Following factors account for the primary export-led growth in some countries: 1. Efficient Allocation of Existing Resources 2. Inflow of Foreign Capital 3. Linkage Effects.
Factor # 1. Efficient Allocation of Resources:
When a country which is isolated from other countries is opened to trading with other countries of the world, it will specialise in the production of those goods in which it has a comparative advantage and therefore reallocates its existing resources more to the production of those goods which will be exported. By doing so it will move along its given production possibility curve. In exchange for the exports, it will get imports. In this way it will be able to get more goods for consumption. As a result, its welfare will increase. Some of these imports may be machines and other capital goods which may be used for production in other sectors of the economy, leading to their growth. In this way expansion in primary exports through improved allocation of resources leads to widespread growth of the economy.
Besides, as Adam Smith pointed out in his ‘vent for surplus’ theory, if before trade the country has idle resources, it can gain substantially from trade by utilising idle resources for producing goods for primary exports for which there is demand in foreign countries and in exchange can obtain imports. In such a case of utilising idle resources for production of exports, the country moves from within its production possibility frontier to a point on it. In this case trade and exports of primary goods may stimulate the economy by utilising its idle resources for production so that its resources are fully utilised so that more of many goods are produced which ensures widespread growth of the economy.
The above explanation of primary export-led growth can be applied to the development of several countries in the nineteenth century. In the nineteenth century, the United States and Canada had surplus land relative to the supplies of labour and capital. Much of their land was lying unutilised so that both countries worked within the production possibility frontier and could produce more some primary goods without reduction in the output of others. British demand for wheat and cotton enabled the US and Canada to bring this idle land into production for growing wheat and cotton for export and imported manufactured goods in exchange for goods which at that time they could not produce as efficiently as Britain.
Besides, Hla Myint has explained that when various countries of Africa and Asia came under the colonial rule and these countries were opened up to world trade, they used their surplus land and labour more intensively to produce tropical products such as rice, palm oil, cocoa for exporting them to obtain industrial goods in return. However, these underdeveloped countries did not gain much from trade with colonial powers as the terms of trade were not favourable for them.
In case of India, the imports of cheap factory-made manufactured products in return for exports of primary products such as foodstuffs, minerals and plantation products had a backwash effect in the form of decline in handicraft industries displacing artisans and labour. Thus, while in case of India, foreign trade in the British period induced growth in agriculture, mines and plantations, it acted as a barrier to its industrial growth.
Factor # 2. Inflow of Foreign Capital:
Once it was known that profitable opportunities existed in tropical agriculture and development of mines and plantations, foreign investment was attracted to the country. Besides, if the export of the commodity was found to be subject to large economies of scale in production, this required a large foreign investment to establish the enterprise. Foreign investment came in underdeveloped countries to produce those goods in which they had a comparative advantage.
Thus, inflows of foreign investment in minerals exporting countries as well as of development of plantations to export unprocessed tea, rubber, coffee. Even to procure wheat and rice grown in agriculture, foreign investment came to develop railroads. Thus, Standard Oil in Venezuela, British Petroleum in Iran, Anaconda in Chile, Alcoa in Jamaica, Lever Brothers and Firestone in West Africa and United Fruit in Central America are some examples of foreign companies which invested capital in underdeveloped countries, mainly in extraction of minerals from mines and development of planations.
Wherever there was shortage of domestic labour, foreign investors brought in migrant labour to do work in mines and planations as in the case of Southern West Africa, Malaysia and Sri Lanka. It is important to note that foreign investment and migrant labour were normally employed for production for export in ‘new lands’ of America and Australia in the nineteenth century.
The impact of role of foreign investment in exports sectors such as for development of mines and plantations in underdeveloped countries is a controversial issue. When local labour is used for extracting minerals and development of planations they are paid money wages which is generally spent on other goods, especially foodstuff and cloth, giving boost to the agriculture and cloth producing industries.
The foreign investment in some areas for export production may open up new profitable avenues for investment in related industries such as processing of agricultural products before being exported and these related industries may be left to the local investors to undertake investment in them. These new opportunities for investment may lead to the increase in savings of the country and also attracting foreign investment. In this way foreign investment has some multiplier effect, however small it may be.
Foreign investment in building railroads in India did lead to the development of agriculture in some of its regions for procuring wheat for exports by foreign capital. This contributed to the development of agriculture in these regions. Railroads and railways had beneficial external effects on the Indian economy as improved transportation in the country. It may however be noted that most of the profits made by foreign investors were sent back to their home countries rather than using them for local investment. Besides, local labour had been paid very low wage, merely sufficient for their subsistence.
However, the dominant view among economists is that foreign investment in export sectors benefited the under developing countries on the whole and contributed to their economic growth. Commenting on it some development economists write, “Thus the expansion of potential markets for primary products can lead to the expanded supplies of foreign investment, domestic saving, labour and skilled manpower. Not only does trade help an economy move toward production frontier and then along it, but trade can also expand the frontier outward enabling the economy to produce more of all goods.”
The spread effect of producing any export depends on the nature of the export good. The main determinant in this regard is how the value added by export of a good is distributed between payments for local residents and the payment made to the foreign factors of production. For example, in case of copper mining a relatively greater part of value added went to the foreign investors and therefore it adds less purchasing power to the domestic population and therefore had a lower stimulating effect on the local economy.
Factor # 3. Linkage Effect:
The concept of export-led growth implies that expansion of exports gives stimulus to other industries which would not grow in the absence of export expansion. The important factor that determines the stimulus to other industries that is provided by the growth in exports is the amount of forward and backward linkage effects that are likely to provide stimulus to the development of other local activities in the economy.
Prof. Hirschman coined the phrases of forward and back ward linkages for the stimuli that are given by an industry to other industries in the economy. Many primary goods exports give rise to forward linkage in the form of processing that must be done before exporting the products as in the case of sugar, rice, vegetable oil because processing them is technically feasible or profitable only immediately after harvesting them. The other example of forward linkage is found in case of some metal products whose costs are greatly reduced by smelting the metal before exporting them.
Backward linkage of production of an industry occurs when the needed inputs are supplied at lower cost when a given exporting industry expands its production. Backward linkages are particularly important when the using industry becomes so large that production in inputs supplying industries achieves economies of scale which reduce the cost of production. The lower cost per unit of input- supplying industry enables it to sell it at cheaper cost to the using industry.
Its chief example is the growth of wheat industry in North America in the nineteenth century that created a larger demand especially for railway rolling stock and farm equipment which led to the establishment of industries producing them in the United States. Another such important example is the rapid expansion of fish- meal industry in Peru in the 1950s and 1960s.
This led to significant increase in the fishing boats and processing equipment. Michael Roemer in his important study points out that in the nineteen fifties and sixties in Peru boat-making industry became highly efficient to produce for export fishing craft to other countries and also Peru’s processing equipment industry registered a sharp and efficient growth that enabled it to supply capital equipment to a wide variety of food processing industries.
Though in agriculture backward linkage is generally weak but modernisation of agriculture such as through green revolution technology, may lead to the large increase in the use of inputs such as fertilizers, pesticides, pump sets, barbed wire that is likely to the growth of local industries producing these inputs. In mining also backward linkage is very weak and the equipment required for it is of a highly specialised nature and is therefore usually imported. Further, the strength of spread effect depends on the extent the production for export introduces new methods of products or skills that can be used in other sectors or activities.
Linkage effect also occurs through increase in demand for consumer goods by the residents whose income increases as a result of production for export. This consumption-demand linkage is present to a larger extent if a larger labour-force is employed and is paid higher wages than received by them previously. This raises the demand for clothing, processed foodstuffs, footwear etc. which are produced on a large scale in underdeveloped countries. This gives a boost to the development of consumer goods industries in the underdeveloped economies.
Thus, it has rightly been pointed out that in “North American wheat industry with its extensive endowment of land, high labour productivity, and egalitarian income distribution based on family farms successfully stimulated consumer goods industries. Neither plantation agriculture in Africa with its large labour force but low wages nor mining industries which pay high wages but employ relatively few workers, are able to generate adequate demand to stimulate local consumer goods industries.”
Provision of Physical Infrastructure:
The availability of physical infrastructure such as power, roads, railroads, ports, etc. built for exporting primary products from India in the later 19th and early 20th century and in the United States in the 19th century also helped in the growth of manufacturing industries by lowering costs. Besides, building of road and rail and ports network for export of cocoa and timber in Ghana, tea in India, copper in South Africa had also stimulating effect on domestic manufacturing industries.