What is an export-oriented growth strategy?

The last 40 years or so have been dominated by what are now called export-led growth or export promotion strategies for industrialization, at least in terms of economic development issues. Export-driven growth occurs when a country seeks to develop economically by engaging in international trade.

The paradigm of export-led growth has replaced the paradigm of industrialization by import substitution. This is what many have interpreted as a failing development strategy. While an export-oriented development strategy has met with relative success in Germany, Japan, and East and Southeast Asia, current conditions suggest that a new development paradigm is needed.

Export-led growth has a lot to do with self-sufficiency. Import substitution, on the other hand, is the opposite. It is an effort by countries to become self-sufficient and reduce their dependence on developed countries. They do this by developing their own industries so that they can compete with other countries that depend on exports. Read on to learn more about the export-led growth and its history.

Import substitution

Import substitution became a dominant strategy following the American stock market crash from 1929 until the 1970s. The fall in effective demand following the crash caused world trade to fall by 66% between 1929 and 1934.

During these dire economic circumstances, countries implemented protectionist trade policies such as import tariffs and quotas to protect their domestic industries. After World War II, a number of countries in Latin America and East and Southeast Asia deliberately adopted import substitution strategies.

The post-war period saw the start of what would become a major trend towards greater openness to international trade in the form of export promotion strategies. After the war, Germany and Japan rejected policies that protected infant industries from foreign competition and instead promoted their exports to foreign markets through an undervalued exchange rate while taking advantage of foreign aid. the reconstruction of the United States. The conviction was that greater openness would encourage a greater diffusion of productive technology and technical know-how.

With the success of the postwar German and Japanese economies combined with a belief in the failure of the import substitution paradigm, export-led growth strategies gained prominence in the late 1970s. The International Monetary Fund (IMF) and the World Bank, which provide financial assistance to developing countries, have helped spread the new paradigm by subordinating aid to governments’ willingness to open up to foreign trade. In the 1980s, many developing countries were now starting to liberalize trade, adopting the export-oriented model instead.

The era of export-led growth

The period between 1970 and 1985 saw the adoption of the export-driven growth paradigm by the Four Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan), which led to their subsequent economic success. As an undervalued exchange rate made exports more competitive, these countries realized that there was a much greater need for foreign technology acquisitions if they were to be competitive in the automotive manufacturing sectors and electronics.

Much of their success has been attributed to their acquisition of foreign technology and its implementation over their competitors. The capacity of these countries to acquire and develop technologies was also supported by foreign direct investment (FDI).

Some newly industrialized countries in Southeast Asia have followed their example, as have several countries in Latin America. This new wave of export-led growth is perhaps best illustrated by the experience of Mexico which began with trade liberalization in 1986 and then led to the inauguration of the North American Free Trade Agreement. (NAFTA) in 1994.

Concrete example of export-led growth

NAFTA has become the model for a new model of export-led growth. Rather than using export promotion to facilitate the development of domestic industry, the new model became a platform for multinational corporations (MNCs) to set up low-cost production centers to deliver exports. cheap in the developed world. While developing countries benefited from the creation of new jobs as well as the transfer of technology, the new model hampered the process of national industrialization.

This new paradigm was extended globally with the creation of the World Trade Organization (WTO) in 1995. China’s admission to the WTO in 2001 and its export-led growth is an extension of the Mexican model. But China has been much more successful in reaping the benefits of greater openness to international trade than Mexico and other Latin American countries. This may be due in part to its increased use of import tariffs, tighter capital controls, and its strategic competence in adopting foreign technologies to build its own domestic technology infrastructure. China depended on multinationals around 2011, when 52.4% of Chinese exports came from foreign companies, which accounted for 84.1% of the trade surplus.

The threat of a trade war between China and the United States following the 2016 federal election has prompted China-based multinationals to rethink their positions. On the one hand, they are faced with a possible disruption of operations in China and a possible lack of inputs. On the other hand, moving to other low-wage countries is not ideal as countries like Vietnam and Cambodia lack the technological capabilities and human skills that China has.

While export-led growth has been the dominant economic development model since the 1970s, there are signs that its effectiveness may be exhausted. The export paradigm depends on foreign demand, and since the 2008 global financial crisis, developed countries have not regained the strength to be the main supplier of global demand. Emerging markets now represent a much larger share of the global economy, making it difficult for everyone to pursue export-oriented growth strategies – not all countries can be a net exporter. It seems that a new development strategy will be needed, one that will encourage domestic demand and a better balance between exports and imports.