The Future of Export-Led Growth: a general assessment

Otaviano Canuto Vice President and Head of Network Poverty Reduction and Economic Management The World Bank
Presentation at the Carnegie Endowment for International Peace June 29, 2009

Key Messages
Export-led growth strategies propelled developing countries to higher levels of economic growth over the past two decades Current financial crisis triggered a decline in trade and the diffusion/deepening of export-led growth strategies tends to become harder Trade openness and export diversification remain key drivers for growth and development but substitutes for currency undervaluation and large current-account surpluses will have to be used

1. EXPORT-LED STRATEGIES AND THE LONG BOOM

Financial crisis after a long boom

8
Developing

6 4 2 0 -2
1981 1985 1989

Growth of real GDP, percent

High-income

1993

1997

2001

2005

2009
4

Source: World Bank: 2009 GEP.

Global current account (im)balances

Source: The Turner Review, FSA, March 2009

US current account deficit and gross capital flows

Source: The Turner Review, FSA, March 2009

Foreign-ownership of marketable US Treasury bonds as percentage of total amounts outstanding

Source: The Turner Review, FSA, March 2009

Household debt as proportion of the GDP

Source: The Turner Review, FSA, March 2009

2. BASIS OF GROWTH: EXPORTS, TRADE SURPLUS, OR INDUSTRIALIZATION?

Rapid growth associated with openness

Average real GDP per capita growth (1997-2007)
Real Exports / GDP in 1997

1.2

0.8

0.6

0.4

0.2

0 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16
10

Source: World Bank Group - DECPG

Speed of openness positively associated with faster growth

Change in Real Exports / GDP (2007-1997)

Average real GDP per capita growth (1997-2007)

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16

Source: DECPG
11

Dependence on fewer exports exposes countries to terms of trade shocks

Developing Countries: Terms of trade volatility (1996-2006)
30

Terms of trade volatility

25

20

15

10

0 0 10 20 30 40 50 60 70 80 90 100

Concentration Index
Source: Gamberoni and Newfarmer, 2009 based on authors calculation based on World Bank, World Development Indicators

Necessity products are more inelastic and less affected by demand shocks
US Import Growth by Industry (in U.S. dollars relative to the same month last year)

Foodstuffs Necessities - Medical stuff Innovations - Cell phones - Environmental products Services

Industry September October November December January February Animal & Animal Products 7.45 -2.20 -4.00 0.69 -7.90 -13.11 Vegetable Products 24.20 18.58 6.59 11.26 -1.23 -8.02 Foodstuffs 19.76 7.93 -3.15 4.66 -6.03 -9.50 Mineral Products 34.01 25.18 -27.90 -35.23 -50.02 -53.61 Chemicals & Allied Industries 26.42 14.00 -3.14 13.34 -11.14 -19.13 Plastics / Rubbers 13.98 8.10 -0.58 -5.97 -14.52 -31.11 Raw Hides, Raw Hides, Leather & Furs 8.28 -1.12 -9.71 -5.08 -3.76 -25.90 Wood & Wood Products -5.41 -9.97 -15.64 -16.85 -25.77 -27.80 Textiles 2.01 -0.40 -10.41 -4.58 -9.40 -19.09 Footwear / Headgear 7.37 7.31 -3.86 -1.19 5.00 -19.77 Stone / Glass 8.49 -14.91 -24.18 -20.14 -34.48 -41.53 Metals 25.29 15.59 1.65 -5.95 -13.01 -33.68 Machinery / Electrical 4.49 -4.26 -16.17 -13.18 -19.46 -26.19 Transportation -10.79 -21.79 -26.51 -21.05 -42.71 -51.49 Miscellaneous 4.68 -1.63 -11.16 -5.90 -14.20 -26.35 Other 6.42 6.08 -4.81 -1.95 -10.95 -6.54 Total 11.59 Source: U.S.I.T.C. and authors' calculations. 2.61 -16.02 -14.58 -26.59 -34.14

March -2.97 -9.72 0.28 -50.74 -9.60 -21.55 -14.21 -26.02 -11.20 -6.77 -34.38 -33.09 -21.45 -45.28 -14.42 -12.41 -28.94
13

Services trade is more robust

0 -10 10

Japan Brazil Indonesia Mexico United States Switzerland Euro area Italy NewFrance Zealand Germany Australia Poland Netherlands United Kingdom Portugal Czech Republic Spain Slovak Republic Hungary Denmark Belgium Greece Luxembourg Korea Ireland Finland Sweden Norway Turkey Canada

-30

-20

-30

-20 -10 Growth Rate Services Imports

10

Quarterly Growth Rates Imports 45 degree line

Source: Borchert and Mattoo (2009)

Source: Rodrik, D. , Growth after the crisis, 2009

Source: Rodrik, D., Growth after the crisis, 2009

Source: Rodrik, D., Growth after the crisis, 2009

Export-led Growth
Revisiting Arthur Lewis and Hla Myint A non-linear and non-spontaneous leap from traditional non-tradables to non-traditional tradables (institutional weaknesses and market failures) Undervaluation as a particular industrial policy Relevance of local technological learning as a complement to structural change Over-absorption in industrial countries made possible by structural change in developing countries

3. THE CRISIS AS A TURNING POINT

19

Pace of decline in trade is easing on a momentum basis goods exports, nominal, qtr/qtr ch% (saar)
Developing Countries

Source: Thomson/Datastream

Does this signal signs of recovery?

Baltic Dry Index, June 20082009, monthly
14000 12000 10000 8000 6000 4000
250

Major Price Indices

Indices of Nominal US$ Prices (2000=100)
500 450

Energy
400 350 300

Metals and Minerals

2000 0
200 150 May-07
Source: Baltic Dry Index, June 2009

Agriculture

Nov-07

May-08

Nov-08

May-09

Source: World Bank Development Economics Prospects, June 2009 21

The New Global Environment

- Deleverage and Financial Introspection: less external finance - Lower growth in industrial countries (effects of the crisis on the potential growth rate) - Less tolerance with current-account large imbalances

Source: Barclays Capital, March 23, 2009

Capital flows down by two-thirds from first-quarter 2008 levels

Gross capital flows to emerging markets $ billion 2007 Q1 Total Total Bonds Banks Equity Lat. America Bonds E. Europe Bonds Asia Bonds Others 156 58 72 26 42 20 79 27 24 8 11 652 146 312 194 156 45 247 64 188 23 61 2008 Q1 Total 103 12 71 20 19 5 36 2 38 3 11 389 65 257 68 90 20 157 35 98 7 44 Jan 23 9 8 6 9 5 5 2 8 2 0 2009 Feb 8 7 1 1 3 3 1 1 4 3 1 Mar 9 2 5 2 4 2 0 0 2 0 2 Q1 40 18 13 8 17 10 5 3 14 5 3

Source: DECPG Finance Team.

Implications for Export-led Growth

Export pessimism and the fallacy of composition Flying geese and the recent boom features In the absence of undervaluation, subsidies to promote tradables?

A higher role for domestic demand expansion?

Shifting geographical distribution of global demand? Open trade still fundamental (inc. to circumvent mismatch between local production and demand & to help small countries accrue economies of scale)