Why the past successful export-led growth model cannot continue - Essay Example

Why the Past Successful Export-Led Growth Model Cannot Continue Introduction An export-led growth model refers to an economic approach, adopted by a country, which specializes on export (Aghion & Durlauf, 2013). This model is adopted developing nations in an attempt to increase the country’s Gross Domestic Product among other indexes that determine the wealth of a country. The countries with this model research on products that it can produce efficiently and supply those commodities to other countries.

This type of economy favours countries that can efficiently produce manufactured goods, raw materials or information services (Seyoum, 2013). This essay will take a closer look at this model and its sustainability issues. Moreover, the essay will also attempt to assess the economic position of China and the challenges it faces in currently and in the future. Finally, the essay proposes several reforms that will remedy China’s economy for the future. Export-led Economic Model 2013 is considered a successful year for China as its economy grew by 7.7%. Its growth is often attributed to its workforce; China’s population is over 1 billion, and its productivity (Seyoum, 2013).

These factors foretell success for the country as it tries to maintain its position as the world’s leading trading nation. Furthermore, with these factors the China cannot overstretch its resources while supplying commodities. This model, based on export, was brought into the limelight after the 2008-2009 financial crises. Many financial and economic experts laid the blame on this economic model. Despite the success of the model, many questions are being raised about the model (Yang 2008).

Primarily, is whether the model can continue defining the strategies being adopted by countries in international trade. Secondly, is the model going to adapt to the dynamic global circumstances of the 21st century. The model has crumbled leading to the two financial crises in this century (Aghion & Durlauf, 2013). The viability of the model for future economies is the dilemma facing today’s economists. Is the model obsolete and do we require a different approach in the international market for developing market.

Why the Export-Led Model Cannot Continue Despite transforming countries into export giants, export-led economies are not sustainable because of several reasons. The days when adopting an export economy was considered as a successful strategy in the international trade are over (Aghion & Durlauf, 2013). East-Asian countries, which rely on this model, face several problems after implementing the model. The model results in an excessive production capacity by its industries (Yang 2008). Over a medium term, the profits projected for this model are not achieved.

The entry of China in the market has altered the model significantly. China has out-produced these East-Asian economies and this has led to their demise. China’s resources cater for lower production costs and consequently low pricing of the commodities in the international market (Seyoum, 2013). The economic might of China has made the use of this model by other countries not feasible in the end. The second challenge that faces the model is the fact that China has no competitor in the import business.

The USA has, in recent years, declined its impact in international trade (Aghion & Durlauf, 2013). It is faced with debts that do not allow it to compete with China and enhance favourable market conditions for the export-driven economy. Western countries and China have failed in filling this void, as they cannot match the import demand of the US. Another significant challenge facing the model is the ever-rising energy and resource costs (Aghion & Durlauf, 2013). This increase in costs leads to reduced production networking and results in further trade and growth.

Finally yet importantly, the export-driven model grew due to the technological advancement in recent decades. However, technological innovation is in a declining state as focus shifts from this sector. The market has become flood with technology that is becoming obsolete in an alarming rate (Aghion & Durlauf, 2013). New technology in the form of nanotechnology, bioinformatics and others are not being produced to add freshness in the market. The major challenges for China’s Economy Despite the growth of China’s economy, there are several emerging challenges that might derail this progress.

The first challenge is the slow growth of the economy, which is because of the global financial crises (Fewsmith, 2010). The country’s economy did bounce back, contrary to expectations, but it might experience a recession in the near future. In order not to slip back, Beijing should adopt economic policies that balance both stability and reform. The second challenge that raises major concern is China’s increasing population and its weak agricultural sector. China’s agricultural produce cannot sustain its billion citizens (Fewsmith, 2010).

Moreover, the population is expected to rise in the next decade increasing the demand for agricultural produce. If the country fails to ensure food security for its citizens, its economy will crumble (Ash, Howe & Kueh, 2013). The astonishing growth of China’s economy led to the development of bubbles that benefited from the growth. As the economy faces slow growth, the bubbles will begin bursting. If the bubbles collapse quickly, the country is bound to experience an economic crisis and to some extent social unrest (Ash, Howe & Kueh, 2013).

There are not many people who acknowledge that China’s economy is unsustainable. Growth of an economy is usually used as the yardstick in measuring an economy. However, China’s GDP levels do not mirror those of its economic growth (Fewsmith, 2010). China’s GDP per capita is low for a country with the second largest economy in the world. The growth rate of the GDP per is not impressive. This is attributed to the large income gap between the rich and poor in the country. Another area of concern is China’s energy consumption.

The growth of its economy has impacted negatively on the country’s resources (Ash, Howe & Kueh, 2013). China, to boost economic growth, subsidized land and energy prices. This subsidization led to the inefficient use of energy that ultimately led to the environmental conditions present in the country. China’s haste for economic superiority led to the use of unsustainable practices leading to environmental degradation and deprivation of resources (Ash, Howe & Kueh, 2013). Suggested Reforms for China’s Economy The export-led economic strategy has worked miracles for China; however, the model is not sustainable in the future as elaborated by the aforementioned facts.

To continue its growth, China needs to embrace another strategy that is sustainable in the new world economy (Aghion & Durlauf, 2013). This new model should rely less on exports due to the declining economies of the West, Japan and the USA. Additionally, the model should reduce the use of fixed asset investment. Some of the areas the model should focus on are domestic consumption together with technological innovation (Ash, Howe & Kueh, 2013). These two areas benefits the country’s middle class and helps in the bridging the income gap in the country.

The country should seek to improve on its manufacturing philosophies, from low-end to high-end products. This improves the pay the workers get and, in the end, improves the demand of the country (Ash, Howe & Kueh, 2013). Consequently, the country’s products have a domestic market together with the international market. The domestic market acts as a safe-net in case exports fail to trade as expected (Ash, Howe & Kueh, 2013). By increasing workers pay, the country kills two birds with one stone.

First, the income gap is reduced and secondly, China’s economy does not solely rely on international trade for economic growth. Technological growth is the other reform that will improve China’s current situation (Ash, Howe & Kueh, 2013). The manufacturing companies in China rely on Western designs to create their products. Through patent laws, China’s companies contribute a lot to Western countries in order to utilize the designs. This extra cost is reducible through promoting innovation in the country.

China will get more profits than before by using their own designs (Ash, Howe & Kueh, 2013). This will increase the revenue stream into the country instead of transferring it to Europe. The aforementioned reforms will assist the country in changing its export-led model into a more sustainable model. Conclusion In summary, countries seeking to grow their economies should not adopt this model. India, another rapidly developing economy, has adopted a different strategy to remain competitive.

Less capital-intensive alternatives such as services are alternatives offered to countries. References Aghion, P., & Durlauf, S. (2013). Handbook of Economic Growth (Vol. 2). Newnes. Seyoum, B. (2013). Export-Import Theory, Practices, and Procedures (Revised). Routledge. Yang, J. (2008). An Analysis of So-Called Export-Led Growth. International Monetary Fund. Ash Robert, Howe Christopher & Kueh Y.Y (2013). China’s Economic Reform: A Study with Document. Routledge. Fewsmith Joseph (2010).

China Today, China Tomorrow: Domestic Politics, Economy, and Society.Rowman & Littlefield Publishers.