TRADE STRATEGIES FOR ECONOMIC GROWTH & ECONOMIC DEVELOPMENT EXPORT LED GROWTH VERSUS IMPORT SUBSTITUTION BLINK & DORTON (2011), Economics a Course Companion, p371 to p375

Growth & Development Strategies Export Led Growth vs.. Import Substitution Industrialization

GROWTH STRATEGIES Export-led Growth OR Export Oriented Industrialization Export led growth is an outward-oriented growth strategy, based on openness and international trade. Growth is achieved by concentrating on increasing exports, and export revenue, as a leading factor in the aggregate demand of the country. Increasing exports should lead to increasing GDP, and this in turn should lead to higher income and, eventually, growth in domestic markets as well as exporting ones. The country concentrates on producing and exporting products in which it has a comparative advantage of production.

GROWTH STRATEGIES Export Led Growth In order to achieve export led growth, it is assumed the country will need to adopt certain policies. These include: Liberalized Trade: Open up domestic markets to foreign competition order to gain access to foreign markets. Liberalized Capital Flows: Reduce restrictions on FDI. A Floating Exchange Rate: Infrastructure: Investment in the provision of infrastructure to enable trade to take place. Deregulation & Minimal Government Intervention.

GROWTH STRATEGIES Export Led Growth The previous list illustrates the theoretical “package” of policies associated with export- led growth. In reality, countries that adopt an outward- oriented strategy do not necessarily adopt all of these policies.

GROWTH STRATEGIES Export Led Growth: Primary Products The overall trend in primary products has been downward for many years, with the exception of oil and some metals. This is due to increasing supply and relatively insignificant increases in demand. This combined with increasing protectionism by developed countries, means that export led growth based solely on the export of primary products is unlikely to be achieved.

Export Led Growth: Manufacturing Exports The focus on export-led growth is usually on increasing manufacturing exports. Asian Tigers The success of countries such as South Korea, Hong Kong, Singapore and Taiwan (known previously as the Asian Tigers) is usually used to illustrate the effectiveness of such a strategy. These countries exported products in which they had a comparative advantage, previously based upon low cost labor and were extremely successful in doing so.

Export Led Growth: Manufacturing Exports Asian Tigers Over time the type of product being exported by the majority of these countries has also tended to change from products that were produced using labour intensive production methods, to more sophisticated products, using capital intensive production methods and more highly skilled workers. Improvements in education systems were essential for this.

Problems with Export Led Growth Rising Protectionism in Developed Countries The success of the Asian tigers since around 1965 has led to increased protectionism in developed countries against manufactured products from developing countries. Trade Union and workers in developed countries argued that they could not compete against the imports from low-wage developing countries that this was unfair. The lobbied their governments to put tariffs and quotas on the lower-priced goods.

Problems with Export Led Growth Rising Protectionism in Developed Countries Price increases as a result of tariffs effectively removed the comparative advantage of the exporting countries. Tariff escalation also reduced the ability of the developing countries to export processed goods and assembled products, forcing many to export primary products and low-skilled manufactured goods instead.

Government Policy & Export Led Growth The Role of Government Certain assumptions are made about the necessary conditions for export led growth. If we examine the successful countries these conditions were not necessarily met. Many economists would argue that the role of the state in successful export-led growth is vital & minimizing government intervention is not the way forward.

The Role of Government in Export Led Growth The Asian Tigers In the Asian tiger countries, governments played an important role by providing infrastructure, subsidizing output through low credit terms via central banks and promoting savings and improvements in technology. In addition, governments adopted policies where they protected domestic industries, that were not yet able to compete with foreign firms (infant industry argument for protection) They also promoted the industries that were ready for competition in export markets.

The Role of Government in Export Led Growth This topic is one of great debate among development economists, and many argue that invention is vital. Others argue that the state intervention in these economies actually slow growth rates.

Problems with Export Led Growth MNCs become too powerful! If countries attempt to kick start their export- led growth by attracting MNCs, there is always the fear that the MNCs may become too powerful within the country and this may lead to problems.

Problems with Export Led Growth Increased Income Inequality It is argued by some economists that free- market export-led growth may increase income inequality in the country. If this is the case, then the economic growth may be achieved at the expense of economic development.

IMPORT SUBSTITUTION INDUSTRIALISATION (ISI) It may also be referred to an inward-oriented strategy. This states, that a developing country should, wherever possible, produce goods domestically rather than import them. This should mean that industries producing the goods domestically will be able to grow, as will the economy, and will then be able to be competitive on world markets in the future as they gain from economies of scale.

IMPORT SUBSTITUTION INDUSTRIALISATION It is the opposite of export-led growth. It is not supported by economists who believe in the advantages of free trade based on comparative advantage.

IMPORT SUBSTITUTION INDUSTRIALISATION Necessary conditions for strategy to work: Governments need to adopt a policy of organizing the selection of goods to produce domestically. Historically this has been labour-intensive, low skilled manufactured goods such as clothing or shoes. Subsidies are made available to encourage domestic industries. The government needs to implement a protectionist system with tariff barriers to keep out foreign imports.

Advantages of ISI ISI protects jobs in the domestic market, since foreign firms are preventing from competing so domestic firms dominate. ISI protects local culture and social habits by practically isolating the economy from foreign influence. ISI protects the economy from power, and possibly the negative influence of MNCs.

Disadvantage of ISI ISI may only protect jobs in the short run. In the long run economic growth may be lower in the economy and the lack of growth may lead to a lack of job creation. ISI means that the country does not enjoy the benefits to be gained from comparative advantage and specialization. Therefore products are produced relatively inefficiently when they could be imported from efficient foreign producers.

Disadvantages of ISI ISI may lead to inefficiency in domestic industries because competition is not there to act as a spur to be efficient or to conduct R&D. ISI may lead to high rates of inflation due to domestic aggregate supply constraints. ISI may cause other countries to take retaliatory protectionist measures.

Countries adopting ISI The main countries which attempted ISI were in Latin America, including Argentina & Chile. Both has since changed their policies. As former colonies gained their independence many also adopted inward oriented strategies. These included India, Nigeria and Kenya. These policies showed some success in the 1960s and 1970s but the policies started to fail in the early 1980s. Government over-spending and the debt crisis lead to the inability of governments to repay the loans they had take. In the 1980s many of the countries were forced to go to the IMF for help.

THE WASHINGTON CONSENSUS Reforms needed for Economic Growth In 1989, the American economist John Williamson identified 10 common reforms that were necessary for economic growth. The World Bank, the IMF and the US Treasury department agreed with the list and as a result Latin American economies seeking help were encouraged (or forced) to adopt such reforms to illegible for assistance.

THE WASHINGTON CONSENSUS Reforms needed for Economic Growth Fiscal Discipline, that is, balanced budget Redirection of spending from indiscriminate subsidies to basic health and education. Lowering of Marginal Tax Rates and broadening of the tax base. Interest Rate Liberalization A competitive Exchange Rate Trade Liberalization Liberalization of FDI inflows Privatization Deregulation Securing of Property Rights

THE WASHINGTON CONSENSUS Reforms needed for Economic Growth CRITICISM OF THE WASHINGTON CONSENSUS By the end of the 20 th century, the Washington Consensus was increasingly criticized by economists who were not supporters of such policies. This claims that reforms such as the Washington Consensus are just a way of to ensure that MNCs have access to cheap labor markets in developing countries. In this way the MNCs can produce inexpensive products, which are them sold for higher prices in developed countries.

THE WASHINGTON CONSENSUS Reforms needed for Economic Growth CRITICISM OF THE WASHINGTON CONSENSUS The MNCs make high profits and the workers in developing countries gain little. According to this view, the Washington consensus has not led to high economic growth in Latin America. Instead there has been economic crises and increased debt. Such policies have led to increased income inequality and exploitative working conditions, thus working against the goal of economic development.

THE WASHINGTON CONSENSUS Reforms needed for Economic Growth A MOVE TO THE LEFT IN LATIN AMERICA There has been a movement to the left in a number of Latin American countries such as Venezuela, Ecuador, Bolivia and to a lesser extent Brazil. These countries along with Cuba have been very vocal in their condemnation of the Washington consensus.