In this article we will discuss about the strategy of export-led growth. Also learn about why this policy is not suitable for India.
Realising the great importance of export-promotion, economists and policymakers are trying to ascertain the role that exports can play in the growth strategy of LDCs like India. One group of people regard exports as an engine of growth.
Critics, however, treat exports as an essential component determined by domestic growth. They regard exports as a means for financing imports. We may now examine the first issue and see why the policy of export-led growth is not suitable for an LDC like India.
Exports as an Engine of Growth:
It is widely felt that an LDC like India, biased towards exports, can attain fast growth on the domestic front. The successful experiences of Brazil, Taiwan, Korea, etc. provide empirical support to the suitability and correctness of the strategy of export-led growth.
Supporters of outward-looking policy of growth have pointed out that the growth performance of the countries which grew by adopting the strategy of import substitution. What is more important is that the countries with export-biased growth have expanded not only their traditional exports but non-traditional exports as well.
The strategy of export-led growth considers exports an additional or alternative source of demand, which would initiate accelerated domestic economy. Hence, the strategy lays stress on export expansion. The essence of the strategy is that it provides a bias to the economy towards exports.
In other words, exports are treated as an integral part of domestic production. This strategy is completely different from the strategy of export expansion which lays stress on giving suitable encouragement to selective exports with specific measures.
The policy of export-led growth is based on the assumption that the international market for a commodity is much wider than its domestic market. The growth of an industry is normally held in check by the limited size of the domestic market. On the other hand, the vast international market provides unlimited opportunities for output expansion.
Such opportunities arise due to three reasons:
(1) Unlimited demand,
(2) Technological progress, and
(3) Competitive/efficient allocation of resources among efficient units (i.e., production units of economic sizes).
By utilising these opportunities fully a country can modernise its domestic economy and, through it, accelerate its growth rate.
However, to take advantage of these opportunities, an LDC like India should follow fairly liberal and efficient trade policy. This demands that the government manages the economy in such a fashion as to give it an export-orientation. However, government support is not to be of the internationalist type, as under import- substitution policy, in which case imports of certain items are restricted.
Likewise, the policy is not to be one of exportable items. In fact, it involves such government policies as would in general stimulate and mould the domestic economic activities in a fashion that exports increase automatically and freely.
The policy of export-led growth is advocated on three main grounds: Firstly, by expanding demand for goods and services, it stimulates growth from the demand side. In other words, the limited size of the domestic market for industrial goods does not act as a constraint on industrial growth. Furthermore, this strategy creates conditions for the efficient use (resources through large scale expansion of profitable activities.
As A. N. Agrawal has rightly commented:
“Since the world market offers wide choice of goods and services, the domestic producers can choose the right kind of activities that promise rapid growth and large profits. Secondly, the urge for choosing profitable activities is very likely to favour labour-intensive industries”.
This is very important for over-populated LDCs like India where there is the problem of surplus labour.
Finally, the strategy of export-led growth can be carried out at a very little cost. There is hardly any need to provide export incentives, because export effort is not undertaken for its own sake but as a part of its overall industrialisation strategy.
Moreover, it is essential, for the success of an export- oriented strategy, that exporters have ready access to the imported components for the production of exportable items. Due to such compulsion there would be no need for government intervention. Consequently, administrative costs (i.e., costs of government intervention) would be avoided.
Moreover, the costs/inefficiencies associated with the establishment of sub-optimal plants (i.e., plants of less than minimum efficient size) will be reduced on limited because monopolies are unlikely to emerge. (Monopolies usually arise due to the limited size of domestic markets.)
Unsuitability of the Policy in India:
However, several economists have noted that, though justifiable on theoretical grounds, the policy of export-led growth is not suitable for India.
The main reasons seem to be the following:
(1) Prima facie, India is a vast country. But its level of development is very low. Therefore, the strategy of development which suits small countries like Taiwan, Korea, etc. has little relevance in India. Just by expanding exports even on to a large scale, it is not possible to make use of India’s huge surplus labour.
Furthermore, it may not be possible to expand India’s exports much. Exports now constitute only 6% of India’s GDP. It appears that at the present stage of development our production capacity is not sufficient to meet even domestic needs.
So, a substantial increase in the quantity and variety of exports does not appear to be feasible. A reallocation of resources in favour of export-oriented industries is not justified either due to scarcity of all resources (except labour power) and/or the lack of sufficient mobility of resources.
(2) Secondly, in the last three decades most developed countries have erected tariff and non-tariff barriers on their imports from LDCs like India. Thus, in a world of growing protectionism it is not quite logical to think of smooth and uninterrupted expansion of all types of exports from India to the developed countries of the world.
In fact, the strategy of export-led growth works if exports are few, and if the quantum involved is very small. None of these assumptions is valid in India. Moreover, small increase in exports of a few items is unlikely to make a significant impact on the Indian economy.
(3) Thirdly, a policy of export-led growth is likely to create other problems as well. First of all, the domestic production structure has to be adjusted properly to meet the demands of the international markets.
This may go against the fulfillment of the country’s more important and desirable socioeconomic objectives, viz., building huge capital stock, promoting labour-intensive industries (to absorb the growing backlog of unemployed) and ensuring balanced growth of different sectors and regions.
Moreover, if the international forces tend to determine the location and spread of industries it will be difficult to achieve the two main plan objectives:
(a) Equitable distribution of income, and
(b) Reduction of regional inequalities. It will be equally difficult to choose an optimum product-mix and factor-mix, so as to fulfill a two fold objective.
(i) Production of mass consumption goods to meet the basic needs of the people, and
(ii) creation of employment opportunities for the weaker sections of society.
For all these reasons, we cannot advocate the policy of export-led growth in India at present. However, the policy may be recommended at a later stage of the country’s economic development when necessary structural changes occur in the economy.