The Diminishing Returns to Export-Led Growth

Overview

In the 1970s and 1980s, there was a tremendous sea-change in development policy thinking, among both academic economists and policymakers. The inward-oriented, import-substitution strategy of the 1950s and 1960s became discredited and was replaced by an outward-oriented, export-promotion strategy. Although there was resistance, both intellectual and political, to this shift, by the early 1990s the battle was essentially over, and the export-promotion approach had won. This victory was aided in part by pressures from the U.S. government and the Bretton Woods institutions (the World Bank and the International Monetary Fund) in the aftermath of the 1980s debt crisis.

However, it was also based on the apparently superior outcomes of the leading export-oriented economies in terms of both growth and equity objectives. By the 1990s, the debate had shifted. Rather than focusing on whether an outward-oriented approach was superior, discussion now centered on why it was superior and what kinds of policies best promoted export-led growth. With regard to why export promotion was so vital, discussion focused on the relative importance of factors such as encouraging efficiency in resource allocation, stimulating learning effects and technological dynamism, and relaxing balance-of-payments constraints. With regard to policies, debate centered around whether export promotion was best achieved by laissez-faire policies that "let markets work" and "got prices right," or by government intervention that directed resources to strategic industries and altered price signals accordingly.

In all of this discussion, the countries that were held up to the world (by every side in each debate) as the shining exemplars of successful, export-led, outward-oriented growth were the so called "Four Tigers" (South Korea, Taiwan, Singapore, and Hong Kong), and the next wave of newly industrializing countries (NICs) in southeast Asia (such as Thailand, Malaysia, Indonesia, and China). Accordingly, it came as a major shock when many of these nations fell victim to a widespread financial crisis that sparked a sharp economic downturn in 1997-98. Although some non-Asian countries such as Russia and Brazil were caught in the shock waves after the Asian crisis, the core mystery is why a region whose development process had been widely viewed as highly successful, if not miraculous, was at the epicenter of such a gargantuan economic earthquake. Was Asia merely the victim of some contingent (and potentially correctable) circumstances, such as mismanaged exchange-rate pegs or prematurely liberalized financial markets? Or did the financial crisis reveal some deeper, under lying flaws in the Asian development model -- and if so, what are those deeper flaws, how can they be fixed, and what are the implications for development strategies in other regions?