Inadvertently, Brad Setser seems to have given me a very good example of dark matter. In a recent post, he wrote
Super-efficient big box retailing may increase overall US productivity, but big box retailers like Walmart are not exactly a big source of export revenues.
Maybe I am discounting Walmart's intangible exports from its non-US operations ... but I sort of suspect Walmart's intangible exports they are quite small relative to Walmart's tangible import bill.
A couple of points. First, Wal-mart is perhaps the single largest creator of intangibles or dark matter in the U.S. economy. Consider this 2002 study from the McKinsey management consulting firm:
retail-labor productivity growth more than tripled after 1995, contributing roughly one-quarter of the national productivity acceleration of 1995–99. The reason can be explained in just two syllables: Wal-Mart, whose operational innovations—including the "big-box" format, "everyday low prices," electronic data interchange with suppliers, and economies of scale in warehouses—forced competitors to adapt.
Wal-mart became one of the largest companies and feared competitors in the U.S., not because of its spending on plant and equipment, but because of its “operational innovations”—that is, its business know-how. These sorts of intangible investments are not counted in GDP, but they created a retail behemoth.
Now Wal-mart is buying up lots of stores overseas, as well as opening up new ones. . In December alone it bought up 545 stores in Japan and Brazil (in Japan it was Seiyu Ltd, a chain with 405 stores).
In 2005 its international sales came to $63 billion, making the international division by itself one of the largest retailers in the world. (Target, the second largest retailer in the U.S., had $53 billion in global sales in 2005).
Now, what is it going to do with all those new stores? Obviously—apply the business knowhow which made Wal-mart such a powerful and productive competitor in the U.S. This business know-how, altough intangible, is very real and very potent. Just ask all of the retailers that have run up against Wal-mart.
For the sake of argument, let’s suppose that adding the Wal-mart business know-how gives all of its overseas stores a faster productivity growth rate, indefinitely. Then it’s not just current profits which are increased, but future profits as well, as the result of transferring the Wal-mart “secret sauce” from the U.S. to Japan or Brazil, say.
How should we book this transfer of business knowhow from Bentonville, Arkansas, home of Wal-mart, to say Tokyo? Conventional statistics would say that we wouldn’t book it as exports, but rather just pick it up as increased profits overseas.
I don’t buy the conventional view, though. I reason this way. Let’s do a thought experiment. Suppose that in a parallel universe the secret reason for Wal-mart’s higher productivity was a special very expensive “thought-ray” machine, manufactured in a nondescript building in Bentonville, Arkansas. (picture below). Each machine costs $10 million to build.
Each Wal-mart store has one of these machines installed, which increases the productivity of Wal-mart’s workers by 20% as soon as it is turned on.
Now let’s suppose that Wal-mart buys a store in Tokyo, and ships one of its thought-ray machines from Arkansas. The productivity and profits of the store immediately go up by 20%.
Clearly the trade statistics would book the transfer of the thought-ray machine as an export of $10 million, followed by the increase in overseas profitability.
Why don’t we count the transfer of Wal-mart’s business knowhow the same way?