1. The Future of Export-Led Growth: a general assessment The Future of Export-Led Growth: a general assessment Otaviano Canuto Vice President and Head of Network Poverty Reduction and Economic Management The World Bank Presentation at the Carnegie Endowment for International Peace June 29, 2009

2. Key Messages Export-led growth strategies propelled developing countries to higher levels of economic growth over the past two decades Current financial crisis triggered a decline in trade and the diffusion/deepening of export-led growth strategies tends to become harder Trade openness and export diversification remain key drivers for growth and development but substitutes for currency undervaluation and large current-account surpluses will have to be used

3. 1. EXPORT-LED STRATEGIES AND THE LONG BOOM

4. Financial crisis after a long boom 4 Source: World Bank: 2009 GEP. Growth of real GDP, percent Developing High-income

5. Global current account (im)balances Source: The Turner Review, FSA, March 2009

6. US current account deficit and gross capital flows Source: The Turner Review, FSA, March 2009

7. Foreign-ownership of marketable US Treasury bonds as percentage of total amounts outstanding Source: The Turner Review, FSA, March 2009

8. Household debt as proportion of the GDP Source: The Turner Review, FSA, March 2009

9. 2. BASIS OF GROWTH: EXPORTS, TRADE SURPLUS, OR INDUSTRIALIZATION?

10. Rapid growth associated with openness 10 Real Exports / GDP in 1997 Average real GDP per capita growth (1997-2007) Source: World Bank Group - DECPG

11. Speed of openness positively associated with faster growth 11 Change in Real Exports / GDP (2007-1997) Source: DECPG Average real GDP per capita growth (1997-2007)

12. Terms of trade volatility Developing Countries: Terms of trade volatility (1996-2006) Source: Gamberoni and Newfarmer, 2009 based on authors calculation based on World Bank, World Development Indicators Dependence on fewer exports exposes countries to terms of trade shocks

13. Necessity products are more inelastic and less affected by demand shocks Foodstuffs Necessities - Medical stuff Innovations - Cell phones - Environmental products Services 13 US Import Growth by Industry (in U.S. dollars relative to the same month last year)

14. Services trade is more robust Source: Borchert and Mattoo (2009)

15. Source: Rodrik, D., Growth after the crisis, 2009

18. Export-led Growth Revisiting Arthur Lewis and Hla Myint A non-linear and non-spontaneous leap from traditional non-tradables to non-traditional tradables (institutional weaknesses and market failures) Undervaluation as a particular industrial policy Relevance of local technological learning as a complement to structural change Over-absorption in industrial countries made possible by structural change in developing countries

19. 3. THE CRISIS AS A TURNING POINT 19

20. Pace of decline in trade is easing on a momentum basis goods exports, nominal, qtr/qtr ch% (saar) Developing Countries Source: Thomson/Datastream

21. Does this signal signs of recovery? 21 Source: World Bank Development Economics Prospects, June 2009 Source: Baltic Dry Index, June 2009

22. The New Global Environment Source: Barclays Capital, March 23, 2009 - Deleverage and Financial Introspection: less external finance - Lower growth in industrial countries (effects of the crisis on the potential growth rate) - Less tolerance with current-account large imbalances

23. Capital flows down by two-thirds from first-quarter 2008 levels Source: DECPG Finance Team.

24. Implications for Export-led Growth Export pessimism and the fallacy of composition Flying geese and the recent boom features In the absence of undervaluation, subsidies to promote tradables? A higher role for domestic demand expansion? Shifting geographical distribution of global demand? Open trade still fundamental (inc. to circumvent mismatch between local production and demand & to help small countries accrue economies of scale)