1. for especially the less developing countries (World

 

1. Introduction

The export-led growth hypothesis is a popular and a highly debated concept since many decades (Giles & Williams, 2000). Development and growth literature has seen economies achieve great success after relying on exports as a mechanism for economic growth and at the same time it has witnessed the failure of export orientated growth (Tang, Lai & Ozturk, 2015; Panagariya, 2000). Generally, we are able to find impressive growth records in Asia since the 1960’s resulting from their export promoting economies (Tang et al., 2015). These and earlier case studies have generated a large amount of research both theoretically focused as empirically focused on the role of export promotion, being part of the literature on outward orientation and growth. Examining the hypothesis of export-led growth is not a new idea and yet there is no consensus on the validity of the hypothesis. The debate often focusses on the exact role of export growth within the growth trajectories of countries, whether there is a real causality and if so how does this causality run? (Giles & Williams, 2000). The World Bank has a strong interest in the answers to questions related to this type of growth strategy. It is therefore that the World Bank continuously researches trade strategies and growth models for especially the less developing countries (World Bank, 1993; Tang et al., 2015). It is however of interest to consider the export promoting strategy in light of current day variables. The Asian countries might have been an exception, the current situation might not allow for a similar success or the strategy is valid and should be pursued. There is a great divergent between theory and empirical findings on both ends of the argument concerning export-led growth (Tang et al., 2015; Giles & Williams, 2000). Theory and empirical findings do not show a consistent pattern in agreement and often are found to oppose each other. This paper is interested to find the arguments, both theoretically and empirically, for and against export-led growth as a growth strategy for developing countries whilst keeping in mind recent global developments. It is therefore that this paper attempts to answer the question; to what extent is export led growth a stable growth strategy in 2018 for developing nations? Considering the fact that high reliance on exports for growth has proven to make countries vulnerable as seen during the global financial crisis in 2008 (Tang et al., 2015). Moreover, the world is currently in a limbo between a high degree of globalization and the tendency for inward looking economic policies and it is therefore necessary to be aware of the resistance of certain growth trajectories. This paper will hold the recent changes and events in mind whilst exploring to what extent export-led growth is a stable growth strategy for developing nations. The remainder of this paper is organized as follows. In section 2 we revisit the roots of the export-led growth hypothesis. In section 3, by the hand of surveying the different case study examples we will outline the different arguments for and against export-led growth. The conclusion, in light of the current day situation and further research areas are reported in section 4.

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2. Roots of the Export-Led Growth Hypothesis

The discussion on trade, which encompasses export, and economic growth has been going on for over two centuries (Medina-Smith, 2001). Starting with Adam Smith and the classical school of economics positive arguments were made for the case of trading in the global world. This literature has inspired many other big names to argue in favor of trade and economic growth such as James Mill and John Stuart Mill (Medina-Smith, 2001). In the discussion about trade also international specialization is touched upon as a logical consequence of international trading. Krueger (1978) and Bhagwati (1978) have discussed the literature on economic growth and trade extensively and form a strong foundation for the discussion, both papers consider import and export growth policies. They do however build the first building blocks for eliminating import orientated growth models and support the export orientated models in first instance. The economic framework under the neoclassical model did not allow for a change in the steady-state rate of growth therefore limiting the possibility to include long term effect of changes in trade policy (Baldwin, 2004). An extension on this problem was offered by the improvement of the endogenous growth theory. This literature showed the importance of trade for economic growth, by focusing on the different aspects of trade (Edwards, 1998). Romer (1986) and Grossman and Helpman (1991) focused on the relationship between international trade and growth, and was able to demonstrate how different factors could impact growth rates (Baldwin, 2004). One of the reasons that the literature on export-led growth has gained much attention is the many changes that have taken place in development economics international trade policies (Medina-Smith, 2001). Export-led growth gained attention after many developing countries following inward-orientated policies did not achieve positive economic growth results (Balassa, 1980). It is during the decades after the 1980’s that many arguments are being made against import-substituting industries (Panagariya, 2000). This was due to the fact that after the debt-crisis in 1982 many governments, mainly from small countries, realized that import-substitution was not a sustainable approach to growth (Baldwin, 2004). After the dismantling of these interventions the demand for new intervention policies grew and due to the political equation having changed, exports were being considered next (Panagariya, 2000). Many macroeconomic theorist and policy makers in mainly developing countries got onboard with these new policies as well as large international organizations such as the International Monetary Fund and the World Bank (Medina-Smith, 2001). After many countries, both developing and developed started to act upon the new insights for a growth strategy a whole new debate aroused concerning the effectiveness of the export-led growth mentality. Many empirical case studies have been carried out with often contradicting outcomes in the findings which is mainly due to the large differences in estimation technique, research set up and execution. It is worthwhile surveying the different types of research carried out regarding export-led growth case studies in order to answer the question if the strategy is a sustainable solution in current day events.

3. Continuous Disagreement Regarding Export-led Growth

The World Bank (1993) has clearly stated in their report the importance of the free-market and outward-oriented economic attitude for the success story of the Four Tigers. In their report they endorse the growth policies used and are interested in the appliance to other developing nations. This does however not lead to an agreement on the success factor of outward-oriented economic attitude and economic growth in both developed and developing countries. One of the main reason for the disagreement in the debate is the research methods used in order to detect causality and the impact of outward-oriented growth policies on growth. Edwards (1993) is one of the first to criticize cross-country statistical studies which investigate the relationship between trade and growth. In his argument he makes it clear that over simplified theoretical models are being used and that several econometric techniques are also not always applied appropriately. Almost a decade later Srivnivasan and Bhagwati (2001) also counter argue and criticize cross-country regressions because of the weak theoretical foundations and the lacking quality of the data which has to be used in order to obtain results. The positive effect of trade openness and growth has more recently also been criticized by Rodrik and Rodriquez (2001) and by another paper by Rodriquez alone (2007). The literature on evidence for the relationship for or against can be divided into two periods, the early and the recent, although even the early evidence is not so long ago as the debate started late 1980’s, just around 30 years ago. The international development economics arena is constantly moving and changing, and large events such as financial crisis occur impacting the view and understanding of theory and evidence.

3.1 Evidence of the first decade of the export-led growth hypothesis

Measuring trade openness and therefore the importance of export as part of the growth trajectory is difficult. This is also one of the reasons that there is still much debate on the topic. Nevertheless, it is noteworthy to examine the evidence presented in favor of the hypothesis that trade openness (export) has a positive effect on growth. In the first decade of the export orientated growth multiple researchers have attempted to identify the relationship and causality. Dollar (1992) based on real exchange rate as a proxy for trade liberalization found that countries who are more ‘open’ had a significant faster growth trajectory compared to less open countries. Following Dollar, Sachs and Warner (1995) compare closed and open economies and their development. They report high growth percentages per year for open economies close to 5% per year whilst closed economies in their research only grow at most 1% per year. After providing critique to the different cross-sectional studies done Edwards in his paper of 1998 demonstrates that the overall productivity (total factor productivity) of an open country is higher than for a closed economy. He explicitly states and test for robustness of measures of trade, functional form and econometric method and time span which was his earlier own criticism to papers covering the 1980-1990 period. The overall finding and argument from the early period of evidence is that there indeed exists a positive relationship between trade openness and growth (Tahir & Ali, 2014). The development in the literature supporting export led growth in first instance changed the perception of policy makers leaning more towards export led growth than previously import orientated growth strategies.

 

The documented positive relationship was however not accepted fully by the academic world as the first harsh critique was published in 2000. Rodrik and Rodriquez (2000), criticized early mentioned papers mainly on the measure of openness. Dollar (1992) measurement is based upon comparative price levels in 95 countries. Among trade economist measuring the level of openness based upon domestic prices has generally been rejected as a correct measurement for trade barriers (Baldwin, 2004). Rodrik and Rodriquez (2000) argue that Dollar’s measurement is mainly one of economic instability rather than outward orientation concluding that therefore his results do not confirm the hypothesis. Moreover, Rodrik and Rodriquez (2000) find that the results that Dollar presents are not robust to alternation in the growth equation he uses.

 

In the Sachs and Warner (1995), Rodrik and Rodriquez (2000) find that the significance of the results is provided by only two out the five indicators used in the regression, and both of the indicators responsible do not relate to the openness of the economy. They furthermore, find that one of the crucial indicators for the significance level is highly correlated with a dummy variable potentially explaining the blown-up significance. Lastly, is the paper of Edwards (1998) who has tried to improve upon his own criticism by including a systemic way to test for robustness (Baldwin, 2004). Rodrik and Rodriquez (2000) argue that even though Edwards tried to include systemic ways of testing for robustness, that his results are highly dependable on the fact that his regression is based on per capita GDP. Using a different method of including per capita GDP, such as the log of per capita GDP, drops the significance factors of multiple indicators. They therefore argue that all the above-named papers, which all heavily influenced the confidence in export-led growth do not provide for robust and significant empirical results that conform the theoretical hypothesis.

 

The academic world did respond to the heavy critic of Rodrik and Rodriquez by analyzing their critic points and attempting to offer counter arguments. Many of the counter arguments however focus on the relationship between trade restrictions and growth. They, papers such as Warner (2003) and Jones (2000), argue that there is indeed a negative relationship between trade restrictions and growth. It is however not a very strong response as a negative relationship of the opposite does not imply a positive for trade openness. Rodrik and Rodriquez criticized  

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