Impact of import and export on the economic growth of Sweden - Literature review Example

Sweden, also sometimes known by the Holland is located in North West Europe. Trade, energy sector and services industry are some of the major contributors to the Swedish GDP. Sweden also enjoys the honor of being the 16th largest economy in the world. Moreover, the total annual GDP of Sweden stands to be 4 percent higher than the average European GDP. Sweden favors an open trade policy and happens to be one of the top ranking free market economies in the world. Sweden accrues roughly 66 percent of its revenues through foreign trade. The economy of Sweden predominantly dependent on import and export experienced a sharp dip in the total GDP in the year 2009 owing to recession and economic meltdown. Germany is the most important trade partner of Sweden, which provides market for more than 25 percent of the Swedish production. The other important trade partners of Sweden are France, Belgium and UK. Sweden also does require a large amount of imports to support its economy. The nation procures more than 17 percent of the needed imports from Germany. The additional imports required by Sweden primarily originate from the US, China and Belgium. In the year 2009, the total worth of exports from Sweden stood at $ 397.8 billion. Also, the total worth of goods and services imported by Sweden in 2009 was $ 358 billion. No doubt, the economic growth of Sweden is to a great extent dependent on import and export. Introduction Import and export constitute the primary engine of economic growth in Sweden. Sweden is a very small nation that has an economy that is predominantly dependent on import and export for its sustenance. Going by the pivotal role of the import and export in the economic setup of the nation, the Swedish government had made it a point to design and administer the requisite, supportive trade policies and infrastructure. Over the last two decades, Sweden has tried its best to evolve into a net exporter of goods. Hydropower, engineering goods, iron ore and timber constitute the primary Swedish exports. Besides, Sweden also imports to its trade partners, cars, pharmaceuticals, telecommunication and IT products and services. A large number of Swedish companies responsible for a good chunk of imports and exports have managed to establish themselves as global leaders and top brands the like of Electrolux, Volvo and Sony Erickson. A majority portion of the trade and industry in Sweden are managed by private concerns. It is largely owing to the highly professional and competitive approach of these private stakes in the Swedish economy and trade that Sweden is garnering an impressive and more or less stable economic growth. As per the World Economic Forum 2008, Sweden happened to be the fourth most competitive country in the world. One major reason responsible for the success of Swedish exports in the global markets is the impressive investment Sweden makes in research and development. Thus the products exported by Sweden do have an inalienable technological edge tagged to them, which sets them apart from other competitors. A fair estimate of Swedish panache for competitiveness in imports and exports can be judged from the fact that in 2007, Sweden invested roughly 3.5 percent of its GDP in research and development initiatives. To sustain its industrial and trade framework, Sweden also needs to import a variety of goods and services. One salient reason behind the economic potential of Sweden is that it suffered a severe recession in the early 90s. At that time, the Swedish government decided to place international trade at the core of its economic recovery plan. So, no doubt, import and export have a central and crucial role to play in the overall economic growth of Sweden. In the current times marred by recession and economic slowdown, Sweden with its trade setup, backed by apt import and export policies and favorable infrastructure, is more likely to chart a smooth course as compared to other developed economies. The trade sector in Sweden is quiet robust and relatively less vulnerable to global fluctuations. Literature Review This literature review delves on the findings of the existing studies and schools of thought pertaining to the topic under consideration. The literature review deals with the Marxian, Classical and Post Classical theoretical approaches explaining the relationship between import and export and economic growth. All the findings in the literature review will aid the determination of the research questions and the research hypothesis of this paper. In the last three decades, with the liberalization of economies and the further opening up of the global markets, the topic as to the relationship between imports and exports and the economic growth has accrued ample academic and institutional interest (Berg & Lewer, 2006). In that context, the economists the world over have analyzed this phenomenon by subscribing to varied models and assumptions, thereby turning up with varied conclusions and explanations. With the very onset of foreign trade and the resultant imports and exports, the economists the world over started to attempt to seek some insight into the correlation existing between the economic growth and imports and exports (Beg & Lewer, 2006). Even a commonsensical and simplistic approach towards things tends to corroborate the fact that that there exists a valid and unavoidable relationship between economic growth and import and export. Also, it would not be wrong to conclude that the economic growth of a number of developed nations was to a great extent a direct attribute of the parallel developments in import and export. In that context, it will be really fascinating to analyze and research the varied academic and textual sources published since Adam Smith to today, to cull out and identify the varied technological and commercial factors ensuing from a direct growth in imports and exports and their implications for and impact on the varied productive factors in an economy. During the classical period, the concepts of international trade and economic growth comprised to disparate branches of the organized studies and deliberations in economics. In the classical period it was a common belief that imports and exports had a favorable impact on economic growth. In the neoclassic times the theories of international trade and economic growth became topics of autonomous studies, scarcely having any relative connection with each other. So, until the late 60s, the issue of the relevance of imports and exports to economic growth was more or less given a secondary importance. However, in a contemporary context, with the emergence of new models of economic growth, the theories of international trade and economic growth tend to merge with each other, thereby facilitating an apt understanding of the relationship between import and export and economic growth. Views of Marx on International Trade and Economic Growth The issue of international trade and its nature, as well as its relationship to economic growth has been the subject of academic research and cerebral contemplation for the thinkers affiliated to varied schools of economic and political thought. In that context, Marx, though not being a direct supporter of international trade or protectionism, regarded free trade to be more in tandem with the aspirations of capitalism and thus out rightly and directly conducive to economic growth (Sowell, 1986). This was contrary to his views on protectionism, which Marx considered to be a relic of the merchant capitalism (Sowell, 1986). So, in a historical context, Marx was a supporter of free trade and import and export of goods. To a great extent, Marx also considered imports and exports to have a favorable impact on the economic growth of nations (Sowell, 1986). From a Marxist perspective, the relationship between import and export and economic growth eventually could be simplified in a pragmatic and simplistic context, to the relation between exchange and production (Sowell, 1986). As per Marx, The magnitude and dynamics of import and export in an economy are eventually determined by the direction and structure of economic growth (Sowell, 1986). All the varied aspects of exchange are either directly related to the production in an economy or are determined by it. Yes, it is true that the exchange in any economy to a large extent is determined and shaped by production. But, it is also a valid and authentic fact that often exchange could sometimes react and act to give way to production under some specific circumstances. Actually, sometimes, the act of promoting or inhibiting exchange could have a favorable or contrary influence on the production or economic growth in an economy. It is actually a two way process. The expansion or augmenting of production or economic growth in an economy requires new markets. The converse is also true to a large extent. The emergence of new markets and portals for exchange also stimulates production or economic growth. So, as per Marxian norms, import and export and economic growth have a potent correlation (Sowell, 1986). The possibility of linkage between import and export and economic growth in economies, as provided for and inherent in the Marxian views on economics and trade do extend a very relevant revelation for the consumption of academic and research efforts. Classical Views on Import and Export and Economic Growth As per the classical economists, there existed no bifurcation between the issues attributed to economic growth and import and export that are international trade. In the very examination of this theoretical limitation in the classical thought lies the opportunity for identification of the salient models of import and export in classical economics. So far as the relationship between import and export and economic growth is concerned, Smith (1776) for warded tow notions. As per Smith, on the one hand, import and export offered a way out for facilitating economic growth by negating and to a great extent diluting the limitations of size and scope, associated with the internal markets (1776). On the other hand, the augmentation in the size and scope of the available markets through increase in import and export, allowed for an effective division of labor that directly stimulated growth in any economy (Smith, 1776). So, Smith regarded import and export to constitute vital and dynamic influences that certainly do had a salubrious impact on the proficiency and skill competency of labor force (1776). This to a large extent is rationally understandable in the sense that the onus of managing and processing a large bulk of inputs and the need for producing more to cater to the needs of larger and ever growing markets do necessitates a better management, organization and exploitation of the workforce. Also, according to Smith, growth in import and export in an economy encouraged technological development and innovation and provided for the accumulation of capital (1776). This definitely stand to be a valid conclusion in the sense that increased import, especially for growth purposes necessitated a commercial processing of larger quantities of raw materials and increased exports necessitated enhanced production to profit from the scope and potential of overseas markets. Both these objectives cannot be optimally achieved without achieving some kind of technological breakthrough or innovation. Adam Smith also believed that import and export also helped economies get over technical indivisibilities, thereby extending to them ample opportunities to benefit from economic growth (1776). When it comes to Ricardo (1817), he presented a model of economic growth that was dynamic in its scope. In his model of economic growth, Ricardo (1817) identified three forces that are savings, institutional element and international trade. Also Ricardo (1817) mentioned two restrictions inherent in his model of economic growth that are Malthusian principle of population and the law of decreasing incomes. As per this model, the economically progressive nations are characterized by high savings and capital accumulations (Ricardo, 1817). In addition, these nations do also enjoy a high production, but naturally accompanied by a high productivity and an augmenting demand for labor (Ricardo, 1817). Going by these traits and characteristics, such economies are inevitably characterized by a commensurate rise in the wages and population growth (Ricardo, 1817). The irony facing such economies is that going by the quality and quantity related limitations of land, the return harvested from every additional unit of an alimentary resource in such economies tends to fall with the passage of time (Ricardo, 1817). Also, the continual increase in wages as a result of the high demand for labor shadows any proportionate rise in production (Ricardo, 1817). In such scenario, Ricardo (1817) believes that such economies are bound to face a dearth of investment in the future and have to inevitably contend with a “stationary state”. As per Ricardo (1817), a possibility for import and export that are international trade in such economies is one possible and viable way to delay the diminution in the rate of profit. One possible flaw in the Ricardo’s model of economic growth is that it relies heavily on the dependence on labor as an engine of economic growth and at the same time considers this reliance on labor to be responsible for the undoing of a progressive economy. It goes without saying that in his model of economic growth, Ricardo (1817) overlooked the relevance of technology in economic growth. Besides, this model of economic growth also ignored a possible stimulating influence of import and export on technological innovation in a progressive economy. Mill, in contrast to other Classics was greatly influenced by the possibilities unleashed by the Industrial Revolution. Mill (1848), in tandem with other classical luminaries and scholars, believed that economic growth in a nation was directly dependent on production, which happened to be a direct function of land, labor, capital and productivity. Not to say that the approach of Mill was limited and narrow in the context of international trade and its importance for economic growth. Like Ricardo, Mill (1848) also believed that all the progressive economies have to eventually come across a “stationary state”. However, Mill (1848), tended to differ from Ricardo in the sense that instead of relying on import and export as a possible way of delaying the fall in the rate of profit, Mill held technical progress and innovation to be the final and eventual factor that did have the potential and scope to rescue economies from falling into a “stationary state”. Though Mill (1848) also supported and backed import and export amongst nations, he significantly diluted the emphasis that Smith placed on the possibility of augmenting economic growth by extending markets through import and export. Import and Export and Economic Growth in a Post Classical Context The inheritors of Ricardo to a great extent failed to cull out the factors originating from import and export that could boost the state of economic growth in the short and the long run. To put it simply, the changes wrought in the Classical theory in a Post Classical scenario did give due recognition to the social welfare generated by international trade. The economic model propounded by Ohlin (1933) and Heckscher (1919) in the ambit of the neo classical general equilibrium, advocated the opening up of the economies to import and export, holding that the international trade was beneficial and profitable for nations around the world. Samuelson (1948, 1949) further built upon this model through his contributions in the late 40s. Yet, the problem with this model was that it primarily elaborated on the benefits of import and export in terms of the gains accrued in welfare, without establishing a direct link between economic growth, and import and export. To put it simply, classical economists mostly delved on the continual competition between economic growth and population growth, with its inherent uncertainty. Industrial Revolution to a great extent decided the results of this competition in the favor of economic growth. The ebb end of this approach towards economics was that the subsequent economists stopped considering economic growth to be a problem or a challenge, and excluded it from their research pursuits and writings. Marshall (1890) did take pains to point out that “The causes which determine the economic progress of nations belong to the study of international trade.” To interpret this statement practically, the expansion of markets furnished by import and export significantly boosted the global production and favored the achievement of internal and external economies, translating into significant economic growth. Irrespective and despite of being aware of the gaps in his approach and the difficulties associated with his analytic treatment, Marshall did to a great extent understood the importance and relevance of import and export for economic growth. Once again, it was Young (1928) who showed a discernable concern for an interest in economic growth and pointed out that the constraints imposed by the limited size and scope of internal markets, hampered the division of labor and hence productivity. Young (1928) also researched the interrelationship existing between industries, the creation of new industries resulting through the extension of markets by import and export and the technological and managerial innovation, standardization and specialization brought in by the vast markets created through import and export. Another important name that needs to be mentioned in this context is that of Schumpeter. Schumpeter (1942, 1954) did recognize the capital accumulation as an important factor influencing economic growth. However, he went a step further by declaring innovation to be the chief ingredient of economic growth and the need for opening up markets to external economies through import and export, so as to give a fillip to innovation. The late 50s witnessed the resuscitation of the classical approach, but albeit with a provision for the accounting of economic growth. Solow and Swan proposed a model in 1956 that exploited a function of aggregate production to explain the relation between economic growth, accumulation of capital and savings. Strictly speaking, in economic terms, this model gave due importance to the convergence between economies. The achievement of Max Cordon (1997) was that he studied economic growth in terms of macroeconomic variables. Cordon (1997) emphasized the salubrious effect of import and export on the availability of factors of production and the overall productivity in an economy. Cordon (1997) declared that the import and export signified by international trade influenced the economic growth of a nation at a macroeconomic level by influencing the salient macroeconomic variables in an economy. He also proposed that the impact of import and export on economic growth was much strengthened as an economy further developed. Advancing a step further and in a new direction, Lucas (1999) considers technology to be the most important factor influencing productivity and economic growth. As per the proponents of new growth school, the economic growth in the developed nations is primarily propelled by the improvement in productivity through technological innovation. This school of thought holds that on the one side technology adds to global economic growth through a spillover effect and on the other hand, rise in imports and exports allowed for access to broader markets, enhanced competition, random and easy transfer and exchange of information, thereby nudging the trading countries to develop new technologies. Thus, in a contemporary scenario, international trade and technology change are intricately related and happen to be the primary engines of economic growth. The cooperation and exchange of information between economies allows for optimal allocation of resources at a global scale. Thus in the sphere of economic thought and modeling the scope of relation between economic growth and import and export graduated from being a harbinger of better division of labor and enhanced productivity, to an important factor influencing the national economies at a macro level, and finally being an engine for the optimal allocation of resources and information at a global level, through technological innovation. How Import and Export Influence Economic Growth First and foremost, import and export influence the economic growth through promoting economic integration. Varied think tanks right from the Classics have established beyond doubt that the enlargement of markets made possible by import and export stimulates the productivity in an integrated geographic group and hence in the constituent economies. Baldwin (1989) attempted an analysis of the impact of extended markets on European Union (EU) and arrived at the conclusion that the import and export promoted economic growth in the short run by influencing savings and investments and in the long run by influencing production, consumption and innovation. Further, Romer (1990) concluded that the economies open to import and export witnessed a high economic growth as its industries and workforce enjoyed a more ample and ready access to technological knowhow. Import and export also promote economic growth in the open economies through catch-up bonus. The economies readily open to import and export not only enjoy access to the latest and state of the art technologies, but also have at their disposal an indigenous pool of time tested technologies developed and adopted over time, which have proven their worth (Feder, 1982). So such economies do always have the advantage of being able to choose and select the right type of technological inputs, which are in consonance with their needs and requirements. Moreover, these economies are able to exercise this choice in a most cost effective way. As per the study undertaken by Feder (1982), the economies open to import and export do develop the ability over time to imitate technological leaders as well as the wherewithal to innovate, so as to enhance productivity and promote economic growth. The international trade in the developed economies, through the ensuing import and export acts as a promoter of the catch up effect. The catch up effect acts as an enhancer of productivity in an economy. This happens through the establishment of multiple channels. On the one side the local agents tend to import or develop the needed technological inputs and on the other side, the foreign firms residing in an open economy tend to develop or bring in the requisite investment technologies and capita. Conclusion The classical economists accorded a dynamic role to import and export in the objective of achieving economic growth. However, the pivotal role of international trade in economic growth was disregarded by the marginalist revolution. In the post 1870 scenario, economic growth was no longer regarded as a challenge or a problem by the economists under the influence of industrial revolution. However, there still existed some exceptions like Marshall who delved on the relevance and scope of import and export in economic growth. Further, Solow reawakened the relevance of economic growth. The contemporary economists and experts consider import and export as important attributes of economic growth. They allow for a ready exchange and transfer of technologies and information. The import and export also promote economic growth through catch-up bonus and spillover effect. Reference List Baldwin, R 1989, ‘The Growth Effects of 1992’, Economic Policy, Vol. 9, no. 3, pp. 248-281. Berg, Hendrik Van Den & Lewis, Joshua J 2006, International Trade and Economic Growth, M.E. Sharpe, New York. Corden, W Max 1997, Trade Policy and Economic Welfare, Oxford University Press, New York. Feder, G 1982, ‘On Exports and Economic Growth’, Journal of Development Economics, Vol. 12, no. 1, pp. 59-73. Heckscher, E 1919, ‘The Effect of Foreign Trade in the Distribution of Income’, Readings in the Theory of International Trade, pp. 272-300. Lucas, Henry 1999, Information Technology and Productivity Paradox, Oxford University Press, New York. Marshall, A 1890, Principles of Economics, Macmillan, London. Mill, JS 1848, Principles of Political Economy, Green and Co., London. 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