EXPORT LED GROWTH STRATEGY

Import substitution—an effort by countries to become self-

sufficient by developing their own industries so that they can
compete with exporting countries—became a dominant strategy
in the wake of the U.S. stock market crash in 1929 up until around
the 1970s. The fall-off in effective demand following the crash
helped cause international trade to decline by 30% between 1929
and 1932. During these dire economic circumstances, nations
worldwide implemented protectionist trade policies such as
import tariffs and quotas to protect their domestic industries.
Following World War II, a number of Latin American, as well as
East and Southeast Asian countries, deliberately adopted import
substitution strategies.

Export led growth is where a significant part of the expansion of

real GDP, jobs and per capita incomes flows from the successful
exporting of goods and services from one country to another.

In recent years a number of countries have experienced rapid

growth across a number of export industries which has helped to
fuel their long-run expansion. These nations include China,
Ireland, South Korea, Singapore, Hong Kong, Vietnam, Ethiopia
and other emerging countries.

Some of them have experienced a marked increase in their trade-

to-GDP ratio which measures the total value of trade (exports +
imports combined) expressed as a percentage of GDP.

Advantages of export-led growth

1. Exports of goods and services are an injection into the
circular flow of income leading to a rise in aggregate demand
and an expansion of output. This helps to raise per capita
 incomes and reduce extreme poverty especially in
developing/emerging economies
2. Growing export sales provide revenues and profits for
businesses which can then feed through to an increase in
capital investment spending through the accelerator effect.
Higher investment increases a country’s productive capacity
which then increases the potential for exports.
3. Many industries help facilitate trade such as trade insurance,
logistics and port facilities. Countries with fast-growing
export sectors are likely to see increased investment and
employment in these related industries. A good example is
the importance of trade to countries such as the Netherlands
(including the port of Rotterdam), and Singapore and Hong
Kong both of which have developed in globally-scaled hubs
for trade

Potential risks and drawbacks from export-led

growth
1. Focusing on exporting might lead to over-dependence on the
economic cycles of trade partner countries and vulnerability
to external economic and political shocks
2. Running persistent trade surpluses might incite a
protectionist response from other nations who feel that the
benefits of trade have been unequally skewed in favour of
exporting countries. Huge trade imbalances remain a big
concern in the global economic system
3. Production capacity allocated to supply goods and services
for export cannot be put to use meeting domestic needs and
wants. There might be a consequent dip in domestic living
standards unless the country is also prepared to import
goods and services using the revenue generated from
exporting
 4. Rapid export-led growth might lead to demand pull inflation
and higher interest rates. High relative inflation might then
have the effect of making export industries less competitive
in overseas markets and domestic producers less price
competitive against imports
5. Export-led growth might be unsustainable if it contributes
extraction of natural resources beyond what is required for
long term balanced growth to be maintained. Consider for
example the impact of deforestation and over-fishing and
degradation of land by industrial-scale farming.

Overall, export-led growth has been important for many countries.

The challenge is to make ensure that a country is exporting a
sufficiently diverse range of products (e.g. to avoid some of the
risks from primary product dependency) and also that the benefits
from increased exports and growth are widely dispersed across
the population.

KEY TAKEAWAYS
 An export-led growth strategy is one where a country seeks
economic development by opening itself up to international
trade.
 The opposite of an export-led growth strategy is import
substitution, where countries strive to become self-sufficient
by developing their own industries.
 NAFTA was an example of a new model of export-led growth
whereby Mexico became a base for multinational
corporations to set-up low-cost production centers and to
provide cheap exports to the developed world.
 Regional Economic Groupings – Meaning

Regional Economic Groups are the associations of countries situated in a

particular region whereby they come to a common understanding regarding
rules and regulations to be followed while exporting and importing goods
among them. Such groups have liberal rules for member countries while a
separate set of rules is laid for non-members. For example, the European
Union (EU), the Association of South-east Asian Nations (ASEAN). These
groups are popularly known as Trading Blocs.

Economic regionalisation can be viewed as one of the major instruments of

promoting international trade activities among countries through removal of
barriers to mutual trade in goods and services by means of free trade
areas, customs union and other preferential trade arrangements. Further,
linkages may be stimulated through freer international exchanges of capital
and labour.

When two or more countries come together to form a regional trade

grouping, that will have two types of effects. The first is the trade creating
effect, which will increase the national income in the participating countries.
The second will be the trade diversion effect, meaning a resulting change in
the direction of trade activities in favour of the member countries and
against non-members. This actually implies disadvantages and losses on
the part of the non-member countries. For this reason, the formation of
trading bloc is very important issue not only for the signatory countries but
also for the non-member countries.

Economic Grouping of the countries of the same region or areas increases

the size of market, aggregate demand for products and services, overall,
productivity, employment and ultimately economic activity of the region. At
the same time, people of the region get a variety of products at
comparatively lower prices. The number of regional groups has grown
rapidly in recent decades. More than one-third of world trade now takes
place within such groups. 

Within the framework of the globalisation efforts conducted under, first, the
General Agreement on Tariffs and Trade (GATT) and second, the World
Trade Organisation (WTO), the utmost importance was given to the
principle of non-discrimination at the international and national levels. The
first principle is known as the most-favoured nation (MFN) clause and
requires that any trade concession extended to a country must be
automatically and immediately applied to all other GATT/WTO members.
The second principle requires all the members to treat imported goods in
the same manner as domestic products. Additionally, custom duties must
be the only tools to protect domestic goods. Although, these two very basic
principles were agreed under the GATT/WTO, there are, indeed, some
effective exceptions to these rules. One exemption from the most-favoured
nation clause is the case of free trade areas and customs union. Only in
these economic groupings is ‘discrimination’ made permissible against the
non-member countries. Another exception to the principle of non-
discrimination is the special status of the developing countries. Trade
preferences extended to the developing are also excluded from the MFN
Clause. In other words, preferential treatment extended to the developing
countries will not be granted compulsorily to the other countries.

Although trade liberalisation efforts at the global level are accelerating even
day by day, regional economic groupings or regional trade blocs are also
gaining momentum as indispensable forms of increasing trade amongst the
countries, developed or developing, to satisfy, their growth and
development aspirants.

At the level of developed countries, the European Union (EU), the North
American Free Trade Agreeement (NAFTA) and the Asia Pacific Economic
Co-operation (APEC) have created huge economic blocs. These three
blocs are very important in terms of both their weights in the world trade
and economy and their inherent tendencies towards further enlargement
and deepening.

Types of Regional Economic Groups

Regional Economic Groupings aim at creating a larger economic unit from
smaller national economies. For this purpose, they aim to remove trade
barriers and establish closer co-ordination and co-operation among the
countries involved.

Regional Economic Groups can be classified on the basis of the degree of

integration among different economies:
(a) Preferential Trade Area: A preferential trade area is the weakest
form of economic grouping. The member countries reduce custom tariffs
in some product categories. They apply a preferential treatment to some
groups of goods from the member countries as compared to the rest of
the world. Higher tariffs would remain in place for all remaining product
categories. A Preferential Trade area can be established through a trade
pact. It is the first stage of economic integration. The line between a
Preferential Trade Area and a Free trade area (FTA) may be blurred, as
almost any PTA has a main goal of becoming a FTA in accordance with
the General Agreement on Tariffs and Trade.

(b) Free Trade Area: This is the simplest form of economic integration
which provides for internal free trade between member countries. Each
member is allowed to determine its’ own commercial policy with respect
to non-members. For example, Latin American Free Trade Association
(LAFTA). In free trade areas, participants aim mainly to expand trade
activities among themselves. For this purpose, they eliminate customs
tariffs on the products they produce themselves. However, they maintain
their own external tariff on imports from third parties. For this reason,
free trade areas are criticised on the ground that import products from
third countries may penetrate into the grouping through the customs of
the member state with the lowest tariff and may then be re-exported to
the other participants. In order to prevent such trade, free trade areas
generally develop very elaborate rules of origin.
(c) Customs Union: A customs union is a more advanced form of
economic integration which not only provides for internal free trade
between member countries but also adopts a uniform commercial policy
against non-members. For example, European Economic Community
(EEC). In a customs union, the participants not only agree to abolish or
reduce tariffs between themselves, they also set a common external
tariff policy against third parties. In this manner, the member countries,
on the one hand, secure the free or privileged flow of tradable goods
amongst themselves and on the other hand, they form a discriminatory
trade bloc against the non-member countries. In this case, the main
concern becomes the coordination of the trade policies amongst the
member countries instead of developing elaborate rules of origin.

(d) Common Market: A common market allows free movement of labour

and capital within the common market in addition to having free
movement of goods between the member countries. The member
countries of common market also adopt a common commercial policy
with respect to non-members. However, such a scheme necessitates
the co-ordination of commercial and industrial policies. Citizens of a
common market can work and invest in any member country without any
restriction.
(e) Economic Union: In the case of economic union, the member
countries have the same economic policies, including monetary and
fiscal policy, in addition to the features of common market. Additionally,
they also agree to harmonise their national economic policies and act as
single economic unit. For example, the European Union introduced a
common currency Euro 2000 for its member countries.

(f) Political Union: Political union is the ultimate type of economic

integration whereby member countries achieve not only monetary and
fiscal integration but also political integration. For example, EU is moving
towards a political union similar to the one created by 52 states of
America.

Positive Implications of Regional Economic

Groups
 Increased Trade in the Region
 Promotes Efficient Firms
 Improves Performance
 Reduction in Transaction Costs
 Price Transparency
 Promotes Investment
 Reduces Dependence
 Promotes International Peace
 Optimum Use of Resources

Negative Implications of Regional Economic

Groups
 Over-estimation of Trade Benefits
 Loss of Sovereignty
 Threat to Infant Industries
 Overexploitation of Resources of Underdeveloped Member Nations
 Restricts International Trade