What Is an Export-Led Growth Strategy?
In matters of economic development, the last 40 or so years have been dominated by what has come to be known as export-led growth or export promotion strategies for industrialization. Export-led growth occurs when a country seeks economic development by engaging in international trade.
The export-led growth paradigm replaced—what many interpreted as a failing development strategy—the import substitution industrialization paradigm. While an export-led development strategy met with relative success in Germany, Japan, and East and Southeast Asia, current conditions suggest that a new development paradigm is needed.
- An export-led growth strategy is one where a country seeks economic development by opening itself up to international trade.
- The opposite of an export-led growth strategy is import substitution, where countries strive to become self-sufficient by developing their own industries.
- NAFTA was an example of a new model of export-led growth whereby Mexico became a base for multinational corporations to set-up low-cost production centers and to provide cheap exports to the developed world.
Understanding Export-Led Growth
Import substitution—an effort by countries to become self-sufficient by developing their own industries so that they can compete with exporting countries—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 30% between 1929 and 1932. During these dire economic circumstances, nations worldwide implemented protectionist trade policies such as import tariffs and quotas to protect their domestic industries. Following World War II, a number of Latin American, as well as East and Southeast Asian countries, deliberately adopted import substitution strategies.
Post World War II, both Germany and Japan promoted their exports in foreign markets believing that greater openness would encourage diffusion of productive technology and technical know-how.
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 United States, 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 combined with 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 provide 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, many developing nations that had earlier been following import substitution strategies were now beginning to liberalize trade, adopting the export-oriented model instead.
The Era of Export-Led Growth
The period from around 1970 to 1985 saw the adoption of the export-led growth paradigm by the East Asian Tigers—Hong Kong, Singapore, South Korea, and Taiwan—and their subsequent economic success. While an undervalued exchange rate made exports more competitive, these countries realized that there was a much greater need for foreign technology acquisition if they wanted to compete in auto manufacturing and electronics industries. Much of the success of the East Asian Tigers has been attributed to their acquisition of foreign technology and the implementation of that technology compared to their competitors. The ability of these countries to acquire and develop technology was also supported by foreign direct investment (FDI).
Some newly industrializing nations in Southeast Asia followed the example of the East Asian Tigers, as did several 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 and later led to the inauguration of the North American Free Trade Agreement (NAFTA) in 1994.
Example of Export-led Growth
NAFTA became the template for a new export-led growth model. Rather than using export promotion to facilitate the development of domestic industry, the new model for developing nations became a platform for multinational corporations (MNCs) for the setting up of low-cost production centers to provide cheap exports to the developed world. While developing nations benefited from the creation of new jobs as well as technology transfer, the new model hurt the domestic industrialization process.
This new paradigm was 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. However, China was much more successful in leveraging the benefits of greater openness to international trade than 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 was dependent on MNCs around 2011, when 50.4% of Chinese exports come from foreign-owned firms, and the figure was as high as 76.7% if joint ventures were included.
More recently, the threat of a trade war between the United States and China have caused MNCs based in China to rethink their positions. On the one hand, they face possible disruption to operations in China and a possible lack of inputs. On the other hand, relocating to other low wage countries is not ideal because countries such as Vietnam and Cambodia lack the technological capabilities and human skill sets that China possesses.
China's GDP growth rate dropped from over 12% in 2010 to 6% in 2019, according to Bloomberg. The drop in growth is due to the democratization of GDP growth as countries worldwide have followed export-led strategies.
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 for 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 better balance between exports and imports.