Guest article: Who wins and who loses from “export promotion”?

Since the currency board was introduced in Bulgaria 17 years ago, every now and then some political pundit appears in the Bulgarian press to tell us that it is harmful to the Bulgarian economy. Now, I might agree with the statement in principle, considering that any degree of state control over the economy or finances of a country inevitably creates problems. A currency board is too high a degree of state control, and I see the real solution in the abolition of any laws and regulations for the mandatory use of a certain currency as a means of payment. People should be left to decide among themselves what means of payment to use – be it gold or other metals, or electronic currencies, or the notes of a bank, etc. This will help eliminate state control over finances, reduce taxes and government spending, and free ordinary people from the burden of numerous regulations that are an effective barrier to starting any business in Bulgaria.

Unfortunately, the various political know-it-alls who call for the abolition of the board do not intend to replace it with more individual freedom. On the contrary, they want to abolish it in order to restore to the hands of government officials the power over finance that the board has to some extent taken away from them. Most importantly, the power to print money as and when they please, and thus, through the hidden tax of inflation, to rob society even more by methods that direct taxation cannot achieve.

Of course, they don't say that's their goal. It's politically inexpedient to openly say that they want to rob the population. So they all use an argument that sounds so good that it's as if there's nothing you can say against it:

The abolition of the board will lead to a more active monetary policy by the state, with which the state can promote exports.

So, who would have anything against encouraging exports? More exports, more production, more jobs, and so more people have money. We encourage exports and the economy will flourish.

But what exactly is this “more active monetary policy” that would “encourage exports”? And why exactly does the currency board hinder it?

When we get down to the details, it turns out that “active monetary policy” is just the same old money printing by the government. The currency board requires the BNB to put into circulation only as much leva as it has in its reserves. This limits the government’s ability to manipulate the market through the money supply. So the goal of abolishing the currency board is to remove this restriction and allow government officials to once again have the freedom to print as much leva as they want and get the government into as much debt as they want.

But how would this help exports? The argument is this:

Money supply inflation leads to a depreciation (devaluation) of money. This affects the exchange value of the lev against foreign currencies: the value of the lev falls. Thus, Bulgarian producers, whose costs are in cheaper levs, can enter world markets with products whose price is lower in foreign currency, which will encourage world buyers to choose Bulgarian products over those of competitors. Thus, Bulgarian producers acquire a larger share of world markets at the expense of foreign producers, more money enters Bulgaria, and thus Bulgaria wins. It's that simple.

Is it really that simple? On the surface, the argument seems simple and obvious, it does. The problem, however, is that this argument is based on the belief that it is possible to change only one thing, that the economy is a collection of unrelated factors, each of which can be viewed and changed independently of the others. If that were the case, indeed, we would be able to tune the economy like a machine, to achieve exactly the results we want.

What would actually happen if the state resumed printing money again, and how would this affect the export business? Will costs really remain the same in levs so that production prices can be low in foreign currencies?

The most obvious thing missed by the advocates of “export promotion” is that the same measure that will lower export prices will raise import prices. And it will raise them by exactly the same proportion as it will lower export prices. This would not be a particular problem for countries where imports are a relatively small part of the economy: such as the US (13% of GDP) or the UK (26% of GDP). But for Bulgaria, whose total imports are around 60% of GDP, this will negatively affect all sectors of the Bulgarian economy with higher prices for imported products. Ultimately, the victims will be Bulgarian consumers, who will see prices increase in stores for all goods, regardless of whether they are produced in Bulgaria or not. Thus, the welfare of the majority of people will suffer because of the dubious advantage of “export promotion” for a few export-oriented companies.

But even these companies will not benefit as much, as most of them use imported machinery or raw materials. The prices of these machinery and raw materials will have to rise in proportion to the depreciation of the Bulgarian lev, and therefore they will not contribute to the reduction of the cost of products measured in foreign currency.

The expectation of such a reduction in the cost of machinery and raw materials produced in Bulgaria will also not be justified. The increase in the money supply will raise the general level of prices on the domestic market even before this has affected the exchange rate of the lev. The assumption that the state will pump up the money supply in the country and this will not affect prices in any way is unrealistic and childish.

Obviously, inflation will raise all prices proportionally, and this will not lead to any reduction in costs for exporters.

Except for one thing: salaries.

The only category that economists agree on is the wage bill. Keynes acknowledged this and called inflation a “hidden tax,” because it is indeed a hidden tax on the wages of ordinary workers. If the money supply is artificially increased, but wages remain at the same nominal level—or grow at a slower rate than the money supply—then inflation is a direct robbery of workers, since their wages now have less purchasing power. Bulgaria had a period of massive inflation for several years in the 1990s. Exports did not grow, but people’s real incomes fell to $7 a month.

Thus, at the expense of workers, companies will reduce their costs, and therefore their prices. Companies will benefit from this, and the state will also benefit (from taxes), but this benefit will not be at the expense of increased productivity, but at the expense of reduced wages. Which is the same as if the state simply reduced wages by law. Except that such a legislative limitation of wages is too direct and politically inexpedient. Inflation is a much more subtle tool for robbery.

Therefore, those political savants who talk about “active monetary policy to promote exports” are actually talking about turning Bulgaria into a banana republic, a source of cheap labor, a workshop for the economies of other countries. In the end, there is no real profit, there is only a redistribution of wealth from the poor to the rich, from the workers to the economic and political elite. On the surface, it may seem that the economy as a whole is winning. In reality, one stratum is winning at the expense of the majority.

There is only one real way to reduce costs: Investment in improving productivity. Such investment always comes from private initiative; government officials never have an interest in taking the risks that a private entrepreneur takes to increase his profits. (A government official's salary does not rise from successful investments.) In order for a private entrepreneur to invest, he must be able to keep for himself all the money he has made. This applies to entrepreneurs at all levels, from large firms to small workshops, since the general price level does not depend solely on large producers. The same applies to the workers themselves: they must be free to dispose of all the money they have made, because this money is expected to develop a financial market of available credit from which producers can benefit. And of course, for there to be a stable market, it is necessary to have stable expectations about the value of money. Which means that the state must be kept out of control of money.

While the state budget in Bulgaria continues to be 40% of GDP, 40 stotinki out of every lev cannot be used for investment, but goes to the ends of state bureaucrats, the same ones who have no interest in investing in improving productivity. No amount of money supply manipulation can reduce the costs of production; inflation will only lead to a re-adjustment of prices to a new level, and will reduce the real incomes of the majority of Bulgarians. But removing the state’s burden from the economy – and not just the monetary burden, but also the burden of regulations, bureaucratic obstacles and delays, and so on – will lead to more money in workers and entrepreneurs, and more freedom for entrepreneurship and growth. Anything else is utopia.

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