Export promotion policies reflect the interest of national governments to stimulate exports. Subsidies, tax exceptions, and special credit lines are the main instruments used to promote exports. The regulatory aspects of export promotion changed significantly in the late twentieth century. In the past export promotion activities were not substantially regulated, but increasingly since the creation of the World Trade Organization (WTO) in 1995 some export promotion activities have been identified as trade–distorting practices. The WTO has devised rules that allow countries that have been affected by the export promotion practices of their trading partners to use the WTO’s dispute–settlement procedure and in some cases retaliate.
Export promotion is sometimes seen as a complementary development strategy to import protection. While import protection usually allows infant industry to develop, export promotion allows access to external markets. Foreign demand is often required by the limited size of domestic markets and the need to achieve economies of scale, essential in many productive activities. In a 1984 article Paul Krugman argued that, under increasing returns to scale, import protection may act as a form of export promotion, because in this case protection would allow considerable gains in terms of productivity that would enhance the possibilities of exporting. However, in policy circles export promotion or export oriented industrialization (EOI) is seen more often as an alternative development strategy to import substitution industrialization (ISI).
There are two main interpretations about the advantages of export promotion. One has a laissez–faire bias, while the other emphasizes the role of state intervention in promoting exports. Conventional wisdom suggests that an emphasis on exports forces integration into world markets and a more efficient allocation of resources, because external markets impose discipline by eliminating uncompetitive firms. In other words, exports affect positively the supply side of the economy. This view, exposed by Ian Little, Tibor Scitovsky, and Maurice Scott in 1970 and by Bela Balassa in 1971, was influential within the World Bank and the International Monetary Fund (IMF), and it shaped the Structural Adjustment Programs (SAPs) of the 1980s and influenced the liberalization strategy of the Washington Consensus. The studies by Anne O. Krueger and Jagdish Bhagwati, both in 1978, and by Demetris Papageorgiou, Michael Michaely, and Armeane M. Choksi in 1991 suggested that ISI policies generally did not produce sustainable increases in income per capita and that export promotion policies were more appropriate for achieving that goal. Export promotion, in this view, is associated with liberalization and market reforms.
Defenders of outward orientation tended to argue that EOI was behind the successful experience of the Asian countries. The World Bank’s 1993 report The East Asian Miracle supported the view that East Asian economies’ successful export performance resulted from the implementation of market–friendly policies. Several authors have shown the limitations of the World Bank position. Ajit Singh, in his 1995 paper “The Causes of Fast Economic Growth in East Asia,” argued that despite the strong export orientation, the East Asian economies were not fully integrated with the world economy and that ISI was an integral part of the East Asian strategy in the 1950s and the 1960s. The equalization of export orientation with free trade is also misleading. In her 2001 The Rise of “the Rest,” Alice H. Amsden argued that the state intervened heavily in the economy of successful least developed countries (LDCs). In the East Asian economies, protection, conditional on export promotion, allowed import–substituting infant industries to become internationally competitive export–oriented industries. More generally Francisco Rodríguez and Dani Rodrik, in an influential 2000 article published in the National Bureau of Economic Research (NBER) Macroeconomics Annual, showed that the evidence for a negative relationship between trade barriers and economic growth is weak at best.
The alternative view emphasizes the role of exports in expanding demand, in contrast with the conventional view that emphasizes supply effects associated with improved resource allocation. Higher demand provides an outlet for producers in economies with relatively limited domestic markets. The foreign trade multiplier, developed by Roy Harrod, indicates that net exports have a positive effect on the level of activity. Nicholas Kaldor argued that higher levels of exports lead to strengthening productivity, lowering unit costs, which would then positively impact exports. This positive effect of exports on productivity, known as the Verdoorn effect, reduced unit costs and led to further increases in export in a cumulative process of economic development formalized by Robert Dixon and Anthony Thirlwall in their 1975 paper. The notion of a circular and cumulative process of growth led by exports harks back to Adam Smith’s vent for surplus principle.
The alternative view also differs from conventional wisdom in that it does not equate export promotion with free market policies. Raúl Prebisch, in a United Nations 1964 report, emphasized the importance of export promotion and access to the markets of developed countries to promote industrialization in LDCs. More importantly, to avoid recurrent balance of payments crises, LDCs should diversify their exports rather than rely on commodity exports. Prebisch argued that LDCs should replace traditional commodity exports with manufactures or semi–manufactures exports. Industrial policy would have a central role in promoting export diversification. State selective intervention, by providing support for research and development (R&D), imposing restrictions on licensing and royalties, and coordinating with and among private sector agents, is central to increase and diversify exports.
Several authors have also emphasized the limitations of the EOI strategy. Robert A. Blecker, in his 1999 essay “The Diminishing Returns to Export–Led Growth,” noted that export–led growth is a strategy that cannot be pursued by all countries at the same time. Export promotion requires that at the other end there is an importer of last resort, in other words, a country with the international reserve currency and an incredible appetite for imports. Also the integration of China into the world economy and its relatively low labor costs suggest that countries with higher labor costs would find it increasingly difficult to pursue export oriented development strategies. The global imbalances that result from simultaneous export promotion efforts around the globe are a threat to the stability of the global economy.
SEE ALSO Balance of Trade; Developing Countries; Economic Growth; Import Substitution; Industrialization; Infant Industry; International Monetary Fund; Mercantilism; Prebisch–Singer Hypothesis; Protectionism; Structural Adjustment; Surplus; Terms of Trade; Trade; Trade Deficit; Trade Surplus
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Balassa, Bela. 1971. The Structure of Protection in Developing Countries. Baltimore, MD: Johns Hopkins Press.
Bhagwati, Jagdish. 1978. Anatomy and Consequences of Exchange Control Regimes. Foreign Trade Regimes and Economic Development series, vol. 11. Cambridge, MA: Ballinger.
Blecker, Robert A. 1999. The Diminishing Returns to Export Led Growth. Occasional Paper, Council on Foreign Relations. http://www.cfr.org/publication/8709/diminishing_returns_to_exportled_growth_a_cfr_paper.html.
Dixon, Robert, and Anthony Thirlwall. 1975. A Model of Regional Growth–Rate Differences on Kaldorian Lines. Oxford Economic Papers 27 (2) (July): 201–214.
Krueger, Anne O. 1978. Liberalization Attempts and Consequences. Foreign Trade Regimes and Economic Development series, vol. 10. Cambridge, MA: Ballinger.
Krugman, Paul. 1984. Import Protection as Export Promotion: International Competition in the Presence of Oligopoly and Economies of Scale. In Monopolistic Competition and International Trade, ed. Henryk Kierzkowski, 180–193. New York: Oxford University Press.
Little, Ian, Tibor Scitovsky, and Maurice Scott. 1970. Industry and Trade in Some Developing Countries: A Comparative Study. New York: Oxford University Press.
Papageorgiou, Demetris, Michael Michaely, and Armeane M. Choksi, eds. 1991. Lessons of Experience in the Developing World. Vol. 7 of Liberalizing Foreign Trade. Cambridge, MA: Blackwell.
Prebisch, Raúl. 1964. Towards a New Trade Policy for Development. New York: United Nations.
Rodríguez, Francisco, and Dani Rodrik. 2000. Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross–National Evidence. In NBER Macroeconomics Annual, vol. 15, ed. Ben Bernanke and Kenneth Rogoff. Cambridge, MA: MIT Press.
Singh, Ajit. 1995. The Causes of Fast Economic Growth in East Asia. UNCTAD Review, 81–127.
Williamson, John. 1990. What Washington Means by Policy Reform. In Latin American Adjustment: How Much Has Happened? ed. John Williamson, 7–33. Washington, DC: Institute for International Economics.
World Bank, The. 1993. The East Asian Miracle. Policy Research Report, World Bank. New York: Oxford University Press.