EH483 - The Development and Integration of the World Economy in the 19th and 20th

Centuries (Dr. Aashish Velkar)

Essay 3
Ian Tay

Does trade-led growth help to explain late economic development in the 20th century?

Throughout the 20th century, a handful of national economies were dubbed miracle

economies due to the rapid economic growth they experienced that consequently transformed

their economy from backward to highly advanced and competitive in a short period of time.

Leading the way in Asia was Japan, shortly after followed by the four Asian Tigers namely

South Korea, Taiwan, Hong Kong, and Singapore. The growth of a few other Asian countries

– Indonesia, Malaysia, and Thailand - later on gave rise to what some has called the “second

tier miracle economies” in Asia. Going west to the other side of the Eurasian continent, a

European nation also recorded miraculous growth patterns towards the end of the 20 th

century, earning its name as the Celtic Tiger. Further west, Latin American countries such as

Brazil, Mexico, and Costa Rica, have been dubbed success stories as they too recorded

substantial improvements in most economic and social indicators especially in the second

half of the 20th century. One of the reasons that have often been cited for the growth of these

economies is said to be because of their orientation to international trade, especially their

export-orientation. However, a closer look into some of these “success stories” show that the

export-led growth hypothesis, which postulates that export expansion is one of the main

determinants of growth, is alone true only in the short-run and that late economic

development in the 20th century was also a result of domestic forces, not simply external

forces alone. This paper, therefore, will first try to outline evidence of trade led growth in the

20th century across continents and then move on to discuss the conditions for trade-led growth

by using the East Asian example such as their efforts in fostering a supportive and stable

macroeconomic climate and in providing suitable microeconomic controls and incentives.

Evidence of Trade-Led Growth in the 20th Century

The simplest explanation of the benefits of trade goes back to Adam Smith when he

argued that international trade will enable a country to specialize in something that they have

the absolute advantage1 in and with this specialization, optimal efficiency will be achieved,

bringing higher prospects for growth and improved standards of living in trading countries.

For any given economies, exports will also lead to increased production & economies of

scale which is especially important for smaller economies with a small domestic market;

increased specialization which leads to accelerated accumulation of knowhow about the

given product line and improved technology; quality improvement as a result of international

competition; improve allocation of scare resources throughout the economy; increased

knowledge about trends and fashions in more advanced countries; higher labour absorption,

i.e. a reduction in unemployment; increased ability to enhance existing comparative

advantage; and relaxes the current account pressures for foreign capital goods by increasing

the country’s external earnings and attracting foreign investment. 2 However, it cannot be

ignored that imports too is an important component of trade and it also brings many

possibilities of improved standards of living through the reduction of costs.3

Especially in the second half of the 20th century, proponents of the export-led growth

hypothesis have found a great case in point through the “Asian Miracle Economies” as

mentioned above. The World Bank, for example, in their study of the eight high-performing

1
Consequently improved by David Ricardo to show the possibility of trade with a mere existence of
comparative advantage.
2
Jon Woronoff, “Asia’s Miracle Economies,” (USA, 1986), pp. 231-232; World Bank, “The East Asian
Miracle: Economic Growth and Public Policy,” (Oxford, 1993)
3
Ibid, p. 243
Asian economies (HPAEs)4, have argued that the export-led development of these countries

have enabled them to achieve such high growth rates. 5 As Eddy Lee (1981) has commented

on these East Asian countries, “by conventional measures of economic success there is little

doubt that the ‘super-exporters’ have performed extraordinarily well. Per capita real incomes

have increased very rapidly and mass poverty has largely disappeared; there has been

massive absorption of labour into the industrial sector and full-employment has largely been

achieved”.6 Woronoff (1986) even commented that export orientation was the strategy most

intimately connected to the success of Japan, South Korea, Taiwan, Hong Kong, and

Singapore.7 In addition, according to Wu (1989), it was the years of steady expansion of

manufacturing and manufactures exports that led to Taiwan’s economic take-off.8

Elsewhere, in Latin America, Brazil recorded spectacular growth rates during their

own “Economic Miracle” of 1968-73, achieving growth rates of up to 11 percent, much

higher than its regional neighbours.9 This was a result of export promotion being given

greater priority than hitherto through new fiscal and financial incentives for exports. 10

Medina-Smith’s (2002) empirical study on Costa Rica too has shown that export growth in

this country has led to higher economic growth. Costa Rica’s incremental shift from import-

substitution to export-promotion in the 1980’s through the implementation of the so-called

export contract system seems to have given rise to faster economic growth in this country. 11

Besides that, a European economy also managed to record impressive growth rates, turning

4
The eight includes Japan; Hong Kong; Republic of Korea; Singapore; Taiwan, China; Indonesia, Malaysia, and
Thailand.
5
World Bank, “The East Asian Miracle: Economic Growth & Public Policy,” (New York, 1993).
6
Eddy Lee, “Preface,” Export-Led Industrialization & Development ed. Eddy Lee (Singapore, 1981), p. 21.
7
Woronoff, p. 228.
8
Wu Yuan-Li, “Taiwan’s Open Economy in the 21st Century,” Trends of Economic Development in East Asia
ed. Wolfgang Klenner (Heidelberg, 1989), p. 115.
9
R.M Auty, “Industrial Policy, Sectoral Maturation, and Postwar Economic Growth in Brazil: The Resource
Curse Thesis,” Economic Geography, Vol. 71, No. 3 (Jul., 1995), p. 267
10
Ibid.
11
Ibid.
from the “poorest of the rich” to “Europe’s Shining Light”. 12 The investment and export-led

growth of the Republic of Ireland turned this island nation whose income in the 70s was 40%

below that in the United Kingdom to the 4th richest economy in terms of GDP per capita in

2007, only after the tiny nation of Luxembourg, the British crown dependency of Jersey, and

Norway.13 In fact, it cannot be denied that it was the export-oriented manufacturing sector

especially in the ICT industries that turned around the Irish economy as Intel, Microsoft,

Oracle, Compaq, and Dell all made Ireland their European base.14 An econometric study by

Fountas (2000) on the export-led hypothesis in Ireland for the period of 1981 to 1994 also

shows strong evidence in favour of co-integration between exports and output and the export-

led growth hypothesis.15 16

In addition, a majority of cross-section and country specific econometric analyses

since 1967 have also supported the export-led growth hypothesis. 17 In Kavoussi’s (1984)

study, using one of the largest samples of developing countries relative to other similar

studies, for example, it has been demonstrated that higher rates of economic growth are

associated with higher rates of export growth.18 19

The same study shows that even primary

exports can play an important role in the growth process of low and middle-income countries,
12
Names coined by the Economist newspaper – the former in 1988, and the latter in 1997.
13
Roisin Ni Mhaille Battel, “Ireland's "Celtic Tiger" Economy,” Science, Technology, & Human Values, Vol.
28, No. 1 (Winter, 2003), pp. 93-111; Peadar Kirby, “The Celtic Tiger in Distress: Growth with Inequality in
Ireland,” (Great Britain, 2006); Central Intelligence Agency, “The World Factbook
2008,” https://www.cia.gov/library/publications/the-world-factbook/index.html [accessed 23 February 2010]
14
Sean Dorgan, “How Ireland Became the Celtic Tiger,” Backgrounder #1945, June 23, 2006, The Heritage
Foundation. http://www.heritage.org/Research/WorldwideFreedom/bg1945.cfm
15
Stilianos Fountas, “Some evidence on the export-led growth hypothesis for Ireland,” Applied Economics
Letters, 7: 4 (2000), pp. 211 — 214
16
The findings of Fountas (2002) on Ireland, also highlighted the importance of export-promoting policies to
achieve growth as the test for the export-led growth hypothesis in Ireland over the 1950-1990 period did not
support the export-led growth hypothesis but the more recent 1981-1994 period, which was a period where
export-promoting policies were practiced by the Irish government, did.
17
Emilio J. Medina-Smith, “Is The Export-Led Growth Hypothesis Valid for Developing Countries? A Case
Study of Costa Rica,” Policy Issues in International Trade and Commodities Study Series No. 7, United Nations
Conference on Trade and Development, (United Nations, 2001).
18
This study uses a total of 73 samples consisting of 37 Low Income Countries and 36 Middle Income
Countries.
19
Rostam M. Kavoussi, “Export Expansion & Economic Growth: Further Empirical Evidence,” Journal of
Development Economics 14 (1984), pp. 241-250.
not just manufactured products exports as the aforementioned East Asian countries have

relied on.20 In a comparison between the developing countries of Asia and Latin America,

Hughes (1992) even concluded that

if all countries had followed the outward and private-enterprise-oriented rapid

growth North-east and South-east Asian model, their average annual growth

rate of GDP per capita would have been around 7 per cent per annum.

Standards of living would have doubled every decade. Extremes of poverty

would have been largely eliminated. Most people in the world would be living

longer, they would have greater access to education and other public goods

and they would be living lives of modest comfort.21

Conditions for Trade-Led Growth: Lessons from East Asia

The discussion thus far seems to point towards the fact that export-led growth comes

automatically. However, in many of the aforementioned cases, even comparative advantage

was not attained automatically but through a dynamic process of moving from agriculture to

industry. Domestic forces did indeed help propel exports and the structural change. In other

words, it was not simply export-orientation that led to growth but export-promotion, as

already hinted above. Trade-led growth was not simply attained through the rapid growth of

exports linked to a shift away from discrimination against exports under import substitution

to a “free trade” regime which is neutral between production for exports or the domestic

market, but through active institutional support.

Ibid.
20

Helen Hughes, “Explaining the Differences Between the Growth of Developing Countries in Asia and Latin
21

America in the 1980s,” Industrial and Trade Policy Reform in Developing Countries eds. R. Adhikari, C
Kirkpatrick and J. Weiss, (Manchester, 1992)
 By looking at East Asia, it is clear that the governments of these economies actively

encouraged exports and their growth. However, it is important to note that to start with, this

was possible as the East Asian economies have had much greater macroeconomic stability

with less imbalances and generally lower variance in key indicators including real exchange

rates, real interest rates, and inflation. 22 This was achieved by adhering to macroeconomic

fundamentals – particularly by keeping fiscal deficits within the limits of prudent financing

and by rapidly and effectively correcting major macroeconomic imbalances that emerged. 23

In terms of microeconomic controls and incentives in Japan and South Korea, the government

worked hard to ensure that their initial comparative advantage, cheap labour, was sustained

for a stretched-out time period and also targeted certain industries and helped them grow

through various methods such as subsidies, tax exemptions, and infrastructural support. 24 One

of the methods the governments of Japan and South Korea did this was through the heavy

responsibility given to the Ministry of Trade and Industry in both Japan and South Korea.

This ministry in many ways act as a coordinating force between the industries, government,

and other important economic actors. MITI Japan, for example, played a very important role

in forging close ties between industry, banks, and government. MITI Korea even had monthly

export-promotion conference, established in 1962, which was attended by the President

himself, other ministers, and the chairman of the Korea Traders Association. 25 This

conference was an excellent forum for exchanging information among policymakers,

businessmen, and economic experts.26 President Park even personally awarded successful

22
World Bank, p. 106.
23
Ibid, p. 147.
24
It has to be noted here that both Japan and Korea started of as labour-surplus countries, enabling wages to be
lower than other industrialized countries relative to capital. In fact, cheap labour has often been cited as a reason
for the pre-war success of the Japanese cotton-spinning industry. However, at the same time the governments of
these economies also tried to ensure that wages did not rise so fast. For example, the South Korean government
under Park Chung Hee helped control the wages of workers at the exporting firms and also restricted labour
union activities, although wages did go up eventually.? When these economies could no longer compete based
on their cheap labour, the government assisted industries in moving up the value-added chain of production,
producing higher quality products, or pushing them towards heavy and chemical industries.?
25
B.N. Song, “The Rise of the Korean Economy,” (Hong Kong, 1990), p. 96
26
Ibid.
businessmen whose act was seen as a moral encouragement to others to perform well in their

export-industries too.27

Even the Communist Party of China, after opening up their economy to the outside

world, successfully pushed exports through export-oriented special economic zones and open

cities; export incentives for domestic enterprises and foreign investors in targeted sectors;

and, for some firms, mandatory export targets which led to a spectacular tenfold growth of

exports in 1991.28 Elsewhere, investment incentives included tax concessions (Singapore

between 1968 and 1973), export processing zones, or Export Processing Zones (Taiwan and

Malaysia), and investment promotion (Thailand) and by the 1990’s nearly all East Asian

countries were actively reforming economic policies to attract foreign investment, suggesting

a virtuous interaction of internal circumstances, policy experiments, and policy imitation. 29 It

is important, however, to assert that although the governments did provide much help to the

businesses but it was on the principle of “reciprocity”, not simply “giveaways” as in

Argentina, India, Mexico, and Turkey.30 This successfully gave rise to a performance-

oriented industry in East Asia. In addition to that, considerable administrative input was

required to handle a complicated system of incentives, not simply a laissez-faire system and

the East Asian governments did fulfil this role.31According to Lee (1981), one of the

important ingredients in the success of South Korea and Taiwan has been the administrative

capacity to manage complicated incentive system efficiently; apart from a willingness to

adopt export-promotion policies, a capacity to administer them is also necessary.32

27
Ibid, p. 97.
28
Ibid, p. 144.
29
Peter A. Petri, “Common Foundations of East Asian Success,” Lessons from East Asia ed. Danny Leipziger,
(USA, 1997), p. 549.
30
Alice H. Amsden, “Like The Rest: South-East Asia’s ‘Late’ Industrialization,” Journal Of International
Development, Vol. 7, No. 5, p. 795.
31
Lee, p. 14.
32
Ibid.
 Therefore, when looking at the East Asian countries, it is important to look at how the

export-led growth has brought about far-reaching transformations in their economies since

the mid-sixties. Industrialization did occur due the growth in exports – hence the term export-

led industrialization or export-oriented industrialization for the development strategies used

by these countries. For countries such as South Korea, Taiwan, Malaysia, Indonesia, and

Thailand, their shift from import-substitution towards an export-led growth strategy

transformed their economies from being suppliers of raw materials into manufacturers of

products already available in the developed countries.33 Even resource-rich countries such as

Malaysia and Indonesia stopped relying solely on their natural resources and diversified their

production with the active role of the governments supporting and at times even initiating the

transformation. In these two countries by the 1980’s, as industries picked up steam due to the

export push, there was a diminishing role of agriculture and growing importance of

manufacturing and service sectors – marking a structural change in the economy designed to

move away from resource dependence and encourage the growth of manufactured exports

(See Table 1).34 In addition, even after the transition from primary to secondary products, the

East Asian countries continue to climb up the value-added chain, producing higher quality

and higher technology products and as for South Korea, even moving up to heavy industries.

Table 1: Production Structure of Indonesia & Malaysia

Distribution of Gross Domestic Product (Percent)
Agriculture Industry & Manufacturing Services

1960 1981 2009 1960 1981 2009 1960 1981 2009

Indonesia 50 24 14.4 25 54 47.1 25 34 38.5
Malaysia 36 23 10.1 27 54 42.3 46 41 47.6
Source: World Bank, World Development Report, 1983 taken from Akrasanee, 4; CIA World Factbook 2010.

33
Charles W Kegley & , Eugene R Wittkopf. “World Politics: Trends and Transformation”. 10th Edition, (New
York, 2006), p. 155.
34
J. L. Tongzon. The Economies of Southeast Asia: the Growth and Development of ASEAN Economies
(Cheltenham: 1998), p. 20
 Although it is undeniable that even a primary product exporting country such as the

Indonesia (before the 1980’s) and Malaysia (before the 1970’s 35) can achieve growth, studies

such as Kavoussi’s (1984) show that exports of manufactured goods tend to strengthen the

favourable effects of export expansion.36 The same study noted that while primary exports

seem to raise total factor productivity at low income levels, their effectiveness on the

productivity front tends to diminish as countries become more advanced and the only way

forward after is through a shift to exports of manufactured products. 37 This is probably the

reason why Al-Yousif (1997), in his study on the oil-rich Arab Gulf countries from 1973-

1993 failed to find a long-run relationship between exports and growth and only found a short

run relationship between these two variables. 38 Going back to Malaysia, it is not a surprise

that this economy became one of the best performers in the developing world in the last three

decades of the 20th century when it became the world’s largest exporter of semiconductors,

among the largest exporters of disk drives, telecommunication apparatus, audio equipment,

room air-conditioners, calculators, colour television, and various household electrical

appliances.39 Overall, Malaysia was the world’s sixth largest exporter of manufactures, just

behind the Four Dragons of East Asia and China.40

35
Malaysia before the 1970’s was one of the world’s most important exporter of tin, rubber (and consequently
palm oil after natural rubber prices drastically declined due to the introduction of synthetic rubber) and this
made this territory one of the most prosperous in the world, even surpassing Japan in GDP per capita during the
turn of the 20th century.
36
Kavoussi, p. 248.
37
Ibid.
38
Taken from Medina-Smith’s (2001) table on “A brief framework of the related economic literature on the
export-led hypothesis”, p. 8.
39
An interesting element of Malaysia’s industrialization is that it diversified into out of its traditional primary
exports at a faster rate than most other developing countries and even managed to diversify into higher-skill and
technologically more complex products. Especially after the 1970’s, the electrical and electronics products
account for the bulk of the export growth as compared to the lower-technology exports like garments, footwear,
and toys that drove the growth of Indonesia and Thailand. 73% of Malaysia’s manufactured exports were in the
high skill category in terms of value, increasing from $1.6 billion in 1980 to $13 billion in 1990. This is
compared with Thailand’s high-skill exports of $0.7 billion in 1980 (45 per cent of its total manufactured
exports) and $3.6 billion in 1990 (48 per cent) and Indonesia’s $0.2 billion (45 per cent) in 1980 and $1.4 billion
(a large decline in share to 16 per cent of a rapidly growing export base in garments, footwear and plywood) in
1990. Sanjay Lall, ‘Malaysia: Industrial Success and the Role of Government’. Journal of International
Development. Vol. 7, no. 5 (1995), p. 760.
40
Lall, pp. 759-760.
 However, even with that said, although exports have been proven to be crucial in

initiating several cyclical upswings, there is also strong evidence that long-run economic

growth as a whole was propelled by internal forces - in Japan’s case even disproving the

export-led growth hypothesis.41 Boltho’s (1996) study does acknowledge that exports did

contribute to improvements in efficiency, at times they represented crucial complements to

domestic demand, and provided foreign exchange that paid for imports without which the

economy could never have expanded as it did, but still concluded that it was other forces

besides exports that was the engine of Japanese growth. This is not surprising as Japan has a

relatively large domestic economy which it could rely on but the same could not be said for

many other East Asian economies which have much smaller economies and whose leaders

acknowledged that an outward-orientation was the only way to go.42

41
Andrea Boltho, “Was Japanese Growth Export-Led?” Oxford Economic Papers, New Series, Vol. 48, No. 3
(Jul., 1996), pp. 415-432.
42
South Korea’s population, for example, as compared to Japan was much smaller and much poorer to sustain
effective domestic demand; therefore, the global market was much needed to support the kind of growth the
government wanted. That is why President Park put so much emphasis on exports – his favourite maxim being
Suchul ipguk, which means “nation building through exports”. Song, p. 90.
Conclusion

Trade-led growth can indeed help explain the late economic development of many

countries in the 20th century, especially the “miraculous” development of the East Asian

countries. However, as the same group of countries has shown us, it is not simply openness to

trade that would lead to economic growth but active trade promotion i.e. not simply export-

orientation but export-promotion. This is even more important for countries which have to

work to develop their comparative advantage. That being said, even the governments of

primary product exporting economies cannot take things for granted and rely solely on their

natural endowments but strife to transform their economy and diversify into manufactures

and other goods and services. Quoting Eddy Lee for the last time, “prospects for would-be

emulators [of the East Asian economies] would depend on their ability to mobilize a huge

domestic transformation”.43 Only with strong governmental support and at times

governmental leadership in restructuring the economy can this transformation be

materialized. This should resonate with countries such as Angola, a rapidly growing

economy due to the growth in exports (especially to China), which should realize that they

cannot simply rely on the same primary products trade-led growth but must continue

restructuring their economy and reforming their institutions to be capable of generating

continuous long-term growth as the East Asians have done.

43
Lee, p. 3.
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