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04/25/10 - Critical Evaluation Of Export Substitution

The three decades since 1965 witnessed rapid expansion in exports of

manufactures from LDCs to the developed country markets. In the process, there
was also increasing diversification in the manufactured exports. That is, the range of
exports widened. The initial concentration around labour intensive, technologically
standardised, 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 and
capital intensive as well (e.g. ships, TV sets, parts, components and accessories of
engineering products, steel, electrical machinery and other producer
goods?machine tools?etc.).

An important question in the trade policy debate concerns the potential for future
growth in exports of manufactures from LDCs to the developed countries. In other
words, what is the scope for the transferability of the successful experiences of the
East 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 supply
sided competitiveness.

The Views of the Pessimists: New Export Pessimissm

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

Secondly, the pessimists argue that the success of the four Asian Tigers owes a lot
to 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. These
favourable initial conditions were as follows: (i) favourable access to markets of
developed countries characterized by rapid economic growth and trade
liberalisation; (ii) increased and easy access to international finance from private
capital markets; and (iii) increasing relocation of production by manufacturing as
also 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, the
changing conditions of the world economy since 1973 through the 1980s and 1990s
have been hostile to increasing exports of manufactures from the Third World. The
counter arguments of the pessimists are as follows: (a) The developed countries
have been afflicted with deceleration in growth or stagflation; (b) the governments of
the developed countries have not let their ageing or ?sunset industries' to die
economic death in the face of growing international competitiveness from the Third
World, by granting them high effective rates of protection. Furthermore, the
developed countries have resorted to ?new protectionism' in terms of non-tariff
barriers (NTBs) which have discriminated most severely against exports of
manufactures from the LDCs. The various NTBs are as follows: (a) import quotas;
(b) voluntary export restraints?VERs?whereby the developed countries induce other
nations to reduce their exports voluntarily, under the threat of higher allround trade
restrictions when those exports threaten an entire domestic industry in terms of
dumping; (c) very stringent technical, administrative and other regulations?safety
regulations (e.g. in automobiles and electrical equipments), redtapism and
harassment in customs procedures, health and sanitary regulations (e.g. in
production and packing), environmental regulations, labelling requirements (showing
origin and contents), labour standards, restrictions or ban on advertisements, etc.;
(d) laws requiring the governments to buy from domestic suppliers (government
procurement policies); (e) indirect taxes (imposed on imports while giving rebates
for internal producers and exporters); and (f) export subsidies?direct payments or
granting tax relief or subsidised loans to internal agents and granting low interest
bearing 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 flexible
microelectronics based technologies in the developed countries. This has had the
power of undermining the comparative advantage of LDC producers and exporters
based on cheap labour. The pessimists also emphasize the state of high external
indebtedness 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 adopting

stabilisation and structural adjustment programmes. Stabilisation involves drastic
reduction in imports which can result in deindustrialisation. Lastly they argue that the
growth of the manufactured exports from the LDCs will outpace the demand in the
developed countries and if many newer LDCs reach the same high ratio of exports
to GDP as in the case of the successful countries, then the market would be
saturated and the terms of trade would deteriorate, making all countries worse off.

The Views of the Optimists

1. The LDCs now supply only some 3 per cent of the manufactured
goods consumed by the developed countries. Therefore, there is a
large potential for greater penetration of the developed country
markets.
2. Overall, the penetration of industrial market economies by LDC
exports in the 1980s grew more rapidly than penetration by other
suppliers.
3. Specifically, the successful case of Thailand through the 1980s as
an exporter of clothing is a testimony against the views of the
pessimists.
4. The role of NTBs in thwarting the LDC exports is rather
over-exaggerated by the pessimists. Evidence suggests that the trade
adversely affected by NTBs is negligent or nil.
5. The pessimists give too much emphasis to the external demand
constraint. But even during the period of slower growth since 1973,
the Asian Tigers have been able to expand exports at a highly credible
rate. They could do so by remaining competitive on the supply side,
thereby contradicting the commonly held belief that the export growth
of LDCs depends on the income and demand growth in the developed
countries. There are empirical studies to suggest that the export
performance in most countries is relatively more sensitive to domestic
factors, particularly the ability to compete in world markets. The trade
reforms and supply oriented policies of the succesful cases have
governed 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 of

outward looking.
6. There are empirical studies to show that intra-industry trade through
horizontal specialisation (i.e. the exchange of differentiated products of
the same industry or broad product group or industrial classification)
has increased and the extent of this conducted by the developed
countries with the LDCs has more rapidly grown than with that of other
developed countries.
7. It is a false understanding on the part of the pessimists that all
countries would export at the same time at the same rate and with the
same range of exports. Export of manufactures is characterised by
more and more diversification in terms of introduction of newer
products and moving upmarket within product ranges. The
everchanging structure of comparative costs allows a country to
proceed up the ladder of comparative advantage, say from resource
intensive exports to unskilled labour intensive exports to skill intensive
exports to capital intensive exports to knowledge intensive exports.
And as a country moves up the ladder, another country in the queue is
able 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 major
suppliers of the former exports of Japan. As the East Asian Tigers rose
up the ladder, countries such as Thailand, Indonesia, Philippines and
Malaysia are taking over the markets vacated by the Asian Tigers.

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