critical evaluation of export substitution

8/9/2019 Critical Evaluation of Export Substitution

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04/25/10 - Critical Evaluation Of Export Substitution

The three decades since 1965 witnessed rapid expansion in exports ofmanufactures from LDCs to the developed country markets. In the process, therewas also increasing diversification in the manufactured exports. That is, the range ofexports widened. The initial concentration around labour intensive, technologicallystandardised, older products (e.g. textiles?yarn and fabrics?clothing, footwear, toys,electronic assemblies, sports goods, bags, wood products, processed foodstuffs,etc.) was followed by new exports that were relatively more skill intensive andcapital intensive as well (e.g. ships, TV sets, parts, components and accessories of

engineering products, steel, electrical machinery and other producergoods?machine tools?etc.).

An important question in the trade policy debate concerns the potential for futuregrowth in exports of manufactures from LDCs to the developed countries. In otherwords, what is the scope for the transferability of the successful experiences of theEast Asian countries to other LDCs?

The answer to this question, broadly speaking, can be presented by way of the

views of the pessimists on the one hand and the views of the optimists on the other.While the pessimists refer to demand constaint, the optimists refer to the supplysided competitiveness.

The Views of the Pessimists: New Export Pessimissm

First, the pessimists argue that the progress in manufactured exports was largelyconcentrated in four East Asian nations (i.e. South Korea, Taiwan, Hong Kong, andSingapore). They together account for more than two-thirds of total LDCmanufactured exports. In the rest of the Third World, primary products, which arethe traditional mainstay, remain the predominant export.

Secondly, the pessimists argue that the success of the four Asian Tigers owes a lotto certain initial favourable conditions that they experienced which are not available


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to the newer LDCs trying to copycat the experience of the pioneers. Thesefavourable initial conditions were as follows: (i) favourable access to markets ofdeveloped countries characterized by rapid economic growth and tradeliberalisation; (ii) increased and easy access to international finance from privatecapital markets; and (iii) increasing relocation of production by manufacturing asalso trading multinational corporations in order to seek low cost sources of supply,especially based on cheap labour in the Third World countries. As against these, thechanging conditions of the world economy since 1973 through the 1980s and 1990shave been hostile to increasing exports of manufactures from the Third World. Thecounter arguments of the pessimists are as follows: (a) The developed countries

have been afflicted with deceleration in growth or stagflation; (b) the governments ofthe developed countries have not let their ageing or ?sunset industries' to dieeconomic death in the face of growing international competitiveness from the ThirdWorld, by granting them high effective rates of protection. Furthermore, thedeveloped countries have resorted to ?new protectionism' in terms of non-tariffbarriers (NTBs) which have discriminated most severely against exports ofmanufactures from the LDCs. The various NTBs are as follows: (a) import quotas;(b) voluntary export restraints?VERs?whereby the developed countries induce othernations to reduce their exports voluntarily, under the threat of higher allround trade

restrictions when those exports threaten an entire domestic industry in terms ofdumping; (c) very stringent technical, administrative and other regulations?safetyregulations (e.g. in automobiles and electrical equipments), redtapism andharassment in customs procedures, health and sanitary regulations (e.g. inproduction and packing), environmental regulations, labelling requirements (showingorigin and contents), labour standards, restrictions or ban on advertisements, etc.;(d) laws requiring the governments to buy from domestic suppliers (governmentprocurement policies); (e) indirect taxes (imposed on imports while giving rebatesfor internal producers and exporters); and (f) export subsidies?direct payments or

granting tax relief or subsidised loans to internal agents and granting low interestbearing loans to foreign buyers (e.g. by the US Export-Import Bank). This is not all.The pessimists further refer to the increasing adoption of the new flexiblemicroelectronics based technologies in the developed countries. This has had thepower of undermining the comparative advantage of LDC producers and exportersbased on cheap labour. The pessimists also emphasize the state of high externalindebtedness of many LDCs and the increased importance of the IMF and the World


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Bank as their sources of external finance based on the conditionality of adoptingstabilisation and structural adjustment programmes. Stabilisation involves drasticreduction in imports which can result in deindustrialisation. Lastly they argue that thegrowth of the manufactured exports from the LDCs will outpace the demand in thedeveloped countries and if many newer LDCs reach the same high ratio of exportsto GDP as in the case of the successful countries, then the market would besaturated and the terms of trade would deteriorate, making all countries worse off.






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The Views of the Optimists

1. The LDCs now supply only some 3 per cent of the manufacturedgoods consumed by the developed countries. Therefore, there is alarge potential for greater penetration of the developed countrymarkets.2. Overall, the penetration of industrial market economies by LDCexports in the 1980s grew more rapidly than penetration by othersuppliers.3. Specifically, the successful case of Thailand through the 1980s as

an exporter of clothing is a testimony against the views of thepessimists.4. The role of NTBs in thwarting the LDC exports is ratherover-exaggerated by the pessimists. Evidence suggests that the tradeadversely affected by NTBs is negligent or nil.5. The pessimists give too much emphasis to the external demandconstraint. But even during the period of slower growth since 1973,the Asian Tigers have been able to expand exports at a highly crediblerate. They could do so by remaining competitive on the supply side,

thereby contradicting the commonly held belief that the export growthof LDCs depends on the income and demand growth in the developedcountries. There are empirical studies to suggest that the exportperformance in most countries is relatively more sensitive to domesticfactors, particularly the ability to compete in world markets. The tradereforms and supply oriented policies of the succesful cases havegoverned their growth rates which are higher than that of other LDCs


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without such policies or with half-hearted interventions in favour ofoutward looking.






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6. There are empirical studies to show that intra-industry trade throughhorizontal specialisation (i.e. the exchange of differentiated products ofthe same industry or broad product group or industrial classification)has increased and the extent of this conducted by the developedcountries with the LDCs has more rapidly grown than with that of otherdeveloped countries.7. It is a false understanding on the part of the pessimists that allcountries would export at the same time at the same rate and with the

same range of exports. Export of manufactures is characterised bymore and more diversification in terms of introduction of newerproducts and moving upmarket within product ranges. Theeverchanging structure of comparative costs allows a country toproceed up the ladder of comparative advantage, say from resourceintensive exports to unskilled labour intensive exports to skill intensiveexports to capital intensive exports to knowledge intensive exports.And as a country moves up the ladder, another country in the queue isable to follow it up by filling in the gap left by the former. Thus, as

Japan rose on the ladder, the East Asian nations became majorsuppliers of the former exports of Japan. As the East Asian Tigers roseup the ladder, countries such as Thailand, Indonesia, Philippines andMalaysia are taking over the markets vacated by the Asian Tigers.

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critical evaluation of export substitution

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