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The Past and Future of Export-led Growth

Ihssane Loudiyi's picture

by Shahid Yusuf

The history of development since 1950 is remarkable overall but it offers only a few outstanding success stories. These are based on the experience of a small handful of European and East Asian economies among which Germany, Finland, Japan, Korea, China, Malaysia, Thailand, Taiwan (China) and Singapore are the notable ‘high achievers’. Each sustained two or more decades of sustained rapid growth between 1955 and 1997. From among them, only China has continued forging ahead at near double digit rates since 2000. All the others have slowed.

An analysis of this unique body of experience yields five stylized facts which together underpin a particular model of development. The questions being asked insistently following the financial crisis of 2008-09, are: whether the export-led growth model can continue to shape the strategies pursued by the elite group of high achievers and also of late starters aspiring to emulate the performance of the East Asian economies? Or, whether changing global circumstances in the early 21st Century have rendered the model obsolete for most if not all economies and demand a fresh approach differentiated according to specific country circumstances?

The stylized facts of relevance are as follows:

  1. All fast growing economies relied upon a mix of manufacturing activities with electronics, transport, textiles, and engineering industries consistently in the lead. A share of manufacturing in GDP of 25% or more was the norm, with the share of the key subsectors exceeding 70 percent (see Table 1). The leading industries benefitted from the fruitful diffusion and sustained innovative elaboration of general purpose technologies (GPTs).
  2. With the exception of Germany, the other economies depended upon electronics industries to provide a necessary stepping stone to industrial maturity and technological deepening. The share of electronics in manufactured exports averaged 40% in 2000 (excluding India) (see Table 3). Electronics, automotive and engineering industries also provided the vital push to the research and knowledge building infrastructure which (more so than other industries) has sustained competitiveness and buoyed productivity.
  3. Exports of manufactures even in the largest economies such as Japan and China, were and remain important sources of growth by generating demand, stimulating technological advance and inducing the upgrading of quality (see Table 4). They have proven essential to the performance of smaller economies.
  4. Manufacturing activities were responsible for germinating the leading global Multinational Corporations (MNCs) from the fast growing European and East Asian countries, now responsible for the lion’s share of R&D in these economies and the bulk of patents.
  5. The development of manufacturing industries and the necessary supporting infrastructure required a large volume of investment – averaging over 30% of GDP in the high growth stage (see Table 5). This was generally the principal driver of growth during the earlier stages when industrialization was unusually fast paced. Much of the investment was financed from domestic sources, however, each country benefitted from the inflow of foreign capital and technology via ODA and FDI.

These stylized facts comprise the main strands of the so-called export-led investment-fuelled growth model which is the single most promising recipe to emerge from over 50 years of development experience. After attaining a degree of macroeconomic stability and starting with relatively low tech and labor intensive manufacturing activities, the ‘high achievers’ used industrial, exchange rate, trade and later innovation policies to guide or manage market forces so as to groom industries with export potential. Through the patient acquisition of manufacturing capabilities, and a considerable amount of ingenuity, success led to virtuous spirals that catapulted low income economies into the ranks of middle and high income countries.

Is the export-led growth story largely woven around far-sighted economic leadership that saw opportunities and was quick to grasp them through the manipulation of policies and the mobilizing of resources, domestic and foreign? Is it a story moreover, of nimble and innovative companies which quickly leveraged low wages, government incentives and cheap financing to establish beachheads in foreign markets and then worked assiduously to expand them?

These are important strands but in fact, the story is richer and more complex. Successes hinged on a number of other factors:

  • Political and macroeconomic stability was a necessary prelude to the acceleration of industrial development and by attenuating of risks, contributed to the release of entrepreneurial animal spirits.
  • For geopolitical reasons and out of confidence in its own innovation capacity and competitiveness in high value adding activities, the United States was willing to open its markets to imports from economies in Asia and Europe which were important allies in the Cold War. The vast, efficiently retailed and organized American market proved to be an elastic source of demand and U.S. companies were ready to vacate niches for low end labor intensive imports.
  • The U.S. and some European countries took the lead in pushing for trade – and later capital market – globalization. As trade barriers were dismantled, countries that had been quick to industrialize, enlarged their shares of global exports. Initiatives by U.S. companies to outsource and offshore the manufacturing of labor intensive products helped to create ‘international production networks’ that promoted FDI and facilitated export flows from East Asia, pulling many small Asian companies into the export market. The widespread use of ICT and advances in logistics and supply chain management lent impetus to the trade creating process.
  • A trend towards the standardization, modularization, and codification of technologies especially in the electronics and auto industries, made it easier to deverticalize and offshore production. And it allowed East Asian manufacturers, which had accumulated skills and expertise, to absorb the technology and achieve competitiveness. By emphasizing tertiary level S&T education, high achievers promoted technology acquisition. FDI reinforced technology diffusion through vertical and some horizontal spillovers. Early starters benefitted the most from globalization as they widened their lead through investment in production capacity and learning by doing.
  • An open trading environment which facilitated the mobility of people and the diffusion of ideas, has enabled countries that were quicker to build innovation systems to absorb new technologies. Furthermore, the elastic supply of capital at low rates permitted the leading manufacturers to massively ramp up capacity.

If the export-led model worked for some countries in the past, why is it now being questioned? What has changed? Export-led growth is not dead however, its halcyon days might be over for most countries. There are four possible reasons:

  • Because of heavy capital outlay mainly in East Asia, there is excess production capacity in most major industries. Profits have been driven down and growth at earlier rates is increasingly doubtful over the medium term. The entry of China, the amazing speed at which it has built manufacturing capability, its competitiveness across a broad range of manufactures, and its enormous investment in capacity, has provided it with an export boost but also raised the odds against late starters leveraging their own growth rates with the help of exports. Meanwhile, the capital and technology intensity of industries producing memory chips and LCDs for example has risen to the point that they pose insurmountable barriers to new entrants.
  • The U.S., long the importer of last resort and the consumer driven economy par excellence, is now so indebted and its industry so hollowed that prolonged adjustment is inevitable. This will mean weaker demand for imports and greater competition from U.S. exporters. Other western countries with current account and public sector deficits and/or aging populations are unlikely to fill the gap and certainly China and the other BRICs cannot come close to rivaling the import demand of the U.S. – China’s share of global GDP is less than 9 percent.
  • Rising energy and resource costs could lead to a shrinkage of production networking, encourage more vertical integration in leading producers and dampen trade and growth. The costs associated with urbanization and climate change will also increase the capital coefficient of growth (ICORs).
  • The ICT/electronics revolution – at least with respect to manufacturing – may be losing the momentum provided by innovation and the diffusion of technology, while the potential of green technologies is not yet apparent. Export-led growth rode the crest of a technological wave. A new wave that induces a fresh round of manufacturing development has yet to materialize. Bioinformatics, nanotechnology and advanced materials might all contribute to a new technological epoch but individually or collectively they are unlikely to support a prolonged surge of investment and employment in the low and middle income countries looking for new leading sectors. Biotechnology in its various forms is a maturing industry in the U.S. but for all its promise this field has generated only a modest amount of industrial employment and its profitability is far from being firmly established. Nanotechnology is the source of a number of products but nothing by way of breakthroughs that could unleash a new wave of industrialization with the capacity to energize growth in developing countries. Even in advanced countries nanotechnology and advanced materials might make a substantial difference only if an entire complex value chain is elaborated and locally internalized.

What are the alternatives? The experience of India with IT enabled services has encouraged countries to emphasize the export of services (that are less capital intensive but more skill intensive). But the likelihood that high value tradable services can become the growth engines of tomorrow for Asian countries, complementing or displacing growth led by manufactures, is open to question. Consumption-led growth also is attracting attention. However, rising rates of domestic consumption are a viable option – if at all – for a couple of the largest industrializing economies with high current rates of saving.

If net exports are of diminishing importance for most countries (though there might be exceptions such as Vietnam which could displace some of China’s labor intensive exports), and increasing the dependence on consumption has its limits, investment will have to be the principal source of long term sustainable growth in virtually all developing countries – not consumption. The challenges posed by urban-industrialization, population growth, climate change and others are truly daunting. Higher investment financed by greater domestic savings is the only path to desirable rates of growth (which in the vast majority of cases are unlikely to approach the levels reached by the East Asian tiger economies in their heyday). Middle and low income countries with a vast backlog of infrastructure and low capital labor ratios relative to the U.S. need decades of high investment. And none of these countries can afford to rely much on foreign savings by running current account deficits except for relatively brief periods – a fact that was underscored by the East Asian crisis of 1997-98.

To realize these rates of growth through investment in productive assets, infrastructure and services (and not mostly real estate), the role of the state may have to be somewhat larger and that of financial markets smaller than was recently assumed. A new balance will need to be struck between the guiding hand of the state and the hidden hand of the market.


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Shahid Yusuf is an Economic Adviser in the World Bank Institute. He was the Director for the 1999/2000 World Development Report (WDR) and has held positions in the World Bank's regional and research departments. He received his BA in Economics from Cambridge University and his Ph.D in Economics from Harvard University.