How export-led growth is used as a development strategy?

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Export-led growth is used as a development strategy

Export-led growth is a term used loosely to refer to a strategy comprising the encouragement of and support for production for exports. The rationale lies in the belief of many economists that trade is the engine of growth, in the sense that it can contribute to a more efficient allocation of resources within countries as well as transmit growth across countries and regions.

Exports, and export policies in particular, are regarded as crucial growth stimulators. Exporting is an efficient means of introducing new technologies, both to the exporting firms in particular and to the rest of the economy, and exports are a channel for learning and technological advancement.

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Moreover, the growth of exports plays a major part in the growth process by stimulating demand and encouraging savings and capital accumulation, and, because exports increase the supply potential of the economy, by raising the capacity to import.

Mercantilist economists believed that the wealth of a country should be measured by the extent of the accumulation of precious metals and placed a great emphasis on achieving trade surpluses.

Classical economists, on the other hand, argued that trade was welfare improving because it led to an efficient use of resources in each country, in the sense that countries would produce and export the products in which they have a comparative advantage, and import the products in which they have a comparative disadvantage.

It could even be said that the purpose of trade, from a classical point of view, is imports. Exports are simply the way to pay for imports. In this sense, there is also an emphasis on the importance of exports, although of different nature.

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As a development strategy, the classical belief was that development could be transmitted through trade. Classical economists justified the benefits of exports with the traditional argument of comparative advantage.

Accordingly, opening up a country’s market to the international markets allows a country more efficient production and allocation of resources as the country can concentrate on the production of goods in which it has a comparative advantage based on its factor endowments.

Thus, world trade markets allow producers and consumers of the participating countries to benefit from lower prices, higher-quality products, more diverse supply of goods, and higher growth.

The export-led growth model seemed initially to have been vindicated with the success of Asia’s miracle countries, which achieved extraordinarily high growth between the 1970s and mid-1990s, supposedly through export promotion. Since the eruption of the Asian crisis, however, some sectors have expressed increasing doubts as to the feasibility of export-led growth for many developing countries.

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Recent decades have brought about other important justifications for export promotion. Some of these are:

Participating in trade, especially export production and promotion, exposes a country to the latest and most advanced production and marketing techniques, and a “learning-by-doing” process that brings about dynamic innovation and technological diffusion into the economy.

It also drives a country to higher production and to economies of scale, which lead to increasing returns. Many development economists use the “two-gap or three-gap” models of Taylor to justify the need to earn foreign exchange via exports.

According to these models, the investment-savings gap and the foreign exchange gap are major obstacles to the growth and development of many developing countries.

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Since countries need precious foreign exchange for their development needs (capital goods, industrial raw materials, oil, and food), export earnings are a more efficient means to finance these needs than foreign debt since the latter is vulnerable to adverse exogenous shocks and currency risks that may lead to debt defaults.

A similar argument claims that large balance-of- payment deficits, spurred by large import propensities or elasticity’s, may be a hindrance to growth for many developing countries. Thus, moderate trade deficits, or trade surpluses, are more desired.

This, of course, implies that export growth should be in pace with, or ahead of, import growth. Felipe also argues that export-led strategies allow an expansion of aggregate demand without much inflationary pressure and without the danger of a wage-price spiral, compared with strong domestic demand injections.

This partly stems from the real appreciation of the currency that result from large export earnings, which tame inflation and allow real wages to rise.

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It is important to mention that while the literature on growth and development considers the export-led growth strategy, the “domestic demand-led growth strategy” is not a term defined and used hence it has to be defined here, in particular for purposes of empirical implementation.

Therefore, it is not straightforward to place the “debate” between export-led and domestic demand- led growth strategies in a theoretical context.

In recent years, however, a series of economists have hypothesised that, the Asian crisis had very different roots and that after several decades of being presented as the optimal growth strategy, the export-led growth model that the Asian countries followed ultimately gave in and even harmed the growth prospects of developing countries.

These economists have put together a critique of the export-led growth model and proposed a shift toward domestic demand-led growth.

Export-led growth is an economic strategy used by some developing countries. This strategy seeks to find a niche in the world economy for a certain type of export. Industries producing this export may receive governmental subsidies and better access to the local markets. By implementing this strategy, countries hope to gain enough hard currency to import commodities manufactured more cheaply somewhere else.

Export-led growth is important for mainly two reasons. The first is that export-led growth can create profit, allowing a country to balance their finances, as well as surpass their debts as long as the facilities and materials for the export exist.

There are essentially two types of exports used in this context: manufactured goods and raw materials. Manufactured Goods: The use of manufactured goods as exports is the most common way to achieve export-led growth.

However, many times these industries are competing against industrialised countries’ industries, which often include better technology, better educated workers, and more capital to start with.

Therefore, this strategy for export-led growth must be well thought out and planned. Not only must a country find a certain export that they manufacture well, that industry must also be able to make it in the world market competing with industrialised industries.

Raw Materials: Using raw materials as an export is another option available to countries. However, this strategy has a considerable amount of risk compared to manufactured goods.

The terms of trade greatly affect this plan. Over time, a country would have to export more and more of the raw materials to import the same amount of commodities, making the trade profits very difficult to come by.

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