Friday 20 Jul 2018 | 16:35 | SYDNEY
Friday 20 Jul 2018 | 16:35 | SYDNEY

Alternatives to export-led growth


Mark Thirlwell

13 July 2009 09:32

A frequent subject of discussion during my recent research trip to the region was whether emerging (East) Asia’s export-led growth model still had a future, and whether China could replace the US and Europe as the key source of external demand for the rest of the region. 

While the role of China is a relatively new wrinkle to the story, the viability of the export-led growth model is an old debate: in the aftermath of the 1997/98 financial crisis and then again following the 2001/2 downturn in the global electronics cycle, several analysts argued for a shift away from export-led growth. 

It is also a somewhat unsatisfactory debate, in part because it’s not completely clear what an export-led growth strategy is, or to what extent the various East Asian economies have pursued the same development model. There’s also the point that growth accounting exercises confirm that while net exports have made a positive contribution, growth in emerging Asia in recent years has been dominated by domestic demand, as shown below. 

Source: IMF World Economic Outlook April 2008.

Still, there is no doubt that exports play an important role in the region’s growth profile, and there’s certainly a lot of pessimism now being expressed about the region’s development model. For example, Nouriel Roubini has warned that 'the old model of export-led growth is broke', while The Economist has fretted about Asia’s export trap, as has David Pilling in the Financial Times. Pilling’s piece also cites an essay on the subject by Brian Klein and Kenneth Cukier in the latest issue of Foreign Affairs. 

The current debate derives much of its momentum from the way the openness of the region’s economies has made international trade a powerful transmission mechanism for the effects of the global financial crisis. Most emerging Asian economies have a very high ratio of exports to output:

Source: World Bank East Asia and Pacific Update April 2009.

As a result, the collapse in world trade – which has resulted in double-digit falls in export growth rates across the region – has obviously been bad news for regional growth. (Note, however, that the direct impact on growth is exaggerated by just looking at the ratio of exports to GDP, since for many products exported from emerging Asia, domestic value added is relatively low, and hence the impact on GDP is appreciably smaller than the hit to exports). 

Moreover, East Asian economies tend to be specialised in relatively high-end manufacturing exports such as cars, electronics and capital goods, all sectors that have suffered disproportionately in the current crisis.

Source: IMF Regional Economic Outlook Asia and Pacific May 2009.

So, with many forecasters assuming that recovery in the US and other developed economies is likely to be subdued, the prospects for a strong recovery from the region’s traditional markets look limited, and hence the search is on for alternatives. One alternative is a greater focus on domestic demand. Another is a switch to different markets. Which brings us to China, the subject of my next post.