Export-Led Industrialization

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Export-Led Industrialization

• Anne O. Krueger

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She is Krueger
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Development Countries trade policies have fallen
into two distinct groups

• A. Import substitution Those countries which
  have adopted trade policies which diverge from
  the optimality criterion that International
  Marginal Rate of Transformation (IMRT) Domestic
  Marginal Rate of Transformation (DMRT) by a large
  amount, by protecting their domestic markets.
• B. Export promotion Export Led Growth consisting
  of encouragement to exports, usually beyond the
  point that IMRT DMRT. Countries adopting this
  strategy have generally experienced rapid growth
  of traditional exports, but even more rapid
  growth of nontraditional exports.

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What is export-led growth/outward oriented/export
promotion/export substitution?

• A. All terms refer to policies of countries
  successful in developing their export markets.
• B. Common features -most analysts agree that an
  ELI strategy is one there
• 1). There is at least as much incentive to
  earn as to save foreign reserve.
• 2). Interventions are generally in the form
  of incentives rather than imposition of direct
  controls.
• 3). Incentives to export are fairly uniform
  and not discriminatory across commodity groups.
• 4). There is no bias of incentives toward
  production of import substitutes.
• 5). The incentives which do exist must favor
  production for export as much as, if not more
  than, the production for the domestic market.

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Three main results emerging from experiences of
ELI countries

• Remarkable rates of growth associated with
  growth of exports.
• For all countries where it was possible to
  contrast performance before and after the policy
  changes, the growth rate clearly jumped shortly
  after ELI adoption.
• Sustained high growth rates indicated that
  outward-oriented policies created dynamic effects
  in the economics and did not merely produce
  static gains from improved allocation of resource.

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ELI Vs. ISI

• Experience has been that growth performance has
  been more satisfactory under export promotion
  strategies than under import-substitution
  strategies.
• The relationship between export performance and
  growth is sufficiently strong that it seems to
  bear up under many different specifications of
  the relationship.
• It has been tested over many countries for (1)
  rates of growth of real GNP and of export (2)
  for real GNP net of exports and exports and (3)
  for rates of growth of real GNP as a function of
  rate of capital formation, aid receipts, and
  export growth.
• Success stories Korea, Taiwan, Brazil are well
  known, Also Turkey and Philippines did, so that
  there is little double about link between export
  performance and growth rates.

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Three hypotheses of why such a difference in Goth
performance should be associated with export
promotion.

• HYPOTHESES 1 technological-economic factors
  imply an overwhelming superiority for development
  through export promotion. Asserts that gains from
  trade, especially for developing countries, are
  so sizable that losses associated with import
  substitution significantly reduce the rate of
  return on factor accumulation. A failure to take
  advantage of the opportunities to exploit these
  phenomena through trade significantly impairs the
  attainable rate of growth.
• a. Size of markets - Under ELI policies,
  efficient activities can expand well beyond the
  size of the domestic market. Expansion of an
  activity beyond the amount sold in the domestic
  market becomes profitable.

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Continues...

• b. Indivisibility and economies of scale - export
  oriented strategies permit a developing country,
  regardless of the size of its domestic market, to
  establish plants of economically efficient size
  and to maintain long production runs.
• c. Factor intensities - developing countries are
  usually relatively endowed with unskilled labor.
  The rate of human and physical capital formation
  is the constraint upon expansion of the
  industrial sector in these countries.
• d. Infant industries - this argument has long
  been used to justify protection. However in ELS,
  if there are infant industries, once developed
  they can be expanded well beyond the size of the
  domestic market.
• e. Interdependence and quality - efficient
  production of most manufactured goods entails the
  use of a wide variety of inputs. Under ELI,
  exporters have access to their intermediate
  inputs.
• f. Economic behavior.

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Hypothesis 2

• Differences in growth rates have resulted, not
  from the choice of trade strategy per se, but
  rather from excesses in the ways in which import
  substitution policies were administered.
• 1). The failure of import substitution resulted
  from excesses of the particular ways in which
  domestic industries were encouraged for example,
  currency overvaluation, quantitative
  restrictions, techniques of allocating import
  licenses.
• 2). One cost was the failure of export earnings
  to grow as much as they would under better import
  policies.
• a. Led to stop-go patterns
• b. Foreign exchange bottle neck emerged.

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Hypothesis 3

• Policies adopted in pursuit of an export
  promotion strategy are generally far closer to an
  optimum, both in the DMRT IMRT sense and with
  respect to the domestic market, than are those
  adopted under import substitution. The role of
  trade policy is to constrain policymakers in such
  a way that they do not impede the growth rate as
  much as they otherwise would.
• 1). ELI strategies imposes constraints on
  policymakers, both in what they can attempt to do
  and in making them aware of the costs of
  mistakes.
• 2). Policymakers receive feedback in a relatively
  short time period as to the costs of their
  policies.
• 3). It is infeasible o rely upon quantitative
  controls the international price, at least, can
  not be administered and to that extent, more
  generalized forms of incentive, including a
  relatively realistic exchange rate, must be
  employed.

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Conclusions

• Experience has clearly demonstrated the
  importance of access to international markers in
  providing a means of permitting more rapid growth
  than would otherwise be feasible. Given the
  enormous difficulties and costs of achieving
  institutional and other changes that economic
  growth requires, it is probable that trade policy
  changes have a higher rate of return to LDCs than
  most other feasible policy changes.
• The fact of openness itself, rather than of
  export growth, is a critical ingredient for rapid
  increases in output and productivity. This
  consideration is significant in evaluating the
  prospects for future growth of developing
  countries in the context of a potentially slower
  expansion of world trade -- if it is openness
  itself that conveys benefits due to competition
  and the future of policy instruments employed,
  the gains from export orientation will be almost
  as great with slower growth of world trade as
  with more rapid growth.

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SummaryProcess of ELI

• 1.Tariff can not induce production for the
  international market, therefore export subsidies
  or a realistic exchange rate is required.
• 2. There is a tendency to maintain a realistic
  exchange rate.
• 3. This encourage exports and reduces the balance
  of payment motive for tariff protection.
• 4. Exporting industries must be permitted to
  purchase their needed. intermediate goods and raw
  materials at world prices to be competitive.
• 5. This puts pressure on authorities to reduce
  barrios to imports, which in turn may encourage
  other producers to enter the export market.
• 6. A effective export promotion policy must be
  accompanied by a fairly open and liberalized
  trade regime.

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Is it ELI better than Import substitution

• No, we can not say that!!
• In last thirty years, ELI got big success, but we
  can not say which policy is better of not, it is
  depend on in which country and in which time
  period.

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The End

• Thank you!