In matters of economic development, the last 40 or so years have been dominated by what have come to be known as export-led growth or export promotion strategies for industrialization. The export-led growth paradigm replaced—what many interpreted as a failing development strategy—the import substitution industrialization paradigm. While there has been relative success with the new development strategy, including in Germany, Japan, as well as East and Southeast Asia, current conditions suggest that a new development paradigm is needed.
From Import Substitution to Export-Led Growth
Import substitution, far from being a deliberate development strategy, became a dominant strategy in the wake of the U.S. stock market crash in 1929 up until around the 1970s. The fall-off in effective demand following the crash helped cause international trade to decline by approximately 30% between 1929 and 1932. In these dire economic circumstances nations around the world implemented protectionist trade policies such as import tariffs and quotas to protect their domestic industries. Following the World War Two, a number of Latin American as well as East and Southeast Asian countries deliberately adopted import substitution strategies.
Yet, the post-war period saw the start of what would become a prominent trend towards further openness to international trade in the form of export promotion strategies. Following the war both Germany and Japan, while taking advantage of reconstruction aid from the U.S., rejected policies that shielded infant industries from foreign competition, and instead promoted their exports in foreign markets through an undervalued exchange rate. The belief was that greater openness would encourage greater diffusion of productive technology and technical know-how.
With the success of both the post-war German and Japanese economies as well as a belief in the failure of the import substitution paradigm, export-led growth strategies rose to prominence in the late 1970s. The new institutions of the International Monetary Fund (IMF) and World Bank, which provided financial assistance to developing countries, helped to spread the new paradigm by making aid dependent on governments’ willingness to open up to foreign trade. By the 1980s, a number of developing nations that had earlier been following import substitution strategies were now beginning to liberalize trade, adopting the export-oriented model instead. (For more, see: What Is International Trade?)
The Era of Export-Led Growth
The period from about 1970 to 1985 saw the adoption of the export-led growth paradigm by the East Asian Tigers—South Korea, Taiwan, Hong Kong and Singapore—and their subsequent economic success. While an undervalued exchange rate was used to make their exports more competitive, these countries realized that there was a much greater need for foreign technology acquisition in order to compete in auto manufacturing and electronics industries. Much of the success of the East Asian Tigers has been attributed to their ability to encourage the acquisition of foreign technology and to implement it more efficiently than their competitors. Their ability to acquire and develop technology was also supported by foreign direct investment (FDI).
A number of newly industrializing nations in Southeast Asia followed the example of the East Asian Tigers, as well as a number of countries in Latin America. This new wave of export-led growth is perhaps best epitomized by Mexico’s experience that began with trade liberalization in 1986, which later led to the inauguration of the North American Free Trade Agreement (NAFTA) in 1994.
NAFTA became the template for a new model of export-led growth. Rather than developing nations 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 in the developing country in order to provide cheap exports to the developed world. While developing nations benefit from the creation of new jobs as well as technology transfer, the new model hurts the domestic industrialization process. (For related reading, see: Pros and Cons of NAFTA.)
This new paradigm would soon be expanded more globally through the establishment of the World Trade Organization (WTO) in 1996. China’s admission into the WTO in 2001 and its export-led growth is an extension of Mexico’s model, albeit China was much more successful in gleaning the benefits of a greater openness to international trade than was Mexico and other Latin American countries. Perhaps this is partly due to its greater use of import tariffs, stricter capital controls and its strategic skill in adopting foreign technology to build its own domestic technological infrastructure. Regardless, China remains dependent on MNCs illustrated by the fact that 50.4% of Chinese exports come from foreign-owned firms, and if joint ventures are included, the figure is as high as 76.7%.
The Bottom Line
While export-led growth in its various guises has been the dominant economic development model since the 1970s, there are signs that its effectiveness may be exhausted. The export paradigm depends upon foreign demand and since the global financial crisis in 2008, developed nations have not regained strength to be the main supplier of global demand. Further, emerging markets are now a much greater share of the global economy making it hard for all of them to pursue export-led growth strategies—not every country can be a net exporter. It looks like a new development strategy will be needed, one that will encourage domestic demand and a greater balance between exports and imports.