Export-Led Growth as a Tool for Financing Development: Is the Financial Crisis Revealing its Limits?

Eduardo Zepeda, Aldo Caliari, Otaviano Canuto, Marco James Kassaja, James Kiiru, Jorge Mattar, Terry McKinley, Luciana Mermet June 29, 2009 Washington, D.C.
Summary
The global economic crisis is making painfully evident to the developing world the limitations of overdependence on a narrow set of exports and markets.
 

The widespread adoption of export-led growth since the mid-1980s has had mixed results. The majority of countries that have achieved and sustained rapid growth have made export promotion an important component of their economic policies, but a number of countries that follow export-led policies have experienced low growth rates.

Today, the global economic crisis is making painfully evident to the developing world the limitations of overdependence on a narrow set of exports and markets. Many countries are rightly worried about the merits of a growth process built on export-led growth. In the case of successful export-led growth strategies, the global economic crisis is revealing an additional limitation: the large exposure of exporting countries to financial vulnerability.

The Carnegie Endowment, the United Nations Development Programme, and the Center of Concern hosted a conference examining the future of export-led growth that addressed these concerns.

Export-Led Growth: Theory and Empirics

In theory, the expansion of exports can spur economic growth through several channels. 

  • Trade openness shifts goods to sectors in which the economy has a comparative advantage, increasing efficiency. 
     
  •  In developing countries, these sectors are often intensive in unskilled labor; their expansion will create job opportunities and improve equality. 
     
  • Trade liberalization opens the economy to greater inflows of FDI and technology transfers.

Empirically, exports tend to pull up growth as they expand; however, this broad trend masks great variance in results. 

  • Mexico, Malaysia, and Hungary all have similar levels of exports as a percentage of GDP; however, they enjoy very different growth rates.
     
  • Reliance on exports exposes countries to commodity price volatility.
     
  • Specialization on cash crops has placed agricultural producers in vulnerable situations when markets experience sudden changes.
     
  • Wages of unskilled labor in export-dependent economies have not risen, while those of skilled labor have, exacerbating inequality.

Latin America: A Disconnect Between Exports and Broad-Based Growth

Latin America’s export-led growth strategy, widely pursued since the mid-1980s, succeeded in increasing exports out of the region; however, it did not generate the large jump in output growth that its proponents had predicted.  The financial crisis and the accompanying plunge in world trade have further dampened growth prospects for the region. 

  • While net importers of oil, food, and raw materials in Central America will benefit from declines in global commodity prices, most nations in South America, which export many of these goods, will suffer.
     
  • The financial crisis has hit trade in labor and capital, as well as in goods.  Remittances and FDI into the region has slowed substantially as a result of the crisis, which have been particularly taxing for the smaller economies that depend heavily on these flows.
     
  • Some nations, such as Chile, have been able to implement countercyclical policies to support their economies throughout the downturn; however, many others have not enjoyed the same fiscal space and have therefore been limited in their options for response.

Greater diversification and regional integration may enable Latin America to take advantage of export-led growth.

  • Diversification of export products and countries of destination would mitigate the region’s vulnerability to trade demand volatility. 
     
  • Greater regional integration may provide a buffer to global shocks.  While Latin America has established several regional blocks, only that of Central America has succeeded in facilitating substantial trade amongst its member countries.

Africa: A Disappointing Experience

The model results of export-led growth in Asia fuelled high expectations for the strategy in Africa. 

  • African policymakers hoped that the continent, which is home to some of the world’s poorest nations, would benefit from access to a larger and wealthier pool of potential consumers. 
     
  • They also expected that increased trade with developed countries would provide their nations with the foreign currencies, such as U.S. dollars or British pounds, which are needed to conduct intra-African transactions and trade.

However, Africa’s experience with the strategy has been disappointing. 

  • Trade with developed countries has been highly concentrated in a select handful of goods, while intra-African trade has been limited by a lack of complementarily, as many African nations export the same commodities.
     
  • Problems of poverty, food security, and youth unemployment persist.

Greater diversification and regionalism, as well as improved infrastructure, would enhance the benefits to African trade.

  • Despite their limitations, there still exists room for the expansion and deepening of existing regional development communities.  Such efforts need not be limited to commodity trade; they can include greater sharing of resources, such as highways and ports.
     
  • The alleviation of supply-side constraints, such as weak infrastructure, would enable the continent to take advantage of trade preferences in developed countries, which currently go underutilized.

Global Outlook

Export-led growth propelled developing countries to higher levels of economic growth over the past two decades, but the imbalances driving some of this growth will have to change in the future.

  • Large current account imbalances – both surpluses and deficits – propped up increased flows of international capital to countries that successfully enacted export-led growth.   Over-absorption in developed countries drove them into large current account deficits, while current account surpluses enabled over-saving in export-led growth economies.
     
  • As the financial crisis forces developed countries to rein in their spending on exports, export-dependent developing economies will be drained of much of their driver of growth and will be forced to shift to measures to expand domestic demand to maintain growth rates.
     
  • Still, the export-led growth strategies of developing countries – and particularly that of China, which is most often cited -- have not caused today’s global imbalance.
     
  • Trade openness and export diversification will remain key drivers for growth and development, but substitutes for currency undervaluation and large current-account surpluses will have to be found.
Source carnegieendowment.org/2009/06/29/export-led-growth-as-tool-for-financing-development-is-financial-crisis-revealing-its-limits/1cub

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