Outline the debate about whether ‘export-led growth’ is better or worse than ‘import substituting industrialisation’ as an industrial policy for LDCs.
Industrial policy is undoubtedly at the centre of development. Just as industrialisation in the UK and Western Europe during the eighteenth and nineteenth centuries was seen as the first real opportunity to end material want and suffering, so the process of industrialisation is seen as the most important, if not the only, option to LDCs in improving economic growth and social welfare. Increasing the proportion of economic activity made up of industry is closely correlated with increases in economic growth and GDP. And while economic growth is not synonymous with development, as a country’s economic growth improves, there are more funds available for social development, higher employment rates and an increase in investment. Altering over time the structure of the economy from a high proportion of agriculture towards a growing industrial sector, especially manufacturing, is therefore seen as a positive movement in order to achieve economic growth. But if there is a broad consensus regarding the important role of industrialisation in achieving development, then there are different views held as to how LDCs should seek to achieve this structural change. These have developed over time and have been influenced by global events and differing ideologies. The central question revolves around a discussion about whether it is more desirable for LDCs to leave domestic and international market forces to achieve an increase in the industrial base, letting capital, goods, technology and labour freely move in and out, or whether the state should be actively involved. Are there different stages, or certain circumstances, at which one or other of these strategies might be favoured? And should LDCs try to maximise trade with other countries to bring in funds for development, or protect their domestic industry from foreign imports?
This essay discusses the two most influential and widely-adopted strategies that have dominated industrialisation theory since the 1930’s, that is, ‘import substitution’ and ‘export-led’ industrialisation. It first looks in more detail at the importance of industrialisation and trade, and the reasons why it is seen as crucial for LDCs to make the structural change from agriculture to industry. It then gives a broad outline of the main differences between the two strategies. It then goes on to deal in more depth with import substitution industrialisation, discussing the historical context for the development of structuralism, and analysing the successes and failures in Latin America in implementing the strategy and its demise. A discussion of export-led growth follows, proposed by neo-liberalist theories, focussing on the experiences of South Korea and other East Asian ‘tiger’ countries implementing this strategy. Lastly, this essay draws conclusions regarding the relative successes and failures of each strategy, before looking at the current situation and making recommendations for LDC industrialisation and trade for the future.
In order to earn foreign exchange, afford imports, make debt repayments and achieve economic growth, LDCs must trade with industrialised countries and with each other. Indeed, the promotion of exports has long been considered a major ingredient in any viable development strategy. Kirkpatrick and Nixson (1983) go so far as to say that most LDCs regard industrialisation as the fundamental objective of development. Traditionally, most LDCs have conducted the vast majority of their trade with industrialised countries, trading primary commodities such as food and raw materials for manufactured or ‘finished’ goods. Although industrialisation has been a focus for development strategy for over 50 years, most LDCs still rely on primary products for about three quarters of export earnings. In the poorest countries this is even higher – Tanzania for instance relies on agriculture for 80 per cent of exports while 85 per cent of the workforce is employed in agriculture. This pattern of trade has its basis in colonial times, when colonies were seen as places from where commodities could be extracted rather than areas for investment in technology and industrial infrastructure, and the process of industrialisation of Western Europe was undoubtedly supported by the extraction of minerals and food from colonies. This meant that, at independence, most LDCs lacked a developed industrial sector. In the absence of capital for investment in technology and machinery, they therefore tended to continue to export primary commodities in which they had a comparative advantage in terms of climate and specialisation (for example coffee, tea, tropical fruits, rubber or cotton).
However, it is widely acknowledged that promotion of agricultural exports does not lead to sustained economic growth to the extent that industry, particularly manufacturing, can do. There is correlation between level of development and GDP by sector, as Table 1 (see Appendix) shows. The level of development goes up as there is less emphasis on agriculture; the poorest countries in Table 1 have a markedly larger agricultural sector than the ‘upper-middle income’ countries of Malaysia and Costa Rica, where there has been a transition to industry and service provision. There are several reasons for this. Perhaps the most important is that terms of trade for primary commodities have tended to go down over time, meaning that in order to earn the same amount of foreign currency over time, LDCs are required to keep a sustained increase in the level of exports, and in order to improve growth, a huge increase in exports is required. There are several barriers to this increase – intensification of agriculture requires inputs such as machinery and fertiliser, manufactured goods that must be imported, cancelling out some of the gains of increased exports. In addition, growth in demand for primary products is relatively inelastic compared to manufactured goods; even if a country is able to produce more over time, demand will not match this increased supply. This pattern has been exacerbated by the replacement of traditional commodities such as cotton and rubber with synthetic substitutes manufactured in industrialised countries.
On the other hand, demand for manufactured products rises much more steeply over time. According to Todaro (2000), every 1 per cent increase in an industrialised country’s income will raise the demand for food by 0.6 per cent and for primary commodities by 0.5 per cent, but demand for manufactures by 1.9 per cent. The fact that manufactured products are ‘value added’ – the total value of the finished good is more than the sum of the raw materials used to make it - means not only that more can be earned by exporting them but that valuable foreign exchange for imports can be saved if products are produced for the domestic market as well. In addition, LDCs compete with each other for finite industrialised country markets. As each country attempts to maximise its trade share, competition increases and prices go down. This was particularly true during the 1980’s as so many LDCs were coerced into opening up their economies to international trade in order to make repayments on debts; commodity prices went down especially rapidly. For an LDC wishing to maximise the benefits of trade, these are cogent arguments for the development of an industrial base, and these have resulted in emphasis on industry and a neglect of agriculture in recent decades, which has further fuelled the slow growth of income from primary commodities.
The crucial difference between import substitution industrialisation and export-led strategies is that the first is ‘inward-looking’ identifying a strong role for the state, and the second is ‘outward-looking’, relying on market forces to achieve industrialisation, but there are commonalities as well. Both sets of policies concern themselves with the establishment of industrial capacity and with international context and trade. In addition, they are not mutually exclusive; LDCs have drawn on components of each to formulate an overall trade and industry strategy. It is interesting, for instance, that Brazil, often cited as an economic ‘miracle’ (see for instance Todaro, 1992, and Hewitt, Johnson and Wield, 1992), through following an import substitution industrialisation strategy, is classified as ‘moderately outward oriented’ by the World Bank, while Malaysia and Thailand, seen by many as newly-industrialised examples of export-led growth strategy, share the same classification as Brazil (Development Report, 1987). In terms of inward versus outward –oriented trade orientation, the World Bank’s 1987 report measures economic performance by orientation and these clearly show that although both strategies resulted in improved GDP, inflation, GNP per capita and percentage of manufactured exports between 1963 and 1985, that outward-orientation had markedly better performance.