Export-led growth: Still a viable strategy after the crisis?

Mona Haddad, Ben Shepherd 12 April 2011

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In the midst of the global financial crisis, an article in Foreign Affairs claimed that “the era of export-led growth is over in its current form” (Klein and Cukier 2009). True enough, the open economy’s role in allowing the financial crisis – and accompanying trade collapse – to propagate throughout the world has led in some quarters to a wide-ranging reassessment of the role that economic openness should play, particularly in developing countries. Nonetheless, we argue that export-led growth remains the only viable development strategy.

The new consensus on openness and growth

There is little doubt that economic openness and export-led growth have brought major benefits to a wide range of countries, most famously in East Asia. No country in the past 50 years has sustained high levels of growth and increased per capita incomes significantly without greatly expanding its imports and exports. Although the academic literature on openness and growth ground to a stalemate of result and counter-result in the early 2000s, there is now highly consistent and largely uncontested evidence that firms in more open sectors tend to be more productive, and experience faster productivity growth (e.g. Pavcnik 2002). This new outlook in the literature is reflected in the continuing policy-level consensus on the potential of outward-orientation to help promote economic growth and raise living standards. This consensus is evident in the resilience of the world trading system to the extreme shock of the global financial crisis and accompanying great trade collapse. Although there has been some increase in protectionist activity – most notably in the “murky” areas of subsidies and government procurement, and in WTO-consistent mechanisms such as antidumping – the economic impacts have remained quite limited. For example, Bown and Kee (2011) find that although the stock of products affected by G20 temporary trade barriers such as antidumping increased by 25% between 2007 and 2009, this move only affected 0.3% of total trade. Continued vigilance through monitoring mechanisms is of course necessary, but the overall assessment must be that, compared with historical crises, governments have thus far been quite successful in containing protectionist pressures.

One area in which greater attention to protectionism is warranted, however, is south-south trade. Trade among developing countries has become steadily more important over recent years, and this trend is likely to intensify in the future. So it is concerning that recent use of temporary trade barriers has had a strong south-south flavour (Figure 1); 68% of the stock of 2009 temporary trade barriers imposed by developing countries affected the exports of other developing countries (Bown and Kee 2011). The new potential trade among developing countries cannot be fully exploited if rates of protection facing South-South trade do not go down further – to the levels of south-north trade.

Figure 1. Combined G20 use of selected temporary trade barriers by import source, 1997-2009

Source: Bown and Kee (2011).

South-south trade: The new motor of export-led growth

So what does the future of export-led growth look like? One important force that needs to be taken into account is the trend towards global rebalancing between surplus and deficit countries. The US’s voracious appetite for imports might slacken off further, even though macroeconomic fundamentals in deficit and surplus countries alike mean that some level of global imbalances is likely to persist in the medium term (Nguyen and Servén 2011).

Does this dynamic – contracting import demand in a historically important market – make export-led growth a less viable strategy for developing countries? In fact, the data suggest it is an intensification of a trend that has been apparent for at least 15 years. Developing countries, and in particular the BRICs, are becoming consistently more important as sources of world import growth (Figure 2; Hanson 2011). The share of high-income countries, including the US, in world imports has been steadily declining, yet countries like China have implemented highly successful export-led growth strategies. Going forward, we expect that south-south trade will become particularly important as a source of export-led growth for developing countries, provided that policymakers remain committed to the progressive opening of those markets. As just one example of the importance of this phenomenon, Wang and Whalley (2011) estimate that Southern trade will account for 50% of China’s total trade by 2020.

Figure 2. Share of world imports by importer income group

Source: Hanson (2011).

Policy priorities for managing openness

At a policy level, the consensus in favour of an increasingly open world economy has not really been dented by the crisis and its aftermath. Should difficult economic conditions persist, protectionist pressures could of course increase. Nonetheless, the WTO’s rules-based trading system has proved remarkably strong in the face of the great trade collapse that accompanied the financial crisis. Despite the continued lack of momentum in the Doha Round negotiations, the medium-term outlook must be considered positive. In other words, the main foundation for export-led growth – a relatively open world trading system – is likely to persist well into the future.

Although the fundamentals are promising, developing country policymakers have a number of important priorities going forward if they are to successfully manage their integration into the world trading system. The first one is to lower the barriers facing developing country exports to other developing countries, which are often higher than those faced when exporting to high-income countries. As noted above, increased use of temporary trade barriers during and following the crisis had a strong south-south element. Policymakers need to contain the inevitable political pressures to resort to these kinds of measures more often in the future, all the more so in light of the importance that south-south trade is likely to assume as a motor of export-led growth.

Another important lesson from the crisis period is that although openness can bring major economic benefits, it is by no means a panacea for development. No set of policies is. It is important for developing-country policymakers to have instruments available to help them maximise the benefits of openness and minimise the volatility that might come with it. Although more open economies tended to be hit harder by the crisis (Eichengreen 2011), some countries such as Chile were able to leverage strong macroeconomic fundamentals to recover quickly (Zahler 2011).

In addition to strengthening fundamentals, policies that promote export diversification are an important example of a set of instruments that can help manage openness. There is now solid empirical evidence that the link between openness and domestic economic volatility is weaker for countries with more diversified export bundles. Improvements in areas such as trade facilitation and reducing barriers to market entry can play an important role in diversifying the range of products a country exports, as well as the number of overseas markets it deals with (Haddad et al. 2011). Both types of diversification can act as “shock absorbers”, and are an important aspect of managing openness in developing countries.

This column summarises material from Haddad and Shepherd (2011). The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not represent the view of the World Bank, its Executive Directors, or the countries they represent.

References

Bown, C and HL Kee (2011), “Developing Countries, New Trade Barriers, and the Global Economic Crisis”, in M Haddad, and B Shepherd (eds.), Managing Openness: Trade and Outward-Oriented Growth after the Crisis, World Bank.

Klein, B and K Cukier (2009), “Tamed Tigers, Distressed Dragon”, Foreign Affairs, 88(4):8-16.

Eichengreen, B (2011), “Managing Openness: Lessons from the Crisis for Emerging Markets”, in M Haddad, and B Shepherd (eds.), Managing Openness: Trade and Outward-Oriented Growth after the Crisis, World Bank.

Haddad, M, J Lim, L Munro, C Saborowski, and B Shepherd (2011), “Volatility, Export Diversification, and Policy”, in M Haddad, and B Shepherd (eds.), Managing Openness: Trade and Outward-Oriented Growth after the Crisis, World Bank.

Haddad, M, and B Shepherd (eds.) (2011), “Managing Openness: From Crisis to Export-Led Growth v2.0”, in M Haddad, and B Shepherd (eds.), Managing Openness: Trade and Outward-Oriented Growth after the Crisis, World Bank.

Hanson, G (2011), “Changing Dynamics in Global Trade”, in M Haddad and B Shepherd (eds.), Managing Openness: Trade and Outward-Oriented Growth after the Crisis, World Bank.

Nguyen, H, and L Servén (2011), “Global Imbalances: Past and Future”, In M Haddad, and B Shepherd (eds.), Managing Openness: Trade and Outward-Oriented Growth after the Crisis, World Bank.

Pavcnik, N (2002), “Trade Liberalization, Exit, and Productivity Improvement: Evidence from Chilean Plants”, Review of Economic Studies, 69(1):245-276.

Wang, J, and J Whalley (2011), “China’s Trade and Investment with the South Pre- and Post-Crisis”, in M Haddad and B Shepherd (eds.), Managing Openness: Trade and Outward-Oriented Growth after the Crisis. World Bank.

Zahler, R (2011), “The International Crisis and Development Strategies: The Case of Chile”, in M Haddad, and B Shepherd (eds.), Managing Openness: Trade and Outward-Oriented Growth after the Crisis, World Bank.

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Topics:  Development International trade

Tags:  global crisis, export-led growth