The Export of Manufactured Goods to Generate Economic Growth - Essay Example

To what extent is it sustainable for countries to rely on the export of manufactured goods to generate economic growth? Introduction Economic growth indicates a positive change in the national income or gross national product of a country over a certain period of time. A lot of research work has been devoted to study the concepts and complexities determining economic growth. However, in recent times, focus of the economists has shifted to vigorously study the complexities of long-term economic growth or sustainable economic growth, an area that is now called endogenous growth theory. (Barro and Martin, 2004). Economists believe that economic growth is a complex process and it depends on a variety of factors, including the level of exports. According to the export-led growth hypothesis (ELGH), it is not only through increased application of labour and capital that overall growth of the national economies is possible but this can also be done through raising the levels of exports. According to the proponents of ELGH, exports can serve as an “engine of growth.” (Smith, 2001, p. 1) This theory of export-led growth has ample practical support from various countries, especially the developing countries. In recent times, trade policies of many developing nations have indeed become similar as the common believe has been that liberalization aimed at promoting exports is the panacea for all growth ills. Many unsuccessful cases of import substitution, led to trade policy shift to export promotion. The success stories of East Asian nations such as Singapore, Taiwan, Hong Kong and South Korea with respect to manufacturing exports have inspired others to emulate the policy of export promotion even for themselves. However, in recent times the strategy of export-led growth has received a severe drubbing as the Japanese and South Korean manufacturing export-led growth have cooled down. A major global recession would certainly cause difficulties for unhindered growth of these export-led nations. This crisis-driven slump in exports have in many countries has accentuated the significance of generating more domestic demand. Impact of economic growth The theoretical link between economic growth and trade is centuries old. The earliest proponent of the positive relationship between trade and economic growth is the classical economist Adam Smith. Subsequently, other classical economists such as James Mills, John Stuart Mill, Ricardo and Torrens improved upon the theory of Smith. Since then, the positive impact of trade on the economy has been well established through indisputable benefits of international specialization and productivity gain. In this context, Ibrahim (2002) observes, “Exports contribute to economic growth in a variety of ways — greater capacity utilization, economies of scale, incentives for technological improvement and pressure of foreign competition, leading to more efficient management. Thus, marginal factor productivities are expected to be higher in export industries than in non-export industries.” (Ibrahim, 2002, p. 4). Majority of the economists and the think tank in the leading multilateral organizations are of the opinion that export expansion is beneficial for plethora of reasons (1) it creates more economies of scale and generate capacity utilization; (2) it leads to deeper application of technology; (3) it generates more employment opportunities and raises the productivity of labour; (4) it improves allocation of scarce resources in the economy (5) it eases the pressures on current account by augmenting the external earnings of the country and attracts more foreign investment in to the domestic economy; and (6) It raises the total factor productivity which results into overall betterment of the country. (Smith, 2001, p. 4) Competitive issues in international markets In many cases, it has been the comparative advantage of abundant supply of cheap labour that has been instrumental in export-led growth. However, that alone is not sufficient to achieve price competitiveness in the international markets. In order to give a fillip to the export-led growth strategy, direct sops and benefits have been accorded to the exporting industries. These incentives have actually helped those industries to enhance competitiveness. Contentiously, these are akin to market distortions, and are in discord with the WTO mandate of free trade. Ultimately, growth of the exports depends on foreign demand, which again depends on the economic performances of the partner countries. (Hossain, 2006, pp. 8-81). A global recession can have damaging impact on the exports and therefore its GDP. This has actually happened during the latest recession time. Given this kind of external shock, reliance on selected commodities (essentially on one group of commodities), lack of export-market diversification and the emergence of new competitors can only add to the vulnerability of the manufacturing export-led growth. The recent financial crisis, which first started in the real estate market in US, has badly impacted the financial markets across the world. With shrinking demand in the US and Europe, export earnings of many countries have plummeted. Exports of the countries in the East Asia and Japan have been adversely affected. Exports, rather manufacturing exports played/play a crucial role in the economic development of these nations. Whatsoever, as the export-led economy matures, this kind of development model soon starts suffering few bottlenecks. In this context, it may be observed, “Export-oriented economies can develop rapidly in their early stages through the use of their cheap labor resources as well as foreign capital, technologies and markets. But with their expansion, the driving force provided by exports will inevitably decline. There are several reasons for this. First, due to low added value, manufacturing for export can only make profits by selling a large quantity of products. But it is difficult to increase dramatically once a certain level is reached. In addition, manufacturing industries are mostly labor-intensive. When an economy develops to a certain level, human resource costs will rise, thus undermining industrial advantages.” (Beijing Review, 2010) Concluding remarks The financial crisis has underscored the danger of excessive reliance on exports. If a nation relies very much on exports in the long run, then it will be tough for it to sustain the growth momentum due to changes in the external economic environment. This has brought the importance of rejuvenating the domestic demand to the fore. While promoting growth through exports of manufactured goods made with cheap labour, it has also at the same time kept its domestic economy roaring through huge investment in infrastructure and related fields. However, there is also a problem with China. The problem is not its dependence on exports, but its dependence on exports of manufactured goods. “Manufacturing is at the low end of the value chain, which puts China at a disadvantaged position in international wealth distribution.” (Beijing Review, 2010) References 1. Barro, R and Martin, X. (2004). Economic Growth. Cambridge. MIT Press. 2. Beijing Review (2010). High Time for a Transition. Retrieved on August 12, 2010 from: http://www.bjreview.com.cn/quotes/txt/2010-07/20/content_285699_2.htm 3. Hossain, A. (2006). “Sustainability of Export-Led Growth in Developing Countries : Insights from Bangladesh’s Experiences”, In , Leading Economic and Management Issues Involving Globalisation, J. Aurifeille et al (ed), New York: Nova Publishers. 4. Ibrahim, I. (2002) On Exports And Economic Growth. Jurnal Pengurusan. Retrieved on August 12, 2010 from: http://pkukmweb.ukm.my/~penerbit/jp21-01.pdf 5. Smith, E. (2001) Is the Export-Led Growth Hypothesis Valid for Developing Countries? - A Case Study of Costa Rica. United Nations. Retrieved on August 12, 2010 from : http://www.unctad.org/en/docs/itcdtab8_en.pdf Read More