User:Trumpetssounding/exportledgrowthdraft

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.

Origins

From the Great Depression to the years after WWII, under-developed and developing countries started to have a hard time economically. During this time, many foreign markets were closed and the danger of trading and shipping in war-time waters drove many of these countries to look for another solution to development. The initial solution to this dilemma was called import substitution industrialization. Both Latin American and Asian countries used this strategy at first. However, during the 1950's and 1960's the Asian countries, like Taiwan and South Korea, started focusing their development outward, resulting in an export-led growth strategy. Many of the Latin American countries continued with import substitution industrialization, just expanding its scope. Some have pointed out that because of the success of the Asian countries, especially Taiwan and South Korea, export-led growth should be considered the best strategy to promote development.

Importance

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. The second, much more debatable reason is that increased export growth can trigger greater productivity, thus creating more exports in an upward spiral cycle.

The importance of this concept can be shown in the model below from J.S.L McCombie and A.P. Thirwall's Economic Growth and the Balance-of-Payments Constraint.

y_B is the balance of payments constraint, meaning the relationship between expenditures and profits

y_A is the actual growth capacity of a country, which can never be more than the current capacity

y_C is the current capacity of growth, or how well the country is producing at that moment

(i) y_B=y_A=y_C: balance-of-payments equilibrium and full employment

(ii) y_B=y_A<y_C: balance-of-payments equilibrium and growing unemployment

(iii)y_B<y_A=y_C: increasing balance-of-payments deficit and full employment

(iv) y_B<y_A<y_C: increasing balance-of-payments deficit and growing unemployment

(v) y_B>y_A=y_C: increasing balance-of-payments surplus and full employment

(vi) y_B>y_A<y_C: increasing balance-of-payments surplus and growing unemployment (McCombie 423)

Countries with unemployment and balance-of-payments problems look to export-led growth because of the possibility of moving to either situation (i) or situation (v).

Types of Exports

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 industrialized 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 industrialized 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.

Results

Many views of international relations agree on these results of export-led growth.
1. Increases a country's comparative advantage.
2. Increases economies of scale because of the larger market.
3. Utilizes a country's capacity better.
4. Encourages technological innovation.
However, especially from a more leftist view of international relations, export-led growth can also seem to disadvantage the developing country. By expanding their markets and trading with industrialized nations, this point of view says that exploitation of the developing country can occur by the developed country.