Export Led Growth Strategy

Dr. Joy Karmakar

 Introduction
❑ The export-led growth paradigm rose to prominence in the
late 1970s when it replaced the import-substitution paradigm
that had dominated development policy thinking (especially in
Latin America) in the thirty years after World War II.
❑ Export-led growth is a development strategy aimed at growing
productive capacity by focusing on foreign markets.
❑ It is part of a new consensus among economists about the
benefits of economic openness that took hold in the 1970s.
❑ This new consensus rests on a fusion of three strains of
argument.
❑ The first strain, based on Hecksher–Ohlin–Samuelson
comparative advantage theory, is about the gains from trade
between economies with different capital–labor ratios.
❑ The second strain concerns the benefits of openness for
controlling rent seeking, a problem that import-substitution
development was strongly criticized for.
❑ The third strain, which developed later, is the benefits of
openness for growth. The claim is trade encourages
technology diffusion and knowledge spillovers that
contribute to faster productivity growth
 BRIEF HISTORY OF EXPORT-LED GROWTH
❑ The last thirty years have seen tremendous spread of the export-led
growth paradigm. The strategy was pioneered by Germany and Japan in
1950s and 1960s.
❑ In the 1970s and 1980s it was adopted by the four East Asian Tigers—
South Korea, Taiwan, Hong Kong, and Singapore.
❑ In the 1980s and 1990s it spread further, being adopted in South East
Asia by Thailand, Malaysia, and Indonesia. In Latin America it was
adopted by Mexico. In the 2000s China has exemplified the paradigm.
❑ The model has not been constant, but has instead evolved to fit
changing global circumstances and to fit individual country conditions.
This evolution can be thought of as involving four stages.
❑ Stage I was kicked off by Germany and Japan and can be thought
of as running from 1945–1970. Both countries had their own
indigenous industrial base and export growth was driven by an
under-valued exchange rate. Growth also benefitted from U.S. aid
made available after World War II as part of reconstruction and
the Cold War.
❑ Stage II captures the experience of the four East Asian tigers and
runs from 1970–1985. Once again countries relied on an under-
valued exchange rate but now there was need for more foreign
technology acquisition. This was done via strategic planning and
benefitted from the fact that technology was becoming more
mobile.
❑ Stage III is epitomized by Mexico’s engagement with
export-led growth. The major change from stage II is that
countries now started turning themselves into export
production platforms for foreign multi-nationals rather
than developing their own indigenous industrial capacity.
This changed strategy was feasible because of increased
mobility of technology and capital.
❑ The key elements of the new strategy were a) integration
into the global economy; b) an undervalued exchange
rate; c) suppression of wages and social standards.
❑ The goal was to enhance international competitiveness
so as to become attractive to multi-national corporations
(MNCs) as a site for foreign direct investment (FDI) that
was export-oriented. However, the benefits have also
proved much more elusive.
❑ The new strategy is exemplified by Mexico’s experience which began
with the trade liberalization of 1986. That set the path to North
American Free Trade Agreement (NAFTA) and the creation of a North
American free trade area in 1994. The inauguration of NAFTA in
January 1994 was marked by a peso crisis that resulted in massive
devaluation of the peso vis-à-vis the US dollar, providing Mexico with
an under-valued currency.
❑ This third stage of export-led growth represents the beginning of the
modern era of corporate globalization, and a critical feature is that
export-led growth is no longer a purely national strategy. Instead, it is
a partnership between developing countries, multinational
corporations, and developed countries.
❑ Governments and multi-nationals promoted the new system using
the traditional language of free trade and claimed the goal was
creation of a global market place. However, the real goal was not to
promote traditional trade, but rather to create a global production
zone in which corporations could establish export production
platforms that would export back to developed country markets.
❑ There are three important features of the NAFTA–
corporate globalization model.
❑ First, it promotes trade but not the classical trade of
balanced exports and imports.
❑ Second, it promotes a new type of export-led growth
based on relocating existing production and diverting new
investment that benefits emerging market economies by
creating jobs, transferring technology, and relieving
balance of payments constraints on growth. However,
these economies do not own the industrialization process
as was the case in stages I and II.
❑ Third, it does considerable damage to developed
economies via deindustrialization, creation of
international financial imbalances, and undermining the
wage–productivity growth link which in turn undermines
the coherence of the domestic income and demand
generation process.
❑ Stage IV is an extension and augmentation of the stage III
model and is exemplified by China. China’s model makes
three major adjustments to Mexico’s NAFTA model.
❑ First, it is characterized by asymmetric global engagement
with China maintaining greater tariffs on imports.
❑ Second, there is managed under-valuation of the
exchange rate that is maintained with capital controls.
❑ Third, there is a strategy for building an indigenous
national technological base via forced technology sharing,
joint ventures in which MNCs may be minority
shareholders, and technology theft. China’s policies
toward banking and automobile production are prime
examples of this.
 Advantages
❑ 1. Exports of goods and services are an injection into the
circular flow of income leading to a rise in aggregate demand
and an expansion of output. This helps to raise per capita
incomes and reduce extreme poverty especially in
developing/emerging economies
❑ 2. Growing export sales provide revenues and profits for
businesses which can then feed through to an increase in
capital investment spending through the accelerator effect.
Higher investment increases a country’s productive capacity
which then increases the potential for exports.
❑ 3. Many industries help facilitate trade such as trade
insurance, logistics and port facilities. Countries with fast-
growing export sectors are likely to see increased investment
and employment in these related industries. A good example
is the importance of trade to countries such as the
Netherlands (including the port of Rotterdam), and Singapore
and Hong Kong both of which have developed in globally-
scaled hubs for trade
 Potential Risks and Drawbacks
❑ Focusing on exporting might lead to over-dependence on the economic
cycles of trade partner countries and vulnerability to external economic
and political shocks

❑ Running persistent trade surpluses might incite a protectionist response

from other nations who feel that the benefits of trade have been
unequally skewed in favour of exporting countries. Huge trade
imbalances remain a big concern in the global economic system

❑ Production capacity allocated to supply goods and services for export

cannot be put to use meeting domestic needs and wants. There might
be a consequent dip in domestic living standards unless the country is
also prepared to import goods and services using the revenue
generated from exporting
❑ Rapid export-led growth might lead to demand pull inflation and higher
interest rates. High relative inflation might then have the effect of making
export industries less competitive in overseas markets and domestic producers
less price competitive against imports

❑ Export-led growth might be unsustainable if it contributes extraction of natural

resources beyond what is required for long term balanced growth to be
maintained. Consider for example the impact of deforestation and over-fishing
and degradation of land by industrial-scale farming.

❑ Overall, export-led growth has been important for many countries. The
challenge is to make ensure that a country is exporting a sufficiently diverse
range of products (e.g. to avoid some of the risks from primary product
dependency) and also that the benefits from increased exports and growth are
widely dispersed across the population.