Export Performance and Economic Development: An Empirical Analysis

By Yaghmaian, Behzad; Ghorashi, Reza | American Economist, Fall 1995 | Go to article overview
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Export Performance and Economic Development: An Empirical Analysis


Yaghmaian, Behzad, Ghorashi, Reza, American Economist


The relationship between exports, economic growth and development, and the differences between export promotion and import-substitution industrialization have been a subject of much interest in the development literature. A consensus emerged among neoclassical economists in the 1970s and the theory of export-led growth evolved into a "new conventional wisdom" (Tyler 1981). Export-led growth has also shaped the development policies of the World Bank. "Which trade strategies have enabled countries to attain high growth and to develop their industrial potential?" This was the main theme of World Bank's 1987 World Development Report. The World Development Report concluded that "rapid growth and efficient industrialization [were] usually associated with outward-oriented [export-led growth] policies on trade" (World Bank 1987:92).

The purpose of this paper is to challenge the results of the empirical literature in support of the neoclassical theory of export-led growth and to provide a theoretical and empirical alternative. Contrary to the neoclassical theory, we will argue that both exports and economic growth are preceded by a long and complex process of structural change and economic development. In the following section we will discuss and critique the empirical literature on export-led growth. Section m will present an alternative framework in studying economic development and exports. Section IV will report the results of testing the neoclassical model and our alternative. Section V will contain our concluding remarks.

Exports-Led Growth Thesis: A Critical Assessment

Export-led growth has been celebrated as the rational and efficient alternative to other strategies of development. "Outward orientation" and export-led growth are argued to generate the necessary "flexibility in shifting the economy's resources to take account of the changing pattern of comparative advantage" [World Bank 1987: 81]. This changing pattern has been explained by the replacement of comparative advantage in land/resource intensive commodities to a comparative advantage in unskilled-labor intensive commodities. Developing countries have, therefore, been advised to specialize in the production and export of unskilled-labor intensive products. Exports, it is argued, will lead to faster economic growth by a) increasing the rate of capital formation; b) increasing specialization and expanding the efficiency-raising benefits of comparative advantage; c) offering greater economies of scale; d) affording greater capacity utilization; e) and inducing faster technological change [Ram 1987; Kavoussi 1984; Bhagwati 1978; Krueger 1978].

The neoclassical/World Bank scenario of growth has drawn on a vast body of empirical research in the past two decades [Balassa 1985; Emery 1967; Kavoussi 1984; Michaely 1977; Tyler 1981; Ram 1985, 1987]. Following Tyler (1981), Feder (1982), and Kavoussi (1984), an important strand of this research has consisted of production function-type models in which exports are included as an additional factor of production.(1) The following procedure has been used in most studies to test the thesis about the positive impact of exports performance on economic growth.

Yt = f(Kt, Lt, Xt)

where

Y = GNP

K = capital stock,

L = labor force.

X = exports.

Reconstructed in growth terms, the following testable growth equation is obtained.

RY = bo + a I/Y + b2 RL + b3 RX

where

RY = growth rate of GNP,

I/Y = investment-income ratio, a proxy for the growth of capital stock,

RL = growth rate of labor force,

RX = growth rate of exports,

(a) is the marginal physical product of capital, and

(b2) and (b3) are output elasticities with respect to labor and exports.

The above growth equation has been tested by using both time-series and cross section data for various sub-groups of developing countries.

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