Primary Export-Led Growth and Underdeveloped Countries | Economics

Contrary to the effect of exports on stimulating growth in the presently developed countries such as the US, Canada and Australia, the expansion of primary exports in the underdeveloped countries prior to 1950 did not transmit growth to the other sectors of the economy failed to achieve widespread development in these countries. As a result, many countries of Asia and Africa which experienced rapid growth of primary exports remained poor and underdeveloped as export expansion in these countries did not transmit growth to the rest of the economy.

Thus Meier writes, “In most cases, after a country was exposed to the world economy, its exports grew markedly in volume and in variety. Yet, despite their secular rise, exports in many countries did not act as a key propulsive sector, propelling the rest of the economy forward. Although the classical belief that development can be transmitted through trade has been confirmed by the experience of some countries that are now among the richest in the world. Trade has not had a similar stimulating effect for countries that have remained underdeveloped.”

Now the question arises why expansion in exports of underdeveloped countries of Asia and Africa failed to stimulate growth in the other sectors of these countries. Some attribute it to the development of their export sector by foreign capital that led to the growth of a dual economy in which production had export-biased and the pattern of resources allocation by the foreign capital was such that prevented economic development of other sectors. Mines and plantations were developed by foreign capital under colonisation.

Colonisers also often used taxation and coercion to keep plantations and mines supplied with cheap labour in many parts of Asia and Africa, especially India under the British rule. Besides, the trade policy adopted under the British rule was such that encouraged cheap imports of British manufactured goods produced with the minerals and raw materials exported by the British capitalists. The cheap imports of industrial products from Britain led to the decline of handicraft industries in India, displacing artisans and workers.

British policy was in favour of their own capitalist class and was not interested in the overall industrial growth of India. They used India as market for sale of industrial goods and source of supply of food, raw materials, minerals and plantation products to promote their industrial growth. Thus, from foreign trade India did not gain much and its growth of exports during the colonial rule did not stimulate growth of the other sectors of the economy.

Thus, the foreign investment in agriculture, mines and plantations led to the development of ‘enclaves of development’ which failed to transmit growth to the other sectors of the economy. Not only in case of India but also many other countries, especially in Asia and Africa, which developed as a result of foreign capital induced growth of exports, this did not lead to widespread growth of their economies.

Another factor that is said to be responsible for impeding growth in developing countries from expansion of trade or exports is what has been called demonstration effect. The higher consumption standards of the developed countries raised the propensity to consume of underdeveloped countries and thereby reduced their saving rate. The lower saving rate led to the smaller investment rate that acted to lower growth in the underdeveloped countries and nullified the growth-augmenting effect of expansion in exports of primary products.

However, against this it has been contended by some economists that international demonstrative effect also works to increase incentives to supply more work effort and other productive services. In our view this favourable demonstration effect has been quite weak compared to the adverse demonstration effect. An important reason given for inadequate growth of primary exports is sluggish demand growth for primary products of the underdeveloped countries by the industrialised developed countries.

Ragnar Nurkse had pointed out structural shifts in the demand pattern in the developed countries that caused slower growth in exports of primary goods of the underdeveloped economies. In accordance with the well-known Engel’s Law of Consumption the demand for staple foods and beverages in the industrialised developed countries grew more slowly than their income. For the industrialised countries it was estimated that income elasticity of demand for foodstuffs was less than 0.5. As a result, their imports of foodstuffs lagged behind their income growth.

Besides, technological changes in the manufacturing sector worked to lower the demand for primary raw materials as producers attempted to reduce the wastage in the use of raw material products and also to increase the yield of finished products from a given quantity of raw materials. Thus, as a result of improvement in technology metal cans began to use less tin, modern looms wasted less cotton yam, saw mills began to turn wood shavings into boards and so forth.

However, it may be noted that such gloomy prospects for expansion of primary exports may not hold good in case of all primary goods and all primary-exporting countries. Many of the materials which were hardly there at the beginning of the 20th century became prominent exports after 1950 and registered substantial growth. Thus, the demand for petroleum, rubber, copper, aluminium, newsprint, plywood, vegetable oils and soybean products recorded high growth and led to the substantial increase in their exports by developing countries as a result of earlier technological development. Countries of Malaysia, Jamaica, Liberia, Jordon, Kenya, Ivory Coast and Thailand experienced a rapid growth of traditional exports.

What follows from above is not the primary exports of developing countries will register high growth in future but demand for some commodities will rise substantially and the countries producing them will gain substantially and the countries producing them would achieve rapid growth in their exports. But for the developing countries as whole prospects for rapid growth in exports of primary products as a result of the operation of the factors are quite bleak. To conclude, “With slower growth in industrial countries, the impact of Engel’s law and materials saving innovations, it seems unlikely that developed countries will import enough tropical foods and raw materials to fuel an era of rapid development for the Third World during the rest of this century.”

Another important factor that has acted to dampen the positive effect of expansion of exports of primary products as emphasised by Prebisch and Singer is the deterioration of terms of trade of the underdeveloped countries. Though this has been challenged by some but the dominant view is that in the nineteenth century terms of trade between primary goods-exporting countries and manufactured goods-exporting countries declined for the underdeveloped countries. This prevented the export- expansion from stimulating the growth in other sectors of underdeveloped countries of Asia and Africa.

According to Meier, a more important explanation why export-led growth occurred in some countries but not in others is “to distinguish the differential effects of the integrative process by focusing on the stimuli in different countries from their exports and on the different response mechanism within the exporting countries”, He argued that in the underdeveloped countries where export-led growth did not occur techniques of production in the export sector was the same as already in use in other sector or the expansion of export sector took place by widening of the production function without any change in the production technology.

To quote him, “If the introduction or expansion of export crops involves simple methods of production that do not differ markedly from the traditional techniques already used in subsistence agriculture, the stimulus to development will clearly be less than if the growth in exports entailed the introduction of new skills and more productive re-combinations of factors of production”.

Weak Linkages:

The export sector may grow rapidly, yet it still fails to induce widespread development of the economy if linkages of the export sector are quite weak and ineffective. As pointed out by Hla Myint in case of underdeveloped countries the growth of exports of planation industry and most of the mining industries did not transmit growth to the other sectors of the economy remained only enclaves, isolated from the rest of the economy as a result of ineffective linkages, both forward and backward, in underdeveloped countries.

Generally, neither backward linkages to suppliers of production materials nor consumption linkages worked to stimulate overall growth of underdeveloped countries. Of course, in some cases railroads and ports built for the mines helped the growth of other industries by lowering costs and inducing investment. Further, with the exception of planation agriculture in Colonial Africa, the linkages of agricultural export sectors have been quite ineffective to stimulate growth in other sectors of the underdeveloped countries.

It is due to the weak linkage effect or non-operation of spread effect from the growing export-sector that led to the development of dual economy in the underdeveloped countries such as India with labour abundance. Gills, Perkins, Roemer and Snodgrass rightly point out that, “The high wages typically paid in capital-intensive petroleum and mining sectors which often provide high wage standards for union bargaining and government minimum wages in other sectors. As wages rise, the prospects for development based on abundant low-cost labour diminish. The dualistic structure is perpetuated, with a small but relatively high income workforce in modern employment and a large low-productivity workforce of farmers and marginal urban workers, the latter mostly in casual employment and petty services”.