Recommending a Strategy

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Export-Led Industrialization
Anne O. Krueger
She is Krueger
Development Countries trade policies have
fallen into two distinct groups
A. Import substitution: Those countries which have adopted
trade policies which diverge from the optimality criterion that
International Marginal Rate of Transformation (IMRT) = Domestic
Marginal Rate of Transformation (DMRT) by a large amount, by
protecting their domestic markets.
B. Export promotion: Export Led Growth consisting of
encouragement to exports, usually beyond the point that IMRT =
DMRT. Countries adopting this strategy have generally
experienced rapid growth of traditional exports, but even more
rapid growth of nontraditional exports.
What is export-led growth/outward
oriented/export promotion/export substitution?
A. All terms refer to policies of countries successful in developing their
export markets.
B. Common features -most analysts agree that an ELI strategy is one there:
1). There is at least as much incentive to earn as to save foreign
reserve.
2). Interventions are generally in the form of incentives rather than
imposition of direct controls.
3). Incentives to export are fairly uniform and not discriminatory across
commodity groups.
4). There is no bias of incentives toward production of import substitutes.
5). The incentives which do exist must favor production for export as
much as, if not more than, the production for the domestic market.
Three main results emerging from
experiences of ELI countries
 Remarkable rates of growth associated with growth
of exports.
 For all countries where it was possible to contrast
performance before and after the policy changes, the
growth rate clearly jumped shortly after ELI adoption.
 Sustained high growth rates indicated that outwardoriented policies created dynamic effects in the
economics and did not merely produce static gains
from improved allocation of resource.
ELI Vs. ISI



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Experience has been that growth performance has been more
satisfactory under export promotion strategies than under importsubstitution strategies.
The relationship between export performance and growth is sufficiently
strong that it seems to bear up under many different specifications of the
relationship.
It has been tested over many countries for: (1) rates of growth of real
GNP and of export; (2) for real GNP net of exports and exports; and (3)
for rates of growth of real GNP as a function of rate of capital formation,
aid receipts, and export growth.
Success stories: Korea, Taiwan, Brazil are well known, Also Turkey and
Philippines did, so that there is little double about link between export
performance and growth rates.
Three hypotheses of why such a difference in Goth
performance should be associated with export promotion.
HYPOTHESES 1: technological-economic factors imply an
overwhelming superiority for development through export
promotion. Asserts that gains from trade, especially for
developing countries, are so sizable that losses associated with
import substitution significantly reduce the rate of return on factor
accumulation. A failure to take advantage of the opportunities to
exploit these phenomena through trade significantly impairs the
attainable rate of growth.
a. Size of markets - Under ELI policies, efficient activities can
expand well beyond the size of the domestic market. Expansion
of an activity beyond the amount sold in the domestic market
becomes profitable.
Continues…...
b. Indivisibility and economies of scale - export oriented strategies permit a
developing country, regardless of the size of its domestic market, to
establish plants of economically efficient size and to maintain long
production runs.
c. Factor intensities - developing countries are usually relatively endowed
with unskilled labor. The rate of human and physical capital formation is
the constraint upon expansion of the industrial sector in these countries.
d. Infant industries - this argument has long been used to justify protection.
However in ELS, if there are infant industries, once developed they can
be expanded well beyond the size of the domestic market.
e. Interdependence and quality - efficient production of most manufactured
goods entails the use of a wide variety of inputs. Under ELI, exporters
have access to their intermediate inputs.
f. Economic behavior.
Hypothesis 2
Differences in growth rates have resulted, not from the choice of trade
strategy per se, but rather from excesses in the ways in which
import substitution policies were administered.
1). The failure of import substitution resulted from excesses of the particular
ways in which domestic industries were encouraged: for example,
currency overvaluation, quantitative restrictions, techniques of allocating
import licenses.
2). One cost was the failure of export earnings to grow as much as they
would under better import policies.
a. Led to stop-go patterns
b. Foreign exchange bottle neck emerged.
Hypothesis 3
Policies adopted in pursuit of an export promotion strategy are
generally far closer to an optimum, both in the DMRT = IMRT sense
and with respect to the domestic market, than are those adopted
under import substitution. The role of trade policy is to constrain
policymakers in such a way that they do not impede the growth
rate as much as they otherwise would.
1). ELI strategies imposes constraints on policymakers, both in what they
can attempt to do and in making them aware of the costs of mistakes.
2). Policymakers receive feedback in a relatively short time period as to the
costs of their policies.
3). It is infeasible o rely upon quantitative controls: the international price, at
least, can not be administered and to that extent, more generalized
forms of incentive, including a relatively realistic exchange rate, must be
employed.
Conclusions


Experience has clearly demonstrated the importance of access to
international markers in providing a means of permitting more rapid
growth than would otherwise be feasible. Given the enormous difficulties
and costs of achieving institutional and other changes that economic
growth requires, it is probable that trade policy changes have a higher
rate of return to LDCs than most other feasible policy changes.
The fact of openness itself, rather than of export growth, is a critical
ingredient for rapid increases in output and productivity. This
consideration is significant in evaluating the prospects for future growth
of developing countries in the context of a potentially slower expansion
of world trade -- if it is openness itself that conveys benefits due to
competition and the future of policy instruments employed, the gains
from export orientation will be almost as great with slower growth of
world trade as with more rapid growth.
Summary
Process of ELI
1.Tariff can not induce production for the international market, therefore
export subsidies or a realistic exchange rate is required.
2. There is a tendency to maintain a realistic exchange rate.
3. This encourage exports and reduces the balance of payment motive for
tariff protection.
4. Exporting industries must be permitted to purchase their needed.
intermediate goods and raw materials at world prices to be competitive.
5. This puts pressure on authorities to reduce barrios to imports, which in
turn may encourage other producers to enter the export market.
6. A effective export promotion policy must be accompanied by a fairly open
and liberalized trade regime.
Is it ELI better than Import substitution
No, we can not say that!!
In last thirty years, ELI got
big success, but we can
not say which policy is
better of not, it is
depend on in which
country and in which
time period.
The End
Thank you!
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