Sunday, February 28, 2010

Export-led growth: Past and Future

How did Germany, Finland, Japan, Korea, China, Malaysia, Thailand, Taiwan and Singapore manage to enjoy export-led growth and not others? Is there still room for export-led growth? Shahid Yusuf has a very interesting blog post about this issue. He argues that export-led growth model might not be dead yet but it would be difficult to repeat the same successful feat enjoyed by the ‘high achievers’.

The successful countries specialized in high-valued, sophisticated products, leading to constant innovation and thus high productivity and sustained competitiveness.

Some facts about export-led growth:

  • Fast growing economies relied on a mix of manufacturing activities with electronics, transport, textiles, and engineering industries. The share of manufacturing sector is over 25% of GDP.
  • Electronics industries provided a necessary stepping stone to industrial maturity and technological deepening. The share of electronics in manufactured exports averaged 40%.
  • Innovation in electronics, automotive and engineering industries sustained competitiveness and enhanced productivity.
  • Exports of manufactures remain one of the most important sources of growth.
  • Investment to develop manufacturing industries and necessary supporting infrastructure averaged over 30% of GDP. The source for most of the investment was domestic.

Even if there is a stock of resources (investment and capital requirements) ready to be deployed in the economy, countries may not necessarily achieve high marks as the successful countries that relied on export-led growth. Why? How did the successful export-led growth countries become successful? Yusuf points to some necessary conditions required for this to happen:

  • Political and macroeconomic stability
  • Openness (the US market after the Cold War proved to be an elastic source of demand for imports); The EU also opened up its market. The countries that facilitated domestic production managed to export more when conditions were ripe.
  • Advancement in technology allowed outsourcing and offshore production.
  • Open trading environment facilitated the mobility of people and diffusion of ideas.

Export-led growth might not be dead yet but for new entrants it won’t be as easy as it was for the successful countries in the past. Why?

  • There is excess production capacity in most industries. It would be hard for new entrants to break into the already competitive market.
  • The most important and largest exporter, the US, might not be able to live with debt-financed consumption binge. This means there will be weak demand for imports.
  • Rising energy and resource costs.
  • ICT/electronics revolution is almost over. So, innovation in manufactures might not be at the same rate as it was in the past. Green technology might be the next big driver for innovation and related manufactures but it is not certain.

If export-led growth model is dubious, then what would drive growth? Yusuf throws a Keynesian wand arguing that the state much play a larger role by investing in productive assets, infrastructure and services. A new balance will need to be struck between the guiding hand of the state and the hidden hand of the market.

I think there is still room for export-led growth for small landlocked country like Nepal because of its market and geographic proximity to growing economic giants, India and China. Nepal trades more than 60% of its goods and services with India.

Given the clear lack of benefits from the WTO regime, is there still room for export-led growth in Nepal? The answer is yes, provided that we focus on full integration into the regional markets and in signing FTAs with countries that possess potential markets for Nepali exporters. This also includes instituting right measures on trade facilitation and specialization on products that are relevant and within purchasing power of customers in targeted markets.

Charting out strategies to fully integrate with other SAARC nations would also help to stimulate investment and exports. Nepal exports more to SAARC members than it does to other nations. Nepal’s export to SAARC, as a share of its total exports, increased from 53.9 percent in FY 2003/04 to 72.5 percent in FY2007/08. Meanwhile, imports, as a share of total imports, from SAARC increased from 53.9 percent in FY 2003/04 to 67 percent in FY 2007/08. In this regard, expediting integration under SAFTA (and BIMSTEC) would produce more gains than from any other trading blocs. These two blocs (plus China) could be the most important markets for Nepali exports in the coming days. The future of export-led growth would depend on how much Nepal can capitalize from integrating with these markets with huge potential.

Dani Rodrik thinks export-led growth is not a passé yet:

Many countries are trying to emulate this growth model, but rarely as successfully because the domestic preconditions often remain unfulfilled. Turn to world markets without pro-active policies to ensure competence in some modern manufacturing or service industry, and you are likely to remain an impoverished exporter of natural resources and labor-intensive products such as garments.

Nevertheless, developing countries have been falling over each other to establish export zones and subsidize assembly operations of multinational enterprises. The lesson is clear: export-led growth is the way to go.

None of this implies a disaster for developing countries. Long-term success still depends on what happens at home rather than abroad. What is moderately bad news at the moment will become terrible news only if economic distress in the advanced countries — especially America — is allowed to morph into xenophobia and all-out protectionism; if large emerging markets such as China, India, and Brazil fail to realize that they have become too important to free ride on global economic governance; and if, as a consequence, others overreact by turning their back on the world economy and pursue autarkic policies. Absent these missteps, expect a tougher ride on the global economy, but not a calamity.

Eduardo Zepeda argues that the financial crisis has revealed the limitations of export-led growth but it still is an option. But, this strategy has to be combined with strategies that promote domestic market. Also, diversification is needed (especially avoiding over reliance on agricultural sector). Restoring selective industrial policy might be helpful.

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.