Friday, March 5, 2010

Export-led growth 2.0

A very interesting note about the future and trend of export-led growth by Canuto, Haddad and Hanson from PREM division at the World Bank. Does the slackening of import demand due to the global financial crisis from the world’s biggest importers, the US and the EU, mean that export-led growth model is dead? Not really. In fact, a new model is emerging out.

The increasing import demand from rapidly growing economies like China, India, and Brazil is filling up the slack left by weak import demand in the US and the EU. This means that South-South trade is partly picking up the slack. In fact, BRIC import share nearly doubled, from 9 percent to 17 percent, between 1996 and 2008. Other low and middle income counties increased their share of import demand from 8 to 19 percent. Meanwhile, import demand from high-income countries declined from 88 percent to 69 percent in the same time frame. The world trade flow is changing and South-South trade is picking up. Also, middle-income countries are driving export diversification of low-income countries. The export diversification index (concentration index) of low-income countries has seen an improvement of 10 percent between 1997 and 2007 (this means exports moving from being spread evenly across four products to seven products; note that three sectors namely petroleum products, food, and iron and steel accounted for 76 percent of low-income countries’ trade between 1998 and 2006). Is this a sign of export-led growth 2.0?

Due to the global financial crisis world merchandise imports fell by 36 percent between 2007Q4 and 2009Q2. It was thought that the slackening import demand from the main importers would imperil growth in the developing countries. However, they argue that most of the recent growth in low-income developing countries’ export was driven by import demand in other developing countries. This means that low-income developing countries will continue to rely on developing countries for export growth. To increase South-South trade further, they recommend reduction in non-tariff barriers, which account for nearly two-thirds of the protection faced by low-income exporters and upper-middle-income markets.

Recession in the big importers

Due to the intensity of financial crisis spilling into the real economy in the US and the EU, low-income countries that depend on exports of oil and apparel to these economies will suffer more. Mexico and Central American countries rely heavily on the US final demand. Similarly, Nigeria might feel a stronger pinch as it exports most of its oil to the US. Also, the 39 Sub-Saharan African countries that have preferential access in export of apparel to the US market under the AGOA might see decline in demand. Meanwhile, developing Europe, Central Asia, and MENA region might see slackening import demand from the EU. Between 2000 and 2008, the US and the EU-25 absorbed about 20 percent of low-income countries’ export growth. Of this 20 percent, nearly half comes from petroleum products. Apparel accounts for an additional 4.3 percent.

South-South trade is picking up

As the prominent importers’ import demand slow down, it is increasing in low- and middle-income countries. Between 1996 and 2008, import share from BRIC is up from 9 to 17 percent; from low- and middle-income countries up from 8 to 19 percent; and from high-income countries down from 88 to 69 percent. What is driving export growth in low income countries? It is rapid growth in the emerging economies (BRIC). They argue that higher growth rate in low- and middle- income countries explain 51 percent of export growth in low-income MENA region, 42 percent in low-income EU and Central Asia, and 21 percent in low-income Sub-Saharan Africa.

All this means that selective industrial policy could still be an important element of national economic policy in the low income countries. Also, there is already some form of rebalancing happening in global exports and imports.

For an earlier piece on the past and future of export-led growth model see this blog post.