Export-led growth / outward-oriented strategies
This section deals with outward-oriented strategies and the next section, 5.4.5, looks at inward-oriented strategies. The debate about which is most appropriate is closely linked with the arguments for and against free trade/protectionism (section 4.2) and the benefits/costs of foreign direct investment by MNCs (section 5.4.9). You should therefore re-read these sections along with 5.4.4 and 5.4.5.
The majority of trade generated by developing economies goes to the developed world. The developing countries seldom trade within themselves. Exporting to the more sophisticated markets of the developed world forces them to produce at the expected standards and that makes their goods more internationally competitive. Information and technology will move between the two types of economy and increases in productivity should follow.
Being involved in export trade also promotes the ending of protectionist policies. Domestic industry must be competitive and not hide behind barriers. Resources will flow to those industries that have a comparative advantage. These tend to be labour intensive and low technology industries. In the early stage of diversification, government can offer incentives to business to switch away from commodity exports and into manufactured goods.
Export-led demand can be an important source of growth for developing countries in the early stages of their development, particularly given their reliance on primary exports (see section 5.3.3). However, countries may also try to export manufactures as a growth strategy. This is often termed an outward-oriented strategy. This may have a number of benefits:
- It conforms more closely to comparative advantage - resources may be used more efficiently as the resources used in earning a unit of foreign exchange from exports will be less than those used in saving a unit of foreign exchange by replacing imports with domestic goods.
- Increased investment - outward-oriented policies may help encourage inward investment and therefore domestic productivity.
- Economies of scale - the increased sale of exports may help raise the domestic level of production and enable the country to gain from economies of scale.
- Increased employment - increased production should help boost the domestic level of employment.
- Greater equality of income distribution - increased demand for labour will help boost wages in a developing economy and this should help to make income distribution more even.
- Increased competition - an outward-oriented strategy will expose the country to the full weight of international competition. They may struggle initially to compete, but productivity will rise much faster than if import substitution policies are followed.
However, many countries will regard these outward-oriented policies as too risky for their own industries and prefer to erect protectionist barriers. Click on the right arrow at the top or bottom of the page to start looking at import substitution.