How does export-led growth affect volatility? Here is an interesting discussion on this issue. There are four main mechanisms at play in the relationship between outward oriented growth strategy and volatility.
- Terms-of-trade volatility and output: TOT can directly affect output and growth. Decline in exports and export prices would severely affect balance of trade and revenues.
- Domestic market volatility and output: As export sector operates in tune with overseas market, domestic demand and supply shocks are less strongly correlated with output.
- Diversification and volatility: As countries diversify export items in tandem with more reach in overseas market, growth volatility decreases. More on this here.
- Specialization and volatility: Specialization in exports reduces growth volatility if the specializing and exporting nation is a high income one. The demand for their product is pretty much inelastic.
“The stabilization effects of export product diversification are noticeably more consistent than that for export market diversification. This finding suggests that developing-country policymakers should emphasize measures that help broaden their countries’ manufacturing base, and expand the range of exportable products.
There are also a number of steps that governments can take domestically to help the private sector diversify its export base. Rather than protecting domestic producers with “infant-industry” tariffs—a classic inward-oriented strategy—policymakers can remove barriers to domestic market entry, and thereby encourage innovation and development of new markets by companies at home.
There is also strong evidence that better trade facilitation (that is, the reduction of fixed and variable costs associated with moving goods across borders) can be highly effective in promoting export diversification. Practical steps—such as the removal of red tape affecting exports and imports, and developing trade-related infrastructure and services—can make a major contribution to export diversification and help manage outward orientation.”