Free Custom «Export-led Growth» Essay Paper

Introduction

Export-led growth is based on the understanding that exports are a vital contributor to any increase in the economic growth of a country. It is the economic strategy that is applied by developing countries with the intention of improving the standard of living of their citizens. The stratagem entails identifying a market for a commodity that a country has a comparative advantage to manufacture or produce over other producers. As exports continue to appeal to the market, the producing country benefits from cash inflows and acquires the monetary power necessary for the purchase of imported goods and services. Examples of countries that have previously benefited from the strategy include Middle East nations, which specialize in the exportation of petroleum products (Yang 235).

The export-led economic strategy is normally preferred for manufactured goods, information services, and other unprocessed materials. Manufactured goods are easily expanded in terms of their volume availability for export. On the other hand, unprocessed materials are often depleted in the long-run. Before the 2000s, Asian countries laid more emphasis on the exportation of manufactured goods, whereas Latin American countries often preferred raw materials (Yang 340). Reliance on manufacturing is often associated with increased productivity in the country concerned, since it creates more job opportunities than the later. However, the recent global crisis has revealed the other side of over-reliance on the export-led growth. The paper analyzes the advantages of this strategy on the example of countries that have benefitted from the strategy, for example China and India. Later, it considers some drawbacks of the strategy and then gives an illustration of how it has been detrimental to the participating nations.

Advantages

For the past twenty years, nations have always linked success of manufactured goods and services to quick changes in their economic growth. The conclusion is backed by the understanding that a large majority of developing countries have achieved remarkable growth in their economies by actively participating in the export of manufactured goods and services. Moreover, some extensive research has shown a positive connection between these less restrictive trade policies, the manufactured goods, and the resultant economic growth. There are certain benefits associated with this approach for different countries.

First, the strategy offers a ready source of foreign exchange. The cash flows acquired from the sales of the exports are used in the purchase of imports that the country is not able to produce. Countries that have relied on the import substitution procedure rather than the export-led growth model have experienced balance of payments complications due to lack of adequate foreign exchange income that would be used to pay for raw materials or capital goods for the domestic manufacture of products. Exporters are generally shielded from such inadequacies (Yang 21).

Secondly, dependence on exports has led to the development of economies of scale in production.  Companies can manage to produce in large quantities and at the expense of increased variable expenses. Fixed costs, often the highest, are thus distributed among large units produced by the company. Consequently, the final products are sold at low prices that allow people from different social groups in the international market to benefit from them. For example, China has been greatly involved in the manufacture of cheap electronic equipment such as mobile phones that are sold at relatively cheaper prices than original products. This has allowed people from developing countries to benefit from the services provided by these gadgets, an opportunity that was previously unreachable due to price barriers (De Melo and Robinson 32).

Moreover, the existence of a market for products further fuels the production of the commodities (Vos 12). If a country has a comparative advantage, its goods will be in demand forcing the country to search for alternative means by which to increase their level of production. The foreign exchange, thus earned, is reinvested into the manufacturing industries to foster the increase. As the manufacturing industry expands, the labor demand increases leading to the creation of employment opportunities. This will consequently lead to an increase in the standards of living of people.

Export of manufactured goods and services is open to a larger extent of specialization. Developing countries can leverage their comparative advantage in the production of globally competitive products. Such advantages can lie in the access to cheaper and huge labor force that will be readily reflected in the pricing of their commodities in the international markets. For instance, Malaysia has already benefited from such an initiative. In the early 1970’s, the country managed to establish and grow its electronic sector without having any previous experience in that particular industry (De Melo and Robinson 13). The U.S recognized the labor advantages in the country and relocated the labor-intensive production process to Malaysia. The country did not have the necessary technological expertise to manufacture chips, but it specialized in the manufacture and assembly, which were processes that depended heavily on labor. Since Intel’s investment in 1972, the country has grown its economy into a leading production system globally. On the contrary, countries that adopt the import substitution approach are not exposed to such levels of specialization. They may be limited by technological expertise which export-led strategies can go around easily.

Export-led growth exposes manufactured goods to a larger market. The exporting country has the advantage of exporting to all major countries that may require its products. Larger markets also provide an avenue for the variation of prices depending on the location, which leads to increased profits. Change of preference by one section of the market still leaves the country with alternative markets. Therefore, the risk of total lack of sales is regulated. However, the country’s products have to compete favorably in the market if they are to remain relevant (Vos 153).

The strategy also cultivates the development of technological processes. For the manufacturing process to grow at a rapid rate, close ties with multinationals that avail process inputs, technology, capital goods, and ready market are necessary. The connections provide an opportunity for apprenticeship learning of the entire production process. Besides, it would be practically impossible for a country to produce all required intermediate inputs all by itself. For instance, in the case of Malaysia, the country is now in a better position to produce technologically advanced electronic commodities than it would have done in the years before 1972. In the course of production, Malaysian workers have gained the necessary expertise during various stages of production owing to the country’s access to the most modern technologies in the global markets. This increase in expertise is reflected in the changes in the wages of employees, which points to improved standards of living in the country.

Dependence on exports enables the exporting country to balance sales throughout the year by exploiting different selling seasons in various countries. Holiday seasons are often associated with increased sales and vary from country to country (Duncan 6). In situations when the domestic market has shrunk, the exporting country can benefit from sales in another country whose demand for the product is still an all-time high. Moreover, if a country produces too many products with the anticipation of high sales that are not realized in the long-run, it could take advantage of the international market to get rid of the surplus. Moreover, a domestic company may be specializing in the production of commodities that are not prevalent in the international market or which the global market is not aware of. The presence of an alternative to export provides another opportunity for the product to flourish. Though the product’s success may not be guaranteed, with the help of the right marketing strategy, it could be a hit in the market. This presents an opportunity for the exporting country to grow its economy through monopoly sales before other market entrants lower the proceeds from that particular industry (Duncan 46).

In addition, the strategy has a range of benefits it provides for the economy. Growth of the manufacturing export industry greatly affects other sectors of the economy of a country. Given the opportunities of exploiting the large global market, exporters often compete for raw materials and human resources. Therefore, wages and salaries offered by exporter firms are often used as a benchmark for local salaries or as model wages. In order to ensure that their products are competitive in the market, exporters will have to dictate the kind of service or goods provided by their suppliers or influence the provision, administration, and preservation of the infrastructural projects in the country. Moreover, the export markets permit a quick movement of labor and capital from different sectors without necessarily experiencing any reduction in the returns.

One of the countries that has benefited greatly from the advantages of export-led growth is China. The growth has been dependent on the structural alterations and demographic changes. Being a member of the World Trade Organization (WTO) has also provided China with the opportunity to benefit from the global markets by taking advantage of its rich labor supply. It has access to the large foreign markets and has accepted to expose itself to the adverse competition with foreign nations. The country has managed to maintain a growth of 9% for the last three decades. This has greatly reduced its poverty numbers and hence led to an improvement in the standards of living of its citizens. In order to achieve this, the Chinese government has made all possible efforts to secure foreign direct investment for the purpose of exportation. Such efforts include subsidizing of export-oriented investment. On the same note, U. S.-based companies have relocated their manufacturing plants to China to take advantage of the labor availability, particularly during the assembly process of their products. Consequently, the Gross Domestic product of the country, which reflects how much a country produces during a particular year, has been on the increase (Yang 109).

The fast growth of the economy has fueled the world demand for energy. The country is the second largest oil consumer and the largest producer of coal. The possibility of the depletion of non-renewable sources of energy in the future has forced the country to seek new sources of renewable energy. In 2009, the country spent more than $3 billion on clean fuel energy sources and issued incentives for the power companies to rely on solar energy. Such initiatives when applied by all major exporting countries would lead to a reduced level of environmental pollution, that is, the level of carbon emissions will have been greatly reduced.

However, the export-led growth strategy also has some disadvantages. There are certain cases that would not have befallen the developing countries exploiting that strategy were it not for their choice of strategy. The negative effects for countries like China and Japan have only become evident under the influence of the recent global financial crisis.

Inconveniencies

Export-led growth has led to the creation of structural problems. These complications have to be resolved if the countries concerned have to attain balanced growth. Among the most prevalent anomalies are huge savings and the present account surpluses. For instance, at the low earnings level, China has been compelled to transfer its savings to richer nations. As a result, the rate of domestic in-take reduces alongside that of the share consumption of Gross Domestic Product. This results from an increase in the level of GDP due to the direct foreign investment which does not relate proportionately to the household earnings. The issue is compounded by the rapid growth in the corporate and government earnings. Both enterprises and the government are spending huge amounts of money on reinvestment as a means of driving the economy.

The imbalance mentioned above can be attributed to China’s double evolution. The pronounced changes include rapid industrialization that is complemented by huge rural-urban migrations and changed demographic statistics since the government implemented the one-child policy. This transition has caused wages to be censored and the return on investments to be collected in the form of revenues to the government. The households are left with less to spend, thus leading to the decline in GDP. However, these effects are not due until the country completes the double transition when possibly all its savings will be depleted. However, other nations such as India will have followed suit leading to the global imbalance (Haddad and Shepherd 45).

From definition, export-led economies are dependent on other countries for the sustenance of the economic growth. For instance, Chinese and Japanese industries heavily depend on the U.S market for the sale of their products. Such dependence ensures that there is a direct proportionality between the two groups. Therefore, when the market country is affected by an economic crisis, the exporting country will directly be affected by the same crisis. However, countries whose dependence on exports is minimized such as those practicing imports substitution may not suffer directly. For instance, the liberalization of international capital markets in the 1980s led to the fall in the current account balances of the United States from a surplus to deficit. Japan, on the other hand, was running surplus of 4.2% of its GDP and had the U.S market to thank for it. Though different economic turns transpired between that period and the year 2007, the symbiotic relationship between the two nations persisted. The U.S depends on Japan to supplement its account deficits, while Japan counts on the U.S to purchase its products. Therefore, as the United States was faced with the economic crisis of 2008, the economy of Japan was also affected, since the demand for their products had declined in due process. In worse situations, countries that depend on exports to drive their economy may experience delayed or slowed economic recovery due to their overdependence on the international markets for their sales.

Export-led economies may also be forced to institute varied policies to safeguard themselves from the effects of a global crisis due to its reliance on export markets. For instance, the Chinese government was forced to implement several policies to regulate the effects of the 2007-2010 financial crisis. First, monetary spending had to be increased with the purpose of encouraging non-public spending. This would, consequently, increase the domestic demand which would supplement the dwindling international market. Measures taken to increase the monetary spending included provision of fiscal subsidies for the replacement of used cars and household equipment with new appliances. The country also tried to balance the international market demand by stabilizing the value of the Rmb with the help of the appropriate fiscal and monetary policies. Without its overreliance on the export market of the suffering country, the country may not have found the need to institute the procedures mentioned above.

Export-led economies could also be exposed to a diversification problem. In an attempt to exploit their comparative advantage, countries may encourage certain industries while consequently discouraging the development of others. This may expose the country to global demand changes of the commodity the country exports. The situation may become detrimental for a country whose economy was formerly dependent on agriculture for domestic sustenance and shifts to agriculture for export purposes. For instance, if a country managed to realize this, it could benefit more from the export of tobacco and shifted its farming focus to tobacco farming instead of food crop farming. Any decrease in the global demand for tobacco might render that the country is unable to sustain itself.

There are also political issues associated with export-led growth economies. The strategy, as earlier explained, is based on identifying the exports in which a country has a comparative advantage exporting to the global market. These industries are then subsidized by the government or offered other monetary incentives to encourage their growth. The determination of the comparative advantage of a certain industry may often be a daunting task. It may call for the collection of large amounts of data that may not be within the government’s ability to collect. Moreover, politicians may manipulate the selection of the industries with comparative advantage to suit their own vested interests. This may lead to the selection of industries that are not economically sound (Haddad and Shepherd 28).

Over the last three decades, overdependence on export-led growth has led to excess production capacity in Middle East countries. The level of profits has drastically reduced showing that the strategy is unreliable for future rapid economic growth. For instance, the entry of China with its alarming manufacturing ability in a variety of industries has boosted the supply in the international markets and increased competition for the few starters pegging their economic growth on exports. Such start-up countries may thus be forced to go back to the drawing board in search of other alternatives to grow their economies. A large majority of countries that may suffer such an eventuality may be developing countries.

Conclusion

The analysis of the advantages and disadvantages of export-led growth provided above can be summarized into four eventualities and two predictions. First, the export-led growth paradigm has been exhausted by the entry of countries such as China that have led to the crowding-out effect. The transition of the emerging markets and developed countries has also played its part. Secondly, some emerging economies are misled into thinking that attempts to exploit export-led growth will bear fruit in the long-run. Such attempts will only hinder the economic recovery of developed nations, especially after the 2008 global financial crisis. Thirdly, there is a growing need to recalibrate the global economy based on domestic demand-led growth that is set to replace the export-led growth paradigm. Finally, the diversity of the global economic market is not influenced by actions of a single country. It is the pooled effect of different regions that can alter the globalization route.

Even with these conclusions, political reasons may impede the shift of emerging markets from export-led growth and the acceptance of domestic demand-led market growth by the international community (Haddad and Shepherd 23). Export-led growth seems to be addictive. Once a country has chosen to apply the strategy, quitting becomes a problem irrespective of the inconveniences associated with it. Moreover, the global economy is likely to be marred by reduced economic growth of emerging markets, stalled growth of advanced economies, and poor relations between emerging markets and industrialized nations.