Export-Oriented Development Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Export-oriented development was a set of market driven prescriptions based on the policies followed by high-growth developing countries. Their adoption in developing countries was driven by a need to overcome the failures caused by inward-oriented, state driven industrial policies. Performance of export-led development has been mixed, leading to criticism and the proposal of alternative routes to development based on the creation of sustainable societies.

Industrial policy is defined as an intervention or policy by government that attempts to alter the local sectoral structure of production toward sectors that are expected to achieve higher levels of economic growth. These interventions can be direct, in the form of grants, or indirect, in the form of tariffs, trade restriction, and exchange rate management. Historically, these policies have been used by developing countries in an attempt to move from low to high income status and have been the subject of a significant amount of research to determine successful paths to development.

Prior to World War II, world trade was determined by comparative advantage, with each country producing and exporting the items that they could create competitively. Countries such as those in Western Europe and the United States focused on the production of manufactured goods as they possessed the skills and technology, exporting these goods to developing countries. Nonindustrialized countries specialized in the production of commodities or raw materials, most of which were transformed into finished products by firms in developed countries. During World War II, however, industrialized countries shifted production to military goods, leaving developing countries with shortages of consumer goods. Immediately after World War II, prices of the commodities that the developing countries traded for manufactured goods began falling, meaning that developing countries had to spend more of the foreign exchange they earned from commodity production to import manufactured goods.

As a result of these forces, many low and middle-income countries began ambitious programs after World War II to move from commodity producers to manufactured-goods exporters. The intent was to promote local industries to produce substitutes for goods that were imported in order to conserve foreign exchange and promote self-sufficiency. Targets were set for industrial investment and output growth, many of which attempted to change composition of industrial output from simple goods requiring little processing to complex manufactured items. Less developed countries’ governments employed three major policy tools in the attempt to guide industrial development within the domestic market—direct public investment in enterprises, licensing of private industrial activities, and the establishment of development banks.

The state became the dominant actor in local markets, producing goods directly and regulating the production of other items. The intention was to overcome local limitations by providing the tools required for large-scale industry: modern facilities, the ability to create new products, and distribution capabilities. To help these industries develop, the newly formed industries or infant industries were protected and supported. Protection took the form of tariffs, import quotas, and exchange rate controls to provide a cost advantage to local producers. Industries also were supported through licensing schemes to reduce the cost of capital goods acquisition and low cost loans.

Under these policies, Latin America improved rapidly from 1950 to 1970, with the major economies experiencing sustained growth rates of over 5 percent. Growth ended with global financial liberalization in the 1970s following the breakdown of the Bretton Woods system resulting in increased debt, inflation, and stalled growth during the 1980s in Latin America. Import substitution brought several problems. Heavy protection and subsidy promoted inefficient industries, with customers in these countries forced to pay higher prices than imports for locally produced products. The expected employment benefits in terms of higher-skilled jobs did not materialize, and in many countries the employment situation deteriorated. In many cases, imports actually increased, as infant industries brought in foreign capital goods and paid out royalties to obtain licenses for foreign technology.

While import substitution was failing in Latin America and elsewhere, Japan began its phenomenal sustained growth after World War II, followed by South Korea, Taiwan, Hong Kong, and Singapore. International agencies took notice and began prescribing the practices of these countries to developing countries, encouraging them to shift from state-led to market-led development. Some of these policy lessons were summarized in the form of the “Washington Consensus.” a listing of policy prescriptions created by economist John Williamson in 1989.

Generally, governments were encouraged to pursue macroeconomic stability, reduce the role of the state in the local economy and open their markets to international competition in exchange for market access from other countries. Increased international competition would force inefficient local industries to close or upgrade to improve productivity. Opening of financial and product markets would encourage foreign investment, bringing new technology. Finally, increased market access to developed countries would boost exports of locally produced items. The combination of these factors would boost domestic income and increase economic growth.

Criticism

Variations on these policy prescriptions became the dominant development ideology in the 1990s, implemented by countries in Latin America, Asia, and Africa in their pursuit of increased growth. However, many countries did not achieve the promise of high growth and the Asian financial crisis of the late 1990s opened the export-led model to criticism. As the Asian crisis demonstrated, financial liberalization can cause rapid outflows as well as inflows of capital, crippling economies.

The overwhelming focus on exports led to several additional problems. Many developing countries entered the same markets for manufactured goods, resulting in overcapacity and price competition. Income from these exports was therefore reduced as prices were lower than predicted. Some developing countries were willing to reduce the standards of worker and environmental protection to attract foreign investment, with potential long-term damage from environmental degradation. Multinational firms generally tended to make investments with mature or low-skill technology, retaining intellectual property development in developed countries. As such, the promised technological gains were never realized and local industry remained underdeveloped. Developing countries were also vulnerable to volatility in their export markets; slowdown in demand would reduce sales of their exports.

Recently, economists have used the above and other arguments to propose a broader-based view of development. In this perspective, development should take a long-term view and focus on improving the living standards of people in a sustainable manner while being sensitive to local conditions.

Countries should also focus on improving the local institutional framework so that they are better able to monitor and control development. The idea is to move away from a series of rigid policy prescriptions to a range of instruments that can be selected to improve local performance in specific economic and social contexts.

Bibliography:

Dervis and J. Page, “Industrial Policy In Developing Countries,” Journal of Comparative Economics (v.8, 1984);
Philipp Fink, Purchased Development: The Irish Republic’s Export Oriented Development Strategy (Lit, 2004);
Gore, “The Rise and Fall of the Washington Consensus as a Paradigm for Developing Countries,” World Development (v.28/5, 2000);
Sarkar and H. Singer, “Manufactured Exports of Developing Countries and their Terms of Trade since 1965,” World Development (v.19, 1991);
Anjum Siddiqui, India and South Asia: Economic Developments in the Age of Globalization (M.E. Sharpe, 2007);
Williamson, “The Washington Consensus Revisited,” in Economic and Social Development into the XXI Century by L. Emmerij (Inter-American Development Bank, distributed by Johsn Hopkins University Press, 1997);
Wang, F. Gao, and J. Qu, “Thought about Development of Export-oriented Economy,” Issues in Agricultural Economy (v.23/270, 2002);
Tatsufumi Yamagata, The Garment Industry in Cambodia: Its Role in Poverty Reduction Through Export-Oriented Development (Institute of Developing Economies, 2006).

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