Columns - The Sunday Times Economic Analysis

Export led growth or bust

By the Economist

The impact of the global recession on developing countries has raised the issue whether countries like Sri Lanka should reduce their dependence on export markets in North America in particular and Europe.
The question appears very relevant in the current context when the country’s industrial exports are declining and facing uncertainty owing to the possibility of losing GSP Plus status in EU countries. With our friendly ties with regional countries it is sometimes suggested that we increase trade with Asian countries, especially the large economies of China and India and the fast growing countries of East and South East Asia. However this issue must be viewed dispassionately and realistically with the factual context in mind.

There can be no doubt whatsoever that the Sri Lankan economy is highly vulnerable to international developments. The country continues to be trade dependent to the extent of around 70 percent of GDP. Over two-thirds (68 %) of Sri Lanka’s exports were to the US (24 %) and Europe (34%). The country’s export dependency on Western countries is obvious from this data. The traditional dependence on primary crops of tea, rubber and coconut till the late seventies has been replaced by a new vulnerability of the country’s industrial exports being subject to the vicissitudes of international economic currents, booms and busts. This is the old tale of “when America gets a cold the rest of the world gets influenza”.

There is no doubt that markets have broadened and the dependence on America has been reduced. The dependence of other economies on America has diminished but the dependence of developing countries on developed country trade has scarcely grown less. One could adapt a little and say when America, Europe and Japan get colds we suffer an economic flu”. Even China and India are much dependent on the American and European market, though they have become large economies themselves. The dependence of Sri Lanka on developed countries has not diminished.

One of the remedies suggested by some economists has been that developing countries should lessen their dependence on these traditional markets and turn to a generation of internal demand and regional markets. Perhaps the large internal markets of India and China should feed their own economies much more. The developed countries of East and South East Asia must trade much more among themselves. This is a way by which these economies could lessen their vulnerability to the economic fluctuations of North America and Europe.

First let us look at the history of economic development after the war ended in 1945. The fifties saw an unprecedented growth of East Asia and South East Asia. The growth momentum of this region was due to their export led growth. As Joseph Stiglitz, the Nobel Prize laureate has said. “Of the countries of the world, those in East Asia have grown the fastest and done most to reduce poverty. And they have done so, emphatically, via "globalization." Their growth has been based on exports-by taking advantage of the global market for exports and by closing the technology gap. It was not just gaps in capital and other resources that separated the developed from the less-developed countries, but differences in knowledge. East Asian countries took advantage of the "globalization of knowledge" to reduce these disparities. But while some of the countries in the region grew by opening themselves up to multinational companies, others, such as Korea and Taiwan, grew by creating their own enterprises.”

Their industrialization was based on the production of goods for the developed countries of North America and Europe. They certainly capitalised on their comparative advantages of producing labour intensive industrial goods. That was the basis of their growth. The growth of these economies could never have been achieved without the access they had to developed country markets.

Much before the recession economists had come to accept the notion that the potential for other countries to follow the same path would not lead to as spectacular results as they were entering a somewhat saturated market. However there was some scope to follow this path as East Asian and South East Asian countries were progressing and their wage costs were raising. Consequently, and because of their development, they were phasing out of high labour intensive products to more sophisticated industries like electronics. This gave scope for countries like Bangladesh, China, India, Pakistan, Sri Lanka and Vietnam to produce and export labour intensive goods like textiles and garments. These strategies undoubtedly helped them to increase their foreign exchange earnings, decrease unemployment and raise their incomes and reduce poverty.

The global recession however was a serious setback to these countries. Export earnings decreased, manufacturing plants were closed and unemployment increased. It had distressing effects not only on the export industries but employment in the backward linked industries and services as well. This is the background that has led economists in Sri Lanka too to suggest that we reduce our dependence on our traditional markets in developed countries.

There are several fundamental factors to be considered. First, Sri Lanka is a small, labour surplus, resource scarce country with a limited domestic market. This is the primary underlying reason why the import substitution industrialisation strategy in the 1970-77 period failed. Sri Lanka must remain an open economy in which trade dependence is inevitable.

The problem of unemployment and low incomes can be resolved only by using labour to produce goods for export markets. With respect to export markets, it is only realistic to export commodities produced in the country to those labour scarce countries where the production of labour intensive goods are too expensive. In other words Sri Lanka’s comparative advantage for most part is in the production of labour intensive goods. The countries of Asia too can produce the same goods as we at a comparative advantage. Therefore they are not markets for Sri Lanka’s industrial goods. Some agricultural produce such as rubber could be sold to them.

The bottom line is that the Sri Lankan economy has no option but to be dependent on developed countries for marketing industrial goods. This means that it would be vulnerable to global conditions and international competition. EXPORT OR PERISH will continue to be applicable to the economic growth of the country. Ensuring good economic management would be a pre-condition to enabling this competitiveness.

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