Tuesday, July 19, 2011

Is export-led growth dead?

This paper traces the rise of export-led growth as a development paradigm and argues that it is exhausted owing to changed conditions in emerging market (EM) and developed economies. The global economy needs a recalibration that facilitates a new paradigm of domestic demand-led growth. Globalization has so diversified global economic activity that no country or region can act as the lone locomotive of global growth. Political reasoning suggests that EM countries are not likely to abandon export-led growth, nor will the international community implement the international arrangements needed for successful domestic demand-led growth. Consequently, the global economy likely faces asymmetric stagnation.

Here is the full working paper by Thomas Palley. He concludes that we should abandon strategies aimed at attracting export-oriented foreign direct investment and institute a new paradigm based on a domestic demand--led growth model. Otherwise, the global economy is likely to experience asymmetric stagnation and increased economic tensions between emerging-market and industrialized economies.

Well, export-led growth strategy might be so for emerging markets and industrialized countries, but might be equally relevant to LDCs as it was for the now emerging markets. Canuto, Haddad and Hanson (2010) argue that the slack in demand in developed countries is filled up by the rising demand in emerging markets (including BRIC), leading to expansion of South-South trade. The 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). This means that low-income developing countries will continue to rely on developing countries for export growth. They argue that this shift is leading to export-led growth 2.0. Export-led growth model is not really dead for low income countries.