Some answers are easy
Mamun Rashid has posed the question -- Does Bangladesh need an export bank? -- in these pages. Fortunately, some economics questions are easy to answer. No, Bangladesh doesn’t need one, and furthermore, having one would be a bad idea.
Now that we’ve dealt with that inquiry we can go on to solve for world peace, can’t we?
Perhaps though, it’s worth taking a little time to explain why it’s all a bad idea. That coming in three different sets of arguments.
The first is simply that Bangladesh’s exports, and any likely set of them, simply would not benefit from what an export bank provides or does. The point is to insure those shipments that the free market unadorned simply won’t cover.
These come in two different forms, the first is long term projects. Something like building a bridge, or providing a steel works, a series of aircraft frames. The payment schedule might be spread over a decade or more, so a private company, the exporter, isn’t really going to want to carry that risk. They want to lay it off somewhere.
Bangladesh doesn’t make any exports of that kind, and isn’t likely to do so. Bangladeshi heavy industry is not entirely world renowned after all -- and that’s not being rude either, nor deprecating. The structure of the local economy is such that exports are made up from the skill, labour, and intelligence of the population. Industry just isn’t capital intensive of the kind that might benefit from decades long credit insurance.
The other function of tax-payer provided export insurance is when the customer is a government or semi-governmental body. Again, that’s not something Bangladeshi industry really exports to. It’s just not something that is needed.
Pretty much everything is sold on short term (a year or two at most) contracts and to private sector buyers. That free market handles those sorts of contracts just fine.
The second set of arguments is that even if we do require those longer term arrangements, the free market these days will provide that sort of cover. I actually know people, know them as individuals, who provide long term credit insurance on a purely market basis.
Oh, sure, that’s more expensive than the terms usually provided by a government funded export bank. But then, that just shows the subsidy being provided to the extant export banks, doesn’t it?
This argument that export banks are subsidized usually runs into a flat denial that they are -- certainly with the US Exim bank it does. It makes a profit, so how can it be subsidized? But if the process makes a profit, then we can indeed leave it to the free market.
The lust for profits is there, we know that about humans, why wouldn’t people undertake a profitable enterprise? Yet, we do have people insisting both that Exim makes a profit and also that purely private sector provisions wouldn’t work. How do we manage to resolve these contradictions?
The answer being that people are talking about different sets of profits. Exim, and other such export banks, can and often do make accounting profits. At the end of the year, they’ve more money than they started with -- that’s a profit, see? And yet, that’s not what an economist means -- we want to see economic, not accounting, profits.
The difference is that we also want to be able to cover the cost of capital. This is the same concept as opportunity cost. If the government wasn’t providing cheap finance to the export bank, what else could it be doing with the same money? Something more valuable? A private sector insurer must cover that capital cost.
This does often make that private sector version more expensive -- but then, that’s the subsidy being provided to the public option, isn’t it? If public provision is cheaper than market, then we’re not accounting for economic profit properly, we’re ignoring those opportunity costs.
That also provides us with our answer to those who complain about that extra expense, those who argue that exports won’t take place because of that higher cost of not having the public subsidy to the export bank.
If we’re not making economic profits, then we don’t want to be doing whatever it is. Accounting profits are nice to have, of course they are, but it’s the only activity which covers its full costs -- including the opportunity costs, the costs of capital -- which makes us all generally richer.
So, if people cannot afford the costs of private export insurance, they shouldn’t be doing the exporting.
The third argument against is that we’re granting more power over the economy to politics and the bureaucracy. Of course, everyone insists that such a bank will only ever make decisions based upon commercial grounds. That argument doesn’t wash, because if it were only ever on commercial grounds, then we could leave it to the private sector to do on those commercial grounds, couldn’t we?
Decisions, the very existence of the public option, is thus an argument that something other than commercial viability is going to be used to make decisions.
We’re all so in favour of giving politics and the bureaucracy more power over the Bangladeshi economy, aren’t we?
An export bank inevitably falls -- US Exim is a prime example -- into the trap of being a favoured financing arm for political favourites.
Bangladesh doesn’t need an export bank, because what the country exports simply doesn’t need that form of financing. And there’s no likely development path for the country where it will become required.
Further, things have moved on since the world’s extant such banks were set up, the private sector can now provide what is needed, what it can’t is almost certainly an indication that the thing should not be one.
Finally, export banks always, but always, become an arm of politics, and that’s just not the direction we’re trying to steer the country in, is it? For we have all noticed that the less the government tries to plan and direct the economy, the richer we’re all becoming, yes?
Tim Worstall is a senior fellow at the Adam Smith Institute in London.