The high-income OECD countries of the world had about 75 percent of world exports in 1990. Today, about 30 years later, that share of exports has fallen to just over 50 percent. Seen from the other side, the share of world exports from developing countries was around 25 percent in 1990, and has risen to almost 50 percent in 2020.
Over the same period of the past 30 years, world exports have grown more than “five times”, from $ 3.5 trillion to $ 18 trillion. This means that developing countries have grown their exports exponentially much faster than rich countries, from less than $ 1,000 billion in 1990 to over $ 8 trillion in 2020. The change has not happened. was a miracle, because it was made possible by a decisive change in development policy. from import substitution to export promotion.
vs export promotion
As import substitution in developing countries failed to ensure their development, they began to adopt export-oriented policies – initially, a few countries in the 1970s, then many countries in the 1980s. , and finally almost all countries in the early 1990s.
Interestingly, Sri Lanka was one of the forerunners leading many others as early as 1977. But the initial export surge it experienced did not last more than two decades due to its own problems. , while most of the latecomers started to overtake Sri Lanka. Lanka. Some of us might have a question about “what are these own problems”. For now, I think a short answer would suffice: “We have not moved the reform agenda forward.
The issue we are addressing today is one that has allowed “export oriented” economies to grow rapidly. Last week we focused on the question of why import substitution economies have failed. We have seen that import controls can help few businesses to prosper; they can have a monopoly market where there is no competition from imports so that they can exploit their customers with high prices for poor quality. But we cannot multiply it at the national level by converting “import controls” into a national policy due to the problem of “compositional error”.
When countries began to move away from their import substitution policies and shift to export-oriented policies, we generally saw their exports increase and growth accelerate, along with the creation of income and jobs. As a result, they were able to generate foreign exchange earnings, which resulted in an increase in the stock of foreign exchange reserves and stable exchange rates, as well as increasing tax revenues to cover public expenditure. As the success of export-oriented economies became apparent, all developing countries began to adopt export-oriented policies – some abruptly, others gradually, and others with reluctantly.
Exports without opening
The shift to export-oriented policies required liberalization or market policies, which would have resulted in an “open economy”. Why can’t we generate exports without opening up the economy? Again, this is a question related to the “fallacy of composition”. For a particular business, this may be a possibility, while there may be businessmen who have made a fortune out of it. But if we try to multiply this trading experience at the national level by trying to push exports into an import substitution framework, it is a waste of time and resources. Evidence in this regard is not scarce around the world.
Faced with worsening foreign exchange shortages, many developing countries have attempted to push exports under their import substitution regimes, but without success. In fact, Sri Lanka was one of those countries and has been trying to push “non-traditional” exports since the 1960s. But it all became futile efforts, given the worsening currency shortage.
These kinds of strategies may work for someone who would benefit from import controls and also engage in exports, but that doesn’t mean that it works like a national policy. What is needed in a national policy is to put in place an “enabling policy environment” that would attract investment seeking global markets – and not just the internal market with a few million people.
A favorable political environment often requires liberalization policies, as they have all followed “import controls” leading to a political bias against exports. This “anti-export bias” must be eliminated by reducing tariffs, removing non-tariff barriers and relaxing exchange controls.
In addition, export growth requires private investment; because national private investment is too low to make a big leap forward. The door must be open to foreign direct investment (FDI). If FDI does not enter, there must be “something” taking them away from the country; it is not necessary to specify that these bottlenecks must also be removed.
Why do export-oriented policies work for developing countries? This was one of the important questions answered by a large body of business literature that has supported the decisive shift in global development thinking since the 1970s. They included theoretical and empirical studies conducted by various economists who have worked in the field of international trade as well as many global research organizations.
To find a simple answer to this question, one has to start with the “size” of the market, which is the world market in the case of export production versus the local market in the case of import substitution production. The global market offers both opportunities and challenges, while the local market is limited by both. The opportunities provide unlimited space for expansion and to reap the benefits of economies of scale; thus companies develop on a global scale and become competitive.
As challenges, global markets also provide a space for exposure to competition in terms of price and quality. As a result, there is a constant search for technological advancements and improved productivity because companies that do not carry these elements will naturally be forced out of the market.
There is no need to focus on competition in import substitution under import control, as these companies continue to survive without improving prices or quality and even without expansion. This means that export-oriented countries are ‘dynamic’ in terms of businesses as they continue to change and grow with new investments, technological upgrading and
productivity, while import substitution economies continue to stagnate.
As export-oriented policies began to spread in developing countries, supporters of old import substitution policies lost ground. Given the politics of academia, accepting reality is apparently a difficult choice; they began to fight with “defensive strategies” which gave birth to new turning points in the trade debate.
An important aspect of the defensive strategy was the idea of a “new export pessimism”. According to this argument, only a few countries can be successful in export promotion (as they referred to South Korea, Singapore, Taiwan and Hong Kong), but not everyone! This argument has lost ground as the expansion of world trade continues to grow and, its growth has been
even faster than the world
Another aspect of the defensive strategy, supported by evidence gathered from countries like South Korea, was that it was the government that supported the companies behind import protection and then turned them into export industries. Of course, governments have chosen companies to give them special favors; there are success stories as well as failures, while everyone likes to quote success stories but not cases of failure. The most profound proof is that it is the favorable “global” political environment that allows these countries to develop, and not the individual cases of recovery here and there.
Is Sri Lanka an Export-Oriented Economy? I’m sure that’s a moot question for many; if it is an export-oriented economy, there can be no political bias against exports. Sri Lanka’s track record from a comparative perspective is, in any case, a reflection of the poor export performance over the past 25 years! For the same reason, we have been caught up in the above debate and left in limbo with no idea where to turn!
(The author is Professor of Economics at the University of Colombo and can be contacted at
[email protected] and follow on Twitter @SirimalAshoka).