Manufacturing Export-Led Growth: Reason and Success | Economics

In this article we will discuss about:- 1. Reasons for the Adoption of Manufacturing Export-Led Growth Model 2. Success of Manufacturing Export-Led Growth in Japan, South Korea and East Asian Countries 3. Demand Linkages.

After the Second World War many underdeveloped countries attained freedom from the colonial rule. They were now free to decide about the appropriate trade strategy. They had suffered from the exports of primary goods in exchange for manufactured goods. Besides, the findings of eminent economists, such as Raul Prebisch and Hans Singer showed that exports of primary goods were income inelastic and therefore their expansion would cause deterioration in terms of trade for underdeveloped countries.

Therefore, many developing countries, especially India and Latin American countries (with the exception of Brazil), adopted import-substituting industrialisation strategy. Indian planners in the 1950s thought that there was little possibility of expansion of primary exports and therefore Mahalanobis growth model which emphasised the role of basic heavy industries and capital goods industries for industrial development formed the basis of India’s Second Five Year Plan (1956-61).

Mahalanobis growth model was based on export-pessimism and assumed a closed economy and laid stress on the import-substituting industrialisation with a higher priority to basic heavy industries and capital goods industries in the resource allocation in the public sector while the development of consumer goods was left to the private sector which were protected by imposing high rates of tariff and quantitative restrictions on their imports. On the other hand, Latin American countries from the very beginning opted for import-substitution of consumer goods industries and imported capital goods for their development.

With the initiation of economic reforms in 1991 India started giving export orientation to its strategy of industrial growth. However, before India, from the mid-nineteen sixties onwards East Asian countries of South Korea, Taiwan, Singapore, Hong Kong and even China in nineteen eighties adopted manufacturing export-led growth strategy to promote their development.

Reasons for the Adoption of Manufacturing Export-Led Growth Model:

Now, what are the reasons which prompted the adoption of manufacturing export-led growth model? First reason is the traditional comparative cost theory according to which it benefits the countries if they produce and in specialisation the production of those goods in which they have comparative advantage and export a major part of them and import the goods from other countries which can produce them comparatively more efficiently. In this way they can raise the living standards of their people.

This emphasis on specialisation on the basis of comparative costs was supported by Hecksher and Ohlin theorem according to which there is difference in factor endowments of different countries. For example, some countries are labour-abundant and some, especially rich developed countries, are capital-abundant countries. Therefore, according to Hecksher-Ohlin theorem, the developing countries which are abundant in low-skilled labour can produce labour-intensive goods comparatively at a lower cost and rich developed countries which have abundant high-skilled labour and capital would benefit from concentrating on the production of capital-intensive goods which they can produce at a comparatively lower cost per unit.

Another important reason for adopting manufacturing export-led growth strategy by developing countries was the realisation that expansion in exports of manufactured goods by them can overcome the small size of the domestic market (i.e., low level of aggregate demand) for industrial goods. The third reason for giving up export-pessimism was that various countries (including India) was that with adoption of strategy of import-substituting industrialisation various developing countries experienced trade deficit and balance of payments difficulties without giving a push to the expansion of their exports of goods to pay for imports of raw materials and capital goods which were essential for their industrial growth.

Modern manufacturing industries are capital-intensive and require large-scale production enjoying economies of scale. This requires a larger market to sell the manufactured products. The growth of exports as a result of opening the economy to foreign trade ensures wider market for goods and services and greater division of labour. This raises the productivity of resources through growth of specialised skills and introduction of specialised techniques and capital equipment in the export sector. Therefore, international trade causes increase in capital accumulation and technological progress and raises the productivity of labour and other resources. As Hla Myint points out, “The increase in productivity in the export sector and the rising real incomes they generate also spread to the rest of the economy resulting in export-led growth by the manufacturing sector.”

Success of Manufacturing Export-Led Growth in Japan, South Korea and East Asian Countries:

The success of export-led growth began with Japan which through growth of exports and its spread effect on Japanese economy became within few decades after the Second World War the second largest economy of the world. It achieved a high rate of sustained economic growth never witnessed before and was therefore called ‘Japanese Miracle’ Again, South Korea also achieved rapid growth both in income and employment by recording rapid growth in exports of products of labour-intensive industries whose benefits accrued widely in the South Korean population.

Then, the success of Japan and South Korea from export-led growth was followed by East Asian Countries of Taiwan, Hong Kong, Singapore and then by Thailand, Indonesia and Malaysia since the mid-sixties to mid-nineties. These East Asian countries achieved a growth record unmatched by the other developing countries. Their rapid development experience through expansion of exports has therefore been called ‘East Asian Miracle’.

Now, an important question that has been raised is what has caused rapid growth of the East Asian countries by adopting an export-led growth strategy or which is also outward-looking development strategy. Bhagwati and Kruger have attributed the high growth of the East Asian countries to removal of restrictions on trade and emphasizing international competitiveness or more generally through adopting export-oriented strategy of development.

The contention of Bhagwati and Kruger has been that it is the policy of free trade and export-orientation of these countries based on comparative advantage that generated high growth of their G DP. Arthur Young, explaining the reasons for higher growth of East Asian countries, pointed out that increase in total factor productivity (TFP) made only a modest contribution to higher growth achieved by East Asian countries and it was the usual high rate of capital accumulation and greater use of labour that accounted for high GDP growth rates achieved by East Asian countries.

However, some economists, prominent among them is Paul Krugman, expressed the view that since high rates of capital accumulation or investment in East- Asian countries was debt-driven, it was therefore unsustainable. Their prediction proved to be correct as GDP growth in East Asian countries slowed down after 1995 and they faced a serious crisis due to difficulties of repayment of debt.

Now, expansion of exports of manufactured products did not have stimulating effect on the growth of other sectors of some developing economies. Some countries as India and Latin American countries influenced by Nurkse and Raul Prebisch’s writings about the bleak prospects for exports of underdeveloped countries deliberately adopted import-substituting industrialisation strategy. For the export sector to have a more stimulating effect on the widespread growth of underdeveloped countries it is necessary that export sector should not remain an ‘enclave’ separate from the rest of the economy.

Instead, integrated process of development should be built up so that stimuli from the export sector diffuse to the rest of the economy and create response in other industries of the economy. G.M. Meier rightly writes, “A more convincing explanation of export-led development has occurred in some countries but not in others would therefore distinguish effects of the integrative process by focusing on the varying strength of the stimuli in different countries from their exports and on the different response mechanism within the exporting countries”.

Different manufacturing exports will provide different stimuli to the other industries or sectors depending on the technological characteristics of their production. The nature of production functions of goods being exported determines the extent of other secondary changes in the rest of the economy. If the productions of goods being exported have different input coefficients, there will be different rates of learning and different linkage effects through which it will induce growth in other industries.

The extent of processing goods for exports will create important external economies by way of increasing the learning process. If the goods for export use modern methods in their production they will benefit other activities and industries through the spread of technical knowledge, training of labour, demonstration of new production techniques that might be adopted and used in other industries in the economy. Besides, the use of modern methods in export sector promotes organisational and supervisory skills in the economy which promote widespread growth of the economy.

In contrast, if the export sector uses same techniques as being already used in other sectors of the economy, it will have negligible spread effect on the growth in other sectors of the economy. On this issue, to quote Meier again, “More favourable linkages may stem from exports that require skilled labour than from those using unskilled labour. The influence of skill requirements may operate in various ways – greater incentives for capital formation may be provided through education; on-the-job training in the export sector may be disseminated at little real cost through the movement of workers into other sectors or occupations; skilled workers may be source of entrepreneurship; skilled workers may save more of their wage incomes than the unskilled workers”.

Demand Linkages:

Apart from affecting supply-side factors by increase in exports, the nature of production function of goods to be exported determines the distribution of income which in turn determines the demand pattern of goods and increases the employment opportunities in the economy. If in the production of the export-commodity capital-intensive techniques are used, share of profit relative to those of wages will be higher which will cause inequalities in income distribution. The recipients of profits have lower marginal propensity to consume and therefore not only direct demand effect will be small but also demand pattern and therefore resource allocation in favour of luxury goods will take place, some of which may be imported and thereby affecting the foreign exchange situation.

On the other hand, as in case of South Korea and Japan if in the production of export commodity labour-intensive techniques are used, this will not only cause more growth of employment but also generate greater demand for domestic goods. Both these effects will lead to the increase in both income and employment. Meier therefore writes, “If the internal distribution of the export income favours groups with a higher propensity to consume domestic goods than to imports, the resultant, distribution of income will be more effective in raising demand for home produced goods and to the extent that these home produced goods are labour-intensive, there will be more of an impact on employment. In contrast, if income is distributed to those who have a higher propensity to import, leakages through consumption of imported goods will be greater. If income increments go to those who are likely to save large portions, the export sector may also make a greater contribution to the financing of growth in other sectors.”

Furthermore, if production of export commodity is subject to large economies of scale, this will require a greater amount of financing for setting up enterprises for which borrowing of foreign capital or investment by foreigners will be needed. This will have a dual effect. One, foreign investment will have a multiplier effect on increases in output and employment in the domestic economy. Second, this may lead to the outflows of profits made by foreigners instead of further reinvestment of profits in the domestic economy.

Therefore, net effect of foreign investment requires assessment of its costs and benefits and this will also depend on the nature of export sector in which foreign investment takes place. Besides, as has been recently witnessed, the spillover effect of exports will also depend on the instability in export receipts as a result of fluctuations in world trade and global economic environment. This instability in exports will have repercussions on the domestic economy affecting steady growth of income and employment and also causes fluctuations in foreign exchange rate. Meier sums up the factors determining the stimulating effect of integrating process (that is, exports and imports of goods and services and also flows of capital) on the domestic economy in the following way –

We would normally expect the stimulating forces of integrating process to be stronger under the following conditions – the higher the growth rate of the export sector, the greater the direct impact of the export sector on employment and personal income, the more the expansion of exports has a “learning effect” in terms of increasing productivity and instilling new skills, the more the export sector is supplied through domestic inputs instead of imports, the more the distribution of export income favours those with a marginal propensity to consume for domestic goods instead of imports, the more productive is the investment resulting from any saving of export income, the more extensive are the externalities and linkages connected with the export sector, and the more stable are the export receipts that are retained at home. Some exports fulfill these conditions more readily than others and countries specialising on these exports will enjoy greater opportunities for development”.

Even the stronger stimulus from the exports sector does not guarantee the transmission of growth by it to the other sectors of the economy as this transmission mechanism depends upon other conditions in the economy. The weak propelling force of exports in developing countries depends not only on weak stimulus of particular export sector but also on a number of other factors such as lack of adequate infrastructure, skilled labour and education in the domestic economy that hinders the transmission of benefits to the rest of the economy even when the stimulus of export base may be strong.

Now, we have to explain on what factors the strength of the response or diffusing mechanism in the domestic economy to the stimulus from export base depends.

These factors are as follows:

1. The extent of market imperfections – that is, the existence of monopolies, oligopolies and other forms of imperfect competition in the domestic economy the les the imperfections, the greater the transmission of expansion in exports to increase growth in the rest of the economy.

2. The non-economic impediments, as explained above, in the general environment of the economy. The smaller these impediments, the greater the diffusing growth effect of stimulus of exports.

3. The extent of developed infrastructure in the domestic economy. The greater the availability of developed infrastructure in the domestic economy, the greater will be the spread effect on growth of stimulus from exports.

4. The extent of development of human resources (i.e., skills and education of the workforce) which determines the learning rate of the economy.

5. The existence of price distortions that reduce the efficiency of resource allocation and therefore affects the spread effect on the growth from stimulus of export base.

6. The greater the existence of entrepreneurs in the economy and capacity to bear risk on their part. The greater the supply of entrepreneurs and greater the capacity to bear risk, the greater the response to the stimulus of exports in terms of transmitting growth to other industries in the economy.

7. The mobilisation of surplus over consumption in the form of taxation and saving. The greater the surplus, over-consumption and taxes, the greater the amount of funds avoidable for investment which are needed for growth in other sectors of the economy in response to the stimulus from exports.

The above factors determine the economic fundamentals. If these are strong, the various sectors (such as agriculture, various industries and services) of the economy will respond more in generating growth of output to the stimulus provided by exports.

Many developing countries were pessimistic about the possibility of expanding exports rapidly. Japan, South Korea and later East Asian countries and recently China have proved that manufacturing export-led growth is possible. Now, since 1991 when economic reforms were initiated, India too has given up export-pessimism and relying exclusively on import-substitution industrialisation.

India’s exports in the last 15 years have been growing at a rapid rate and have also shown good spread effects within the Indian economy. As a result of several policy initiatives by the Government, the share of manufactured products in our exports has substantially increased while that of traditional exports consisting of primary products (i.e. agricultural and mineral products) has declined.

Thus “it is important that the less developed countries pursue policies that will ensure that they specialise as much as they can in exports with the highest growth prospects. To do this, a country must have the capacity to reallocate resources to exports of goods for which demand may be rising rapidly. Of special significance is the country’s potential for taking advantage of new export opportunities in manufactured goods. The exports of manufactured commodities may play a strategic role in transmitting development to some poor countries that have a favourable factor endowment and can gain a comparative advantage by utilising labour-intensive methods”.