Export-led growth is an economic strategy used by some developing countries. This strategy seeks to find a niche in the world economy for a certain type of export

Export

The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"...

. Industries producing this export may receive governmental subsidies and better access to the local markets. By implementing this strategy, countries hope to gain enough hard currency

Currency

In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...

 to import commodities manufactured more cheaply somewhere else.

Origins

From the Great Depression

Great Depression

The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

 to the years after World War II

World War II

World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

, under-developed and developing countries started to have a hard time economically. During this time, many foreign markets were closed and the danger of trading and shipping in war-time waters drove many of these countries to look for another solution to development. The initial solution to this dilemma was called import substitution industrialization. Both Latin American and Asian countries used this strategy at first. However, during the 1950s and 1960s the Asian countries, like Taiwan and South Korea, started focusing their development outward, resulting in an export-led growth strategy. Many of the Latin American countries continued with import substitution industrialization, just expanding its scope. Some have pointed out that because of the success of the Asian countries, especially Taiwan and South Korea, export-led growth should be considered the best strategy to promote development.

Importance

Export-led growth is important for mainly two reasons. The first is that export-led growth can create profit, allowing a country to balance their finances, as well as surpass their debts as long as the facilities and materials for the export exist. The second, much more debatable reason is that increased export growth can trigger greater productivity

Productivity

Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...

, thus creating more exports in an upward spiral cycle.

The importance of this concept can be shown in the model below from J.S.L McCombie and A.P. Thirwall's Economic Growth and the Balance-of-Payments Constraint.

y_B is the balance of payments

Balance of payments

Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers...

 constraint, meaning the relationship between expenditures and profits

y_A is the actual growth capacity of a country, which can never be more than the current capacity

y_C is the current capacity of growth, or how well the country is producing at that moment

(i) y_B=y_A=y_C: balance-of-payments equilibrium and full employments

(ii) y_B=y_AC: balance-of-payments equilibrium and growing unemployment

(iii)y_BA=y_C: increasing balance-of-payments deficit and full employment

(iv) y_BAC: increasing balance-of-payments deficit and growing unemployment

(v) y_B>y_A=y_C: increasing balance-of-payments surplus and full employment

(vi) y_B>y_AC: increasing balance-of-payments surplus and growing unemployment (McCombie 423)

Countries with unemployment and balance-of-payments problems look to export-led growth because of the possibility of moving to either situation (i) or situation (v).

Types of Exports

There are essentially two types of exports used in this context: manufactured goods and raw materials.

Manufactured Goods

The use of manufactured goods as exports is the most common way to achieve export-led growth. However, many times these industries are competing against industrialized countries' industries, which often include better technology, better educated workers, and more capital

Capital (economics)

In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...

 to start with. Therefore, this strategy for export-led growth must be well thought out and planned. Not only must a country find a certain export that they manufacture well, that industry must also be able to make it in the world market competing with industrialized industries.

Raw Materials

Using raw materials as an export is another option available to countries. However, this strategy has a considerable amount of risk compared to manufactured goods. The terms of trade

Terms of trade

In international economics and international trade, terms of trade or TOT is /. In layman's terms it means what quantity of imports can be purchased through the sale of a fixed quantity of exports...

greatly affect this plan. Over time, a country would have to export more and more of the raw materials to import the same amount of commodities, making the trade profits very difficult to come by.