Examine The Export Led Growth Strategy Economics Essay

Introduction

This paper is focused to examine the export-led growth strategy. This is always believed that the developing countries can enhance their economy growth through the export promotion strategies. The economists such as Giles and Williams (1999) mentioned about export led growth which strategy have positive relationship between export and economy growth. There are number of factors are highlighted in literature review which are responsible most in the export led growth model. All factors are mentioned in this paper in detail. This strategy has been adopted by many developing countries and emerging countries to become out from recession. Some countries are successful to achieve their development goals but some are not. This paper research is based on secondary data research. The secondary data research provides wide range of data to analysis. For example Foreign Direct Investment (FDI) report says that the analysis is based on primary as well as secondary data, while the primary survey provides limited information for the requisite analysis, the secondary database has been a major source of detailed firm- and plant-level analysis. The secondary database provided a rich source of plant-level data which has been used extensively in the analysis. The capitaline database provides data on more than 14,000 Indian listed and unlisted companies classified under more than 300 industries. The information used is based on FDI actually received (SEBASTIAN, N.J, 2010). In this report books, articles and journals used to examine the export-led growth and development policies of countries. The statics and data have collected from World Bank, Asian development bank and International Monetary Fund (IMF) reports. The debate is not new, in past two decades number of studies analysed on exports and economy development. Past studies such as (Krueger, 1978; Chenery, 1979; Tyler, 1981; Kavoussi, 1984; Balassa, 1985; Ram, 1985, 1987; Chow, 1987; Fosu, 1990; and Salvatore and Hatcher, 1991) in the favour of export led growth and economy development, but other studies such as ( Jung and Marshal, hereafter referred as JM,1985; Kwan and Cotsomitis, 1990; Ahmad and Kwan, 1991; Dodaro, 1993; Oxley, 1993; Yaghmaian, 1994; and Ahmad and Harnhirum, hereafter referred as AH, 1995) argue against the economy development. While we are examining the export led growth model in the point of view economy growth, then we also need to focus on globalisation as well. There are many types of globalisation for example globalisation of culture, globalisation of economy and globalisation of society. According to the Walker en Fox (1992) (MOSTERT, J, 2003) “the global integration of the financial markets can be seen as an example globalisation. Walker en Fox argues than the process of financial globalisation is the most important part of the process of globalisation.” Globalisation is the most important part of economy, Brittan (1998:2) states that “as a whirlwind of relentless and disruptive change which leaves governments helpless and leaves a trail of economic, social cultural and environmental problems in its wake” (MOSTERT, J, 2003). The world is connecting to each other via new technology, via phones, via satellite etc. But before 50 years ago it was not much easier then today. For example today Asian countries got number of mobile users. The big telecom companies of UK such as Vodafone and O2 are already invested in India (south Asia). Baldwin and Martin (1999) mentioned that “the innovations and advances in transportation, information and communications technologies” (RAJAN, Graham Bird and Ramkishen S., 2001). This report is mainly examining the export led growth model in developing countries. This paper examines the south Asia part of world and chosen country is India. This report is structured as section 2 brings overview of globalisation and literature review of globalisation, section 3 highlighted the economic globalisation and in section 4 impact of globalisation, in further section 5 is about the overview of developing economies, section 6 spells out export led growth model and literature review of export led growth model, section 7 presents the some recommendations on the basis empirical studies result, the section 8 will discussed about the export promotion strategies which are adopted by India and critical examine the strengths and weakness of these promotion strategies, in the final part of this report is section 9 summarizes the discussion and conclusion.

Overview of Globalisation

Globalisation is the modern way which is changing the world trade system and world politics. The globalisation is the way to reduces the barriers between two countries and interchange the goods, services, labour and capital. Globalisation is popular and cheapest way to reduce the transportation cost, communication cost. It is the faster way to communicate, lower trade barriers and to raise the capital flows. In the result of globalisation the developing economies becoming more close with the world. As per United Nations University, In the new era of growing integration of economies and societies, individuals and corporations reach around the world further, faster, and more economically than before (HESHMATI, Almas, 2005).

Literature review of Globalisation

Globalization has its roots in the second-half of the eighteenth century. The period 1870-2000 is classified into (i) the first wave of globalization 1870-1913, (ii) the de-globalization period of 1913-50, (iii) the golden age of 1950-73, and (iv) the second wave of globalization from 1973 onwards (see O’Rourke and Williamson 2000; O’Rourke 2001; Maddison 2001; Williamson 2002; and World Bank 2002) (HESHMATI, Almas, 2005). “Globalisation is a term that has become very popular and used in many different contexts in the literature. Before the impact of globalisation on Africa can be evaluated it is crucial that the meaning of globalisation should be clarified. The definition of globalisation should also be distinguished from terms like internationalization, regionalization and liberalization” (MOSTERT, J, 2003). Some claims that globalisation is the breakdown between countries border, economy and communities. Giddens (1999) has characterized as a ‘runway world’. ‘For better or worse’, he says, “We are being propelled into a global order that no one fully understands, but which is making its effects felt upon all of us” (HELD, David, 2000). But we look other definition of globalisation given by Guy Brainbant, he says “the process of globalisation not only includes opening up of world trade, development of advanced means of communication, internationalisation of financial markets, growing importance of MNC’s, population migrations and more generally increased mobility of persons, goods, capital, data and ideas but also infections, diseases and pollution” (GOYAL, Krishn A, 2006). He also pointed out the negative aspects of globalisation as well. O’ Brien (1992:5) also links the definition of globalisation to geographical borders. O’Brien distinguishes between national, international, offshore and global. National transactions take place between businesses in the same country (MOSTERT, J, 2003). In the end globalisation is related with exchange of service, goods or capital between countries. As Redding (1999:19) defines globalisation “the increasing integration between the markets for goods, services and capital, Redding’s definition also links globalisation to the breakdown of borders” (MOSTERT, J, 2003). The Globalisation is transforming trade, finance, employment, migration, technology, communications, the environment, social systems, and ways of living, cultures and patterns of governance (STREETEN, Paul, 1998).

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Economic globalisation

The concept of globalisation is very broad. The different people have different views and definitions about globalisation. Some economists view globalisation as positive effects on the world economy and world trade but some says globalisation has negative effects as well (see Bhagwati, 2002) (BHAGWATI, J, 2002). Today as we see the cultural, political and technological globalisation is important but we can’t ignore economic globalisation as well. Robinson (2001) mentioned that “”the fulcrum of the various definitions of globalization seems to be wealth or economic development, the parameters within which many schools of thought view globalization is usually based on trade or economic activity” (OBADAN, Mike I., 2008). The debate about globalisation is the lack of a clearly agreed definition of the concept- the word globalisation exists with many interpretations- but a clear concept is often missing (HELD, David, 2000). But if we see in general definition of globalisation is that it is free movement of goods, service, labour and capital across borders (HESHMATI, Almas, 2005). As this concept is not new debate globalisation was started from 18th century and now it is in second phase. Whenever the economic crisis came in world for example after World War II or 1991 the countries started international trade. The motive behind this only is economic growth. In today competitive world every country wants to compete other and want to become a rich and powerful country of the world. For example China and India they opened their gate for trade with world and they are on the top in economy growth. However globalisation is not only economic globalisation or not only social or political or cultural globalisation, in other words globalisation is a multifaceted (Daouas, 2001; Obadan, 2001b and 2002b; IMF Staff, 2002; UNDP (Nigeria), 2001, etc) (OBADAN, Mike I., 2008). The economic globalisation is the central term concept of globalisation. International trade is participating in shrink the world. For example in UK or USA you can get easily Asian food or goods, the main exports are India and Pakistan. Brazil is the world’s no.1 coffee exports and Malaysia is the world’s no.1 AC (Air Conditioner) supplier. Another example is Multinational Companies become the main careers of the economic globalisation like McDonalds, KFC and some examples of merger of MNC such as Tata Motors (India) merger with Jaguar (UK) and Tata India merger with Bangladeshi company to make bicycle for exports to USA. In 1996, there were altogether only more than 44,000 MNCs in the whole world, which had 280,000 overseas subsidiaries and branch offices. In 1997, the volume of the trade of only the top 100 MNCs already came up to 1/3 of the world’s total and that between their parent companies and their subsidiaries took up another 1/3. In the US$ 3,000 billion balance of foreign direct investment at the end of 1996, MNCs owned over 80%. Furthermore, about 70% of international technological transfers were conducted among MNCs (SHANGQUAN, GAO, 2000). The globalisation mostly viewed as context of economics but it include human rights and reduce the cost of transport, labour cost, communication cost. The main influence of globalisation on the world is to reduce the poverty. For example 30 years ago countries like India and China were very poor, but today these two countries have high purchasing power more than USA or any other developed country.

Impact of Globalisation

Globalization has accelerated growth in the region and contributed to poverty reduction (GHANI, Ejaz and Anand, Rahul, 2009). The impact of globalisation is different on developing and different on developed countries. Brittan (1998:8) indicated that globalisation led to an increase in the wealth of developed countries and also not to bigger poverty in the developing countries. As an example of the improvement in the developing countries Brittan referred to the improvement in the economic situation in the Asian countries (MOSTERT, J, 2003). But Hak-Min (1992:2) argued against the Brittan, he mentioned that the distribution of income between developed and developing countries has become less skewed by indicating that globalisation in the integrated world economy has lead to industrial growth in a limited number of developed countries. There are number of definitions of globalisation and thousands of critics as well in this world. In June 1996 at Communiqué of the Lyon Summit of G7 the given the statement on the impact of globalisation, “In an increasingly interdependent world, we must all recognize that we have an interest in spreading the benefits of economic growth as widely as possible and in diminishing the risk either of excluding individuals or groups in our own economies or excluding countries or regions from the benefits of globalisation” (MUBIRU, Edward, 2003). According to Killick (2000) a significant part of the world and a large numbers of countries are now effectively participating in the processes of integration and globalisation. In this regard globalisation may be thought of as the integration of economies through trade, capital flows and information technology (MUBIRU, Edward, 2003). Frankel (2000:2) view globalisation as being one of the most powerful forces to have shaped the world economy during the past 50 years (LOOTS, ELSABE, 2001). In past two decades world economy is rapidly growing up. The world economy growth in 2010 is rose up as compare to 2008-2009. According to CIA since 1946 economic crisis the gross world product grew by 4.6% on the bounced of exports (CIA, 2011). It will be continuing in 2011 and 2012 as well. According to IMF report expected economic growth at about 41/2 percent in both year (IMF, 2011). Amazingly the exports boost by 20% in 2010 from 2009. The above table shows about the largest economies of the world which GDP growth rate is very high and rapidly increasing. These five countries are world main exports, for example China in manufacturing, India for service and manpower, Taiwan in electronics, Brazil for coffee and transport equipment and South Korea is for semiconductors and wireless communication. (CIA, 2011)

Largest Economies

GDP (%)

China

+10.1

India

+8.3

Taiwan

+8.3

Brazil

+7.5

South Korea

+6.1

Table : Largest Economies GDP

Among large economies, China (+10.1%), Taiwan (+8.3%), India (+8.3%), Brazil (+7.5%), and South Korea (+6.1%) recorded the biggest GDP gains-China also became the world’s largest exporter. Continuing uncertainties in mortgage and financial markets resulted in slower growth in Japan (+3.0%), the US (+2.8%), and the European Union (+1.7%), (CIA, 2011). The China and India has surprised the world by their economic growth. The China has gain economy by exports of manufacturing products. For example, Australia and China free trade agreement in 2002 (MAI, Dr Yinhua et al., 2005). Country like India is main manpower and service supplier for USA. India opened the trade gate after 1991 crisis. As per previous studies of impact of globalisation is the key event in world economy. According to Akin and Kose, during this gradual process, several emerging countries have gained in economic importance and have begun to influence economic developments in other countries (FIDRMUC, JARKO and KORHONEN, IIKKA, 2009). China is one of the most important exporting and importing nations worldwide. India seems to be following the development path of China more recently (see winter and Yusuf, 2007, and Yusuf et al., 2007), although India concentrates more on services than does manufacturing-oriented China (FIDRMUC, JARKO and KORHONEN, IIKKA, 2009). From last empirical studies and data statics we got the result that globalisation has participated a lot to boost up international trade. The international trade is the fast way to boost up economy and cash flows. The countries always implement new policies and international trade policies such as free trade and export led growth. Developing countries main focus is ‘export led growth’. The researchers mentioned that export led growth as hypothesis which gives country to achieve their development goals. Before we go further first need to know what is ‘export led growth’ model. After that this report will focus on a one of developing country which is already focusing on this model and gained their economy up. The chosen country is India and India is developing country and situated in south Asia. The crisis came in 1991 India was affected most in the world. After the crisis India opened their trade gates and implements some new export promotion programmes. From the time period till now India is almost successful to achieve their goals. To get better understanding on India and these export promotions discussed later in this paper. This report will also examine the strengths and weakness of programmes which India set to achieve their development goals. On the basis of past empirical studies and research this paper will suggest some possible recommendations. Further start with ‘export led growth’, on the basis of past empirical studies we will try to find the definition of this model and also will focus on to find the relationship of ‘export led growth’ and international trade.

Overview of Developing Economies

The World Bank has divided the world economies in three parts. First is developed economies means which country’s economy is high , second is developing countries which country’s economies is growing up and last one is least developed country which means poor countries. The developing world described as Africa, Asia and Latin America as compared to industrialized world such as Western Europe, Eastern Europe, North America and Japan (NAYYAR, Deepak, 2009). The division of world economies concept came in 19th century. While the world economy was increasing up in 19th century then the second phase of globalisation was started. We already discussed above about the globalisation and impact of globalisation on world economy. The developing country such as China is the important source for the world economy. China is following by India and there are more country will be in count in further time. China and India average growth rate surprised world economy. Today almost big countries are trading with china. China main export is manufacturing products and India is service.

Why Country Do Export

In general way export is the growth engine. There are lot of benefits are involved with international trade. The main reason for trade is comparative advantage. According to Feder (1982) exports helps economy in many ways such as greater capacity utilization, economies of scale, incentives for technological improvement and pressure of foreign competition, leading to more efficient management (IBRAHIM, Izani, 2002). Due to globalisation every country wants to become on peak. For example Brazil produces coffee most in the world and India is best in natural resources and tea. Iran and Iraq has lot oil to export to world. These country exports their products on high price unless they sell their product on domestic demand. According to Monir Tayeb (2000) countries do export because they presumed to supply foreign markets because it is profitable for them to do so (TAYEB, Monir H., 2000). He also mentioned that countries also interested to do Inter-industry trade (IIT); this is one type of international trade which is mentioned by Monir Tayeb (2000). The definition of IIT is that when a country tends to export one good and import a wholly different type of good. For example UK exports whiskey and imports the Brandy. Italy exports the wine to Germany and at the same time that it also imports German wines. In other way Inter-Industry trade occurs when two countries exchange different varieties of essentially the same type of good (TAYEB, Monir H., 2000). The question is what another benefits are involve with export? The different countries have different requirements for example in poor countries they export for economic growth and developing countries interested to do with both benefits development of their countries and comparative advantage. The developed country like USA has massive production of goods and electronic products so they do export to become more beneficial. But the most important is involved with export is government policies. How country export and what is the barriers for trade this is always decided by their governments. As per theoretical studies we will talk about the possible benefits which are involved with exports. So first is the comparative advantage second is economic growth and third is the development of country. First start with comparative advantage:

Comparative Advantage: The British economist David Ricardo (1817) invented the theory of comparative advantage. The basic concept of advantage theory was written by Adam Smith in 1766 he set brought the theory of absolute advantage. He argued that “countries would tend to specialise in international trade and in particular, that they would export goods they produced more cheaply than their trading partners and import goods they produced more expensively” (TAYEB, Monir H., 2000). The above table is giving the simple hypothetical example of absolute advantage.

Country

Whisky (Cost per unit)

Brandy (Cost per unit)

United Kingdom

£7.00

£8.50

France

£8.50

£7.00

Source: Monir Tayeb (2000)

In the example the UK whiskey is cheaper than France and the France Brandy is more cheaply then UK, because the consumer purchase France brandy from British sources and British consumers also do same they purchase from French suppliers. The key features of international trade are specialisation and exchange. Both countries are specialising in production of goods and they are exchanging their products to get benefit from absolute advantage. This concept simply says that it is good for both nations. This is good for world economy as well. Both countries who has good production of products and they can exchange their product on free trade agreement they will be beneficial both of them because they establishing their international market. This is also good for people because they are getting products on less money. Ricardo theory is based on physical and natural influences over competitiveness, technological and human factors which were given by shortly economists. The most effective model of comparative advantage was Heckscher-Ohlin (H-O) theorem. This model originally developed by Heckscher (1919) and Ohlin (1933) and today as Heckscher-Ohlin comparative model. This model assumption is about capital and labour. For example Japan makes the robots to assemble the cars and other motors. The key thing is the labour is costly than compared to Japan. For example India total export in 2010 was $201 billion and total import was $327 billion in the world it shows India import goods more than export. This country is exchanging their products such as petroleum products, precious stones, machinery, iron and steel, chemicals, vehicles, apparel. The main exports partners are UAE 12.87%, US 12.59%, China 5.59%. The other thing is very important to notice is the role of government policies and financial institutions to get better advantage of comparative advantage. The studies for example Memedovic (1994) included the ‘type of state’ (class base, administrative capacity and mode of intervention) and argued that the help of the government can bring about changes in comparative advantage (SIEGFRIED BENDER, Kui-Wai Li, 2002). This is true the country do export because they have advantage of cheap labour. For example USA multinational companies have number of call centres in India. The USA average employee wages per hour is $18.00 to $22.00 per hour. But in India they are getting employee on $111 per month. India is the number one service exporter for USA. The below example is also of comparative advantage.

Example: Comparative Advantage

Let’s quantify comparative advantage with an imaginary example. Suppose an acre of land in Canada can produce either 1 unit of wheat or 2 units of corn.3 And suppose an acre in the U.S. can produce either 3 units of wheat or 4 units of corn. The U.S. then has absolute advantage in both wheat (3 units vs. 1) and corn (4 units vs. 2). But we are twice as productive in corn and thrice as productive in wheat, so we have comparative advantage in wheat.

Source: (FLETHER, Ian, 2010)

The other model of comparative advantage named the specific factors theory is associated with Jones (1971). This model is only based on one factor is labour. But the H-O model considered two factors labour and capital. The below table is example of H-O comparative advantage model:

Country

Man-Made Fabric actual cost

Opportunity Cost

Cotton fabric actual cost

Opportunity cost

UK

£300

0.92

£325

1.08

Turkey

4500 TL

1.06

4250 TL

0.94

Source: Hecksher-Ohlin comparative advantage p.17 (TAYEB, Monir H., 2000)

The above example is showing the labour cost difference between UK and Turkey. So this is also comparative advantage for the countries. Porter (1990) mentioned some competitive advantages in his study. The above are the advantages which Porter (1990) mentioned:

The availability of skilled labour

Locally available technology and know how

Access to suppliers of key inputs

Market proximity

The local cost of inputs

Vernon’s (1966) product life cycle theory is also important in trade. He determined that every product has life cycle, once product has launched it is in introduction stage, once product people used and the product become popular on domestic level. In short time the product start export to world. In the end we can say if country is interested to do export because of comparative advantage and economy growth as well.

Export Led Growth

In past decades there are many empirical studies has been analysed on export-led growth and world economy. The main topic for these studies was to examine the relation between exports and economic growth for example Giles and Williams (2000). Most of studies were focus on exports and GDP, but some other studies such as Hatemi-J and Irandoust (2001), Hacker and Hatemi-J (2003) and Bernard and Jensen (2004) focused on the exports and total factor productivity (TFP) growth. While these studies were focusing on Exports and GDP or TFT but studies such as Murphy, Shleifer, and Vishny (1989) were purposed the theory of “Big Push” industrialization1. Murphy, Shleifer and Vishny (1989) said that “simultaneous industrialization of many sectors can be self-sustaining and profitable even if no sector can break even when investing alone.”2 After the crisis of 1991 many Asian countries were under the recession time but countries like Thailand, Malaysia found the external way to overcome recession time. According to Felipe (2003) “Since the East Asian financial crisis erupted in 1997, countries in the Asian and Pacific region have been immersed in a search exercise to identify what policies led to the crisis and recession, and what alternative set of policies would lead them back to a path of sustained and higher growth rates.” The Asian countries were trying to rebalance their economy and GDP, for example Jomo (1998), Seguina (2000), Lim (2004) said that “The majority view has been that the crisis was the consequence of a fundamental flaw in precrisis financial policies, which led to currency overvaluation, over borrowing, and over lending for the domestic economy; and speculative bubbles that eventually burst.” The Thai government development policy was based on dual track strategy (Lian 2004).

Relationships between Export and Economic Growth

(Literature Review)

This debate is controversy and number of empirical studies done already. Some authors suggested that open economy has positive effects on growth more than close economies (Sachs and Warner, 1995; Edwards, 1992, 1993, 1998; Srinivasan and Bhagwati, 1999; Krueger, 1997; Ben-David and Kimhi, 2000) (FREDERICO G. JAYME, Jr, 2001). Empirical evidence from developing countries support studies such as Taylor, 1993; McCombie and Thirlwall, 1999; Blecker, 1999b; Helleiner, 1996; UNCTAD, 1995 (FREDERICO G. JAYME, Jr, 2001). Trade is the key concept for the countries to grow. For example countries like Malaysia, China, India and Brazil they all are got benefits from trade. The countries do export for comparative advantage. For example Brazil is number one coffee production country and world main coffee exporter as well. The trade is the only way to right use of economy’s resources by imports of goods and service otherwise they have to sell at home with high resources cost. For example Ricardian model says that the welfare gains if any country specializes in producing goods in which it has a comparative advantage (FREDERICO G. JAYME, Jr, 2001). The Hecksher-Ohlin-Samuelson (H-O-S) model, on the other hand, shows the welfare gains, In the two-country model that each country specializes based on their factor endowments. The result of these models is that international trade is the way to achieve the international competitiveness and static productivity. International trade enable to countries reduce the transportation cost, production cost and reduce the labour cost in case of developing countries. Beck (2002) mentioned that Financial development and international trade are identified as macroeconomic variables as being highly correlated with economic growth performance across countries in the empirical growth literature (UDDIN, Md. Gazi Salah, 2005). The other example of empirical study of economic growth is Calderon and Liu (2003) says that the relationship between financial development and economic growth has now well recognized in the literature that financial development is crucial for economic growth and Chang (2002) mentioned that it is a necessary condition for achieving a high rate of economic growth (UDDIN, Md. Gazi Salah, 2005). Trade has a strong positive relationship with economic growth (Mazur and Alexander, 2001) (UDDIN, Md. Gazi Salah, 2005). Trade allows countries to set a large market for their domestic products. The two studies Prebisch (1950) and Singer (1950) about the effects of trade on income are based on two grounds First, incessant decrease in the international price of raw materials and primary commodities would lead, without industrialization in developing countries, to more profound differences between developed and developing countries. Second, for their Industrialization, developing economies require short or medium term protection of their infant industries. Furthermore, the structure of trade, under which exports are concentrated on a few primary products and imports are constituted mostly by manufactured goods, renders developing countries overly dependent and vulnerable (RAZAFIMAHEFA, HAMORI Shigeyuki and Ivohasina F., 2003). The others author such as Levine and Renelt (1992) and Rodriguez and Rodrik (1999) emphasize on trade effects on economic growth. There are most studies done in the favour of trade effects on growth but there are some studies which are contradicted with these studies. For example Rodrik [1995] argues that in most studies of openness and growth, indicators used inappropriately reflect the trade regime (RAZAFIMAHEFA, HAMORI Shigeyuki and Ivohasina F., 2003). Edwards (1997) tests, for a data set of 93 countries, the robustness of the impact of trade on growth by introducing first alternatively and then simultaneously nine measures of openness. He said that each proxy for openness is correlated positively with economic growth and the composite index from those proxies also enters with a positive coefficient in the growth regression. Krueger (1978) study tested two hypotheses which has positive effects of openness on growth, first is more liberalized regimes result in higher rates of growth of exports, and second is a more liberalized trade sector has a positive effect on aggregate growth. Feder (1982) he analysed the set of 31 semi-industrialized count