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Export-led growth

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 29 Dec 2018

Export led growth is where a significant part of the expansion of real GDP, jobs and per capita incomes flows from the successful exporting of goods and services from one country to another.

In recent years a number of countries have experienced rapid growth across a number of export industries which has helped to fuel their long-run expansion. These nations include China, Ireland, South Korea, Singapore, Hong Kong, Vietnam, Ethiopia and other emerging countries.

Some of them have experienced a marked increase in their trade-to-GDP ratio which measures the total value of trade (exports + imports combined) expressed as a percentage of GDP.

Advantages of export-led growth

  1. Exports of goods and services are an injection into the circular flow of income leading to a rise in aggregate demand and an expansion of output. This helps to raise per capita incomes and reduce extreme poverty especially in developing/emerging economies
  2. Growing export sales provide revenues and profits for businesses which can then feed through to an increase in capital investment spending through the accelerator effect. Higher investment increases a country’s productive capacity which then increases the potential for exports.
  3. Many industries help facilitate trade such as trade insurance, logistics and port facilities. Countries with fast-growing export sectors are likely to see increased investment and employment in these related industries. A good example is the importance of trade to countries such as the Netherlands (including the port of Rotterdam), and Singapore and Hong Kong both of which have developed in globally-scaled hubs for trade

Exports of goods and services as a % of GDP for Vietnam

Potential risks and drawbacks from export-led growth

  1. Focusing on exporting might lead to over-dependence on the economic cycles of trade partner countries and vulnerability to external economic and political shocks
  2. Running persistent trade surpluses might incite a protectionist response from other nations who feel that the benefits of trade have been unequally skewed in favour of exporting countries. Huge trade imbalances remain a big concern in the global economic system
  3. Production capacity allocated to supply goods and services for export cannot be put to use meeting domestic needs and wants. There might be a consequent dip in domestic living standards unless the country is also prepared to import goods and services using the revenue generated from exporting
  4. Rapid export-led growth might lead to demand pull inflation and higher interest rates. High relative inflation might then have the effect of making export industries less competitive in overseas markets and domestic producers less price competitive against imports
  5. Export-led growth might be unsustainable if it contributes extraction of natural resources beyond what is required for long term balanced growth to be maintained. Consider for example the impact of deforestation and over-fishing and degradation of land by industrial-scale farming.

Overall, export-led growth has been important for many countries. The challenge is to make ensure that a country is exporting a sufficiently diverse range of products (e.g. to avoid some of the risks from primary product dependency) and also that the benefits from increased exports and growth are widely dispersed across the population.

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