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The Analyst Magazine:
Asian Economies :Export-led growth prospects
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After more than a decade of recession, there seems to be nothing the government can do to stimulate domestic demand sufficiently to resume economic growth.

Export-led growth is an appealing strategy for developing nations. In the early stages of development, a country needs to import real capital (machines), which often entails borrowing in a foreign currency. Exports allow the borrowing nation to earn the foreign currency required to service its external debt. This strategy is often successful _the USA is perhaps the best example of a nation that followed such a strategy in its early stages of development _ at least over the short run. However, whether a nation should rely heavily on export-led growth beyond the earliest stages of development is a complex issue on which experts disagree. Still, I believe there are three fairly uncontroversial facts indicating the risks involved in excessive reliance upon exports as the main source of growth. First, a group of countries (say, Asian nations) can run positive trade balances only to the extent that there are others that run trade deficits.

While at any point in time there are many nations that run trade deficits, there is only one nation that can be expected to run trade deficits on a sustained basis: the USA. This leads to the second risk: reliance on export-led growth means that your nation will be subject to the economic performance of the nations that import your products. To the extent that an exporter cannot substitute domestic demand for falling international demand, its economy will suffer. Indeed, it is no secret that when the USA "catches a cold", countries that rely on USA markets end up with pneumonia. Third, a nation that relies on exports is always in danger that a newer and cheaper exporter will come along and steal away its markets. This actually implies that the developing nation that relies on export-led growth will need to keep living standards low in order to compete in global markets. In turn, this means that domestic demand cannot substitute for exports when the global economy turns downward.

 
 

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