protecting your kid until they’re 55. 

Is Argentina getting that balance right at the moment? 

Well, I don’t think so, because you are not protecting and promoting promising industries enough, while you are protecting some of the old industries forever. I keep saying that export is important, but it is wrong to believe that export will increase automatically if you liberalize trade, because it won’t. And this is what has happened to so many countries. I don’t use this term, but many economists refer to the “middle income trap”, which means that you initially develop some industries with protectionism and then you open up to get more competition. After that it’s fine, but then you keep it open forever for everyone. Then new industries cannot grow and you are stuck with whatever you have created. The reason for the economic success of countries like Korea and Taiwan is not because they protected everything, not because they had free trade for everything. They had these different plans for different sectors. When the industries become more developed, you push them into the export market and repeat to protect another generation of industries. When they grow up, you push them into the export market. What is wrong is that people think there should be one policy for every industry. 

You talk about the need to regulate the market. Here in Argentina, we have a lot of regulations, mainly on exchange rates, because the dollar scarcity is a real problem. Do you think there is a point where you say “it’s too much regulation”? 

Of course. Everything has to be done in moderation. When it comes to things like regulations related to foreign exchanges, the important point is that the ultimate solution can only come from increasing the ability to produce and especially export. As simple as that. But until you achieve that, in the short run, you have to get used to regulatory measures, even though they create some negative effects. I mean, when you are in a position where there is a big shortage of foreign exchanges, you have to use every means to make it less. South Korea, despite being very successful in exports, ran a trade deficit until like 1986. And until the late 1980s foreign travel was banned completely. You couldn’t import any cars, you couldn’t even import bananas. The permanent solution is to increase your ability to export, but unfortunately when that is not going to happen immediately you have to use these measures. I know it’s difficult in Latin America because the middle class think the annual shopping trip to Miami is one of the basic human rights, so how do you impose that kind of restriction?

In the early 2000s, Argentina and neighboring countries like Bolivia, were pretty famed for taking advantage of the commodities boom and plowing that income into social policies. A lot of people are now looking to lithium to do the same, specifically in Argentina, Chile and Bolivia. Can we expect something similar with a sort of green version of the commodities boom? 

I’m not against using funds from natural resource exports to support social policies, especially in Latin America, where there’s a lot of problems with poverty and inequality. But in the end the best welfare measure is to create stable and well-paying jobs for people. If you look at Brazil, they had to spend a huge amount of money creating Bolsa Familia and other social subsidy programs, and when Bolsonaro came, he just canceled it. But even the worst dictator is not going to say, I’m going to shut down jobs because I don’t like the people who have the jobs. The problem is if you just use this money for social policy and don’t invest in creating new industries and raising productivity. 

What should South America’s lithium triangle be looking to do with this resource? 

Well, I think you could try to form some kind of cartel like OPEC, and keep the prices up and demand higher royalties. Why are you giving this for free? You have to do something about getting a bigger share of the lithium revenue, but eventually you want to develop not necessarily batteries, but something related to those industries. Because in the end being a raw material producer will always subject you to other people’s ability to innovate. Latin America has had so many of those episodes. So today lithium looks like a great idea, but there are a lot of people that are working on alternative battery technologies. So maybe 15 years later, lithium will not be very valuable. So you basically need to use this as a way to a) earn more royalties b) earn more foreign exchange by exporting this thing c) by using it to develop new industries, maybe batteries, maybe something related to batteries, maybe something completely different. There’ll always be another technological revolution that makes lithium completely useless, or less valuable. 

You wrote “23 things they don’t tell you about capitalism“. Would you add anything new to that list?

I have a new book that is coming out in Spanish next month, “Edible Economics”. In that new book I wrote about automation, climate change, and the importance of care work. 

And what about AI?

In the chapter on automation, I say that when you think about the history of capitalism, it is the history of automation. We have automated so many things, destroyed so many jobs but created even more jobs. So on the whole I’m not too worried about A.I. destroying jobs, because it will also create jobs. However, I think the current worry about these jobs is actually based on, if you like, a class hypocrisy. Because the economists or journalists who write about these things, they used to say, well, job losses are part of capitalism. When blue collar workers were at war against new technologies, journalists and economists laughed at these people. But now journalists and academics are the two most vulnerable people to AI, now they are worried about their own jobs. But I think that there’s one serious problem with AI, which is that it is built in a way that largely reflects the prejudices of white American men. I think we need to regulate this from that point of view but not because it’s going to destroy jobs. 

*The interview has been edited for length and clarity.


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