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Export-oriented industrialization (EOI) sometimes called export substitution industrialization (ESI), export led industrialization (ELI) or export-led growth is a trade and economic policy aiming to speed up the industrialization process of a country by exporting goods for which the nation has a comparative advantage. Export-led growth implies opening domestic markets to foreign competition in exchange for market access in other countries.
However this may not be true of all domestic markets, as governments may aim to protect specific nascent industries so they grow and are able to exploit their future comparative advantage and in practise the converse can occur. For example, many East Asian countries had strong barriers on imports from the 1960s to the 1980s.
Reduced tariff barriers, a floating exchange rate (a devaluation of national currency is often employed to facilitate exports), and government support for exporting sectors are all an example of policies adopted to promote EOI and, ultimately, economic development. Export-oriented industrialization was particularly characteristic of the development of the national economies of the Asian Tigers: Hong Kong, South Korea, Taiwan, and Singapore in the post-World War II period.
Export-led growth is an economic strategy used by some developing countries. This strategy seeks to find a niche in the world economy for a certain type of export. Industries producing this export may receive governmental subsidies and better access to the local markets. By implementing this strategy, countries hope to gain enough hard currency to import commodities manufactured more cheaply somewhere else.
From the Great Depression to the years after World War II, under-developed and developing countries started to have a hard time economically. During this time, many foreign markets were closed and the danger of trading and shipping in war-time waters drove many of these countries to look for another solution to development. The initial solution to this dilemma was called import substitution industrialization. Both Latin American and Asian countries used this strategy at first. However, during the 1950s and 1960s the Asian countries, like Taiwan and South Korea, started focusing their development outward, resulting in an export-led growth strategy. Many of the Latin American countries continued with import substitution industrialization, just expanding its scope. Some have pointed out that because of the success of the Asian countries, especially Taiwan and South Korea, export-led growth should be considered the best strategy to promote development.
Export-led growth is important for mainly two reasons. The first is that export-led growth can create profit, allowing a country to balance their finances, as well as surpass their debts as long as the facilities and materials for the export exist. The second, much more debatable reason is that increased export growth can trigger greater productivity, thus creating more exports in an upward spiral cycle.
The importance of this concept can be shown in the model below from J.S.L McCombie and A.P. Thirwall's Economic Growth and the Balance-of-Payments Constraint.
yB is the balance of payments constraint, meaning the relationship between expenditures and profits
yA is the actual growth capacity of a country, which can never be more than the current capacity
yC is the current capacity of growth, or how well the country is producing at that moment
(i) yB=yA=yC: balance-of-payments equilibrium and full employments
(ii) yB=yA<yC: balance-of-payments equilibrium and growing unemployment
(iii)yB<yA=yC: increasing balance-of-payments deficit and full employment
(iv) yB<yA<yC: increasing balance-of-payments deficit and growing unemployment
(v) yB>yA=yC: increasing balance-of-payments surplus and full employment
(vi) yB>yA<yC: increasing balance-of-payments surplus and growing unemployment (McCombie 423)
Countries with unemployment and balance-of-payments problems look to export-led growth because of the possibility of moving to either situation (i) or situation (v).
Types of exports
Manufactured goods are the exports most commonly used to achieve export-led growth. However, many times these industries are competing against industrialized countries' industries, which often have better technology, better educated workers, and more capital to start with. Therefore, this strategy must be well thought out and planned. A country must find a certain export that they can manufacture well, in competition with industrialized industries.
Raw materials are another export option. However, this strategy is risky compared to manufactured goods. If the terms of trade shift unfavorably, a country must export more and more of the raw materials to import the same amount of commodities, making the trade profits very difficult to come by.
Despite its support in mainstream economic circles, its success has been increasingly challenged over recent years due to a growing number of examples in which it has not yielded the expected results. EOI increases market sensitivity to exogenous factors, and is partially responsible for the damage done by the 1997 Asian financial crisis to the economies of countries who used export-oriented industrialization. It is also criticized for its lack of product diversity as economies pursue their comparative advantage, which makes such economies potentially unstable if demand for their specialization falls. This is something which occurred during the financial crisis of 2007–08 and subsequent global recession. Similarly, localized disasters can cause worldwide shortages of the products that countries specialize in. For example, in 2010, flooding in Thailand led to a shortage of hard drives.
Other criticisms include that export oriented industrialization has limited success if the economy is experiencing a decline in its terms of trade, where prices for its exports are rising at a slower rate than that of its imports. This is true of many economies aiming to exploit their comparative advantage in primary commodities as they have a long term trend of declining prices, noted in the Singer-Prebisch thesis though there are criticisms of this thesis as practical contradictions have occurred.
Primary commodity dependency also links to the weakness of excessive specialization as primary commodities have incredible price volatility, given the inelastic nature of their demand, leading to a disproportionately large change in price given a change in demand for them.
The problem is that EOI presupposes that a government contains the relevant market knowledge to judge whether or not an industry to be given development subsidies will prove a good investment in the future. The ability of a government to do this may be limited as it will not have occurred through the natural interaction of market forces of supply and demand. Also to exploit a potential comparative advantage requires a significant amount of investment which governments can only supply a limited amount of. In many LDCs, it is necessary for multinational corporations to provide the foreign direct investment, knowledge, skills and training needed to develop an industry and exploit the future comparative advantage.
Scholars have shown that governments in East Asia, however, did have the ability and the resources to identify and exploit comparative advantages. EOI has therefore been supported as a development strategy for poor countries because of its success in the Four Asian Tigers. However, this claim has been challenged by the evidence of very specific historical conditions in East Asia that were not present elsewhere, and which allowed for the success of EOI in these nations. Japanese producers, for example, were given preferential access to US and European markets after World War II. This, in turn, made it possible for countries like South Korea and Taiwan to later become incorporated into Japan’s overseas marketing networks as Japanese trading conglomerates were seeking to offload the lower end of their manufacturing value chain to other countries. By virtue of this connection to Japanese commercial networks, South Korean firms had "access to export markets that virtually no other country—except Taiwan—enjoyed." Without these advantages, it is doubtful that EOI could be as successful in other countries as it was in East Asia.
- Goldstein, Joshua S., and Jon C. Pevehouse. International Relations. 8th ed. New York: Pearson Longman, 2008.
- Gibson, Martha Liebler, and Michael D. Ward. "Export Orientation: Pathway or Artifact?" International Studies Quarterly 36.3 (1992): 331-43.
- McCombie, J.S.L., and A.P. Thirlwall. Economic Growth and the Balance-of-Payments Constraint. New York: St. Martin's, 1994.
- Prabirjit Sarkar. "EconPapers: The Singer-Prebisch Hypothesis: A Statistical Evaluation".
- Borden, William (1984). The Pacific Alliance: United States Foreign Economic Policy and Japanese Trade Recovery, 1947-1955. Madison: University of Wisconsin Press. p. 187.
- Chibber, Vivek (2003). Locked In Place: State-Building and Late Industrialization in India. Princeton University Press. p. 65.