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EXPORT-LED GROWTH VS.

DOMESTIC DEMAND-LED GROWTH: A POLICY CHOICE IN INDIAN CONTEXT


Dr. Ruby Ojha Associate Professor, Dept. of Economics, PGSR, SNDT Womens University, Churchgate, Mumbai 400020

INTRODUCTION
The export-led growth model was initially upheld with the success of Asia's miracle countries, which achieved extraordinarily high growth between the 1970s and mid-1990s, supposedly through export promotion. The growth records of Asian newly industrializing countries (NICs) - in particular, Hong Kong, Singapore, Korea and Taiwan, second-generation NICs (Malaysia and Thailand) - are cited as such examples.
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INTRODUCTION
Over the last thirty years these NICs have approximately doubled their standards of living every ten years. China is the latest country to join this group The World Bank (1993) perceives that the experiences of these countries serve as a model for development, a view also supported by the US Agency for International Development and the International Monetary Fund
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THE CASE FOR EXPORT-LED GROWTH


export growth may represent an increase in demand for the countrys output and thus serves to increase real output. an expansion in exports may promote specialization in the production of export products. an increase in exports may loosen a foreign exchange constraint which makes it easier to import inputs to meet domestic demand. Participating in trade, especially export production and promotion, exposes a country to the latest and most advanced production and marketing techniques, that brings about dynamic innovation and technological diffusion into the economy. Since countries need precious foreign exchange for their development needs, export earnings are a more efficient means to finance these needs than foreign debt . export-led strategies allow an expansion of aggregate demand without much inflationary pressure.
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BUT, THE SUPPORT FOR EXPORTLED GROWTH IS NOT UNIVERSAL. CRITICS POINT OUT THAT THE EXPERIENCES IN THE EAST AND SOUTHEAST ASIAN COUNTRIES ARE UNIQUE IN MANY WAYS AND NOT NECESSARILY SUSTAINABLE AND REPLICABLE IN OTHER COUNTRIES.
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A near-collapse in international trade that followed a synchronized global recession in 2008 has seriously dented Asias confidence in this growth policy as demand from major developed economies plummeted, leading to the International Monetary Fund anticipating a double-digit contraction in world trade volume. Most of the critics argued that the emphasis on export-led growth of most East Asia countries had a series of negative effects.
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PROBLEMS OF EXPORT-LED GROWTH


It prevented the development of domestic market growth reinforced the dependency of developing countries on the developed world not an optimal strategy any longer and it is risky and dependent on the consumption pattern of others

PROBLEMS OF EXPORT-LED GROWTH CONTD.


race to the bottom deterioration in developing countries terms of trade impact of export-led growth on financial instability issues of autonomy it suffers from a fallacy of composition it has tilted the focus away from development rooted in domestic market growth It has placed workers in developing countries in conflict with workers in industrialized countries It has also harmed the global economy by creating an environment of excess capacity and

Export-led growth can work for first comers, but it falls apart once all try to clamber on board the export-led bandwagon. If true, the export-led growth paradigm will find itself checkmated while new supplier countries will be unable to compete with China.
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THE CASE FOR DOMESTIC DEMAND-LED GROWTH


Given the deficiencies of export-led growth, developing countries need a new model of development and domestic demand-led growth strategy serves the purpose. Deutsche Bank Research of July 2009 says that EM-6 have been (or will be) able to engineer a more or less rapid recovery by boosting domestic demand. Achieving such an outcome will require a new constellation of policies to expand the domestic market. 10

DOMESTIC DEMAND-LED GROWTH RESTS ON FOUR PILLARS: improved income distribution


good governance financial stability and space for countercyclical stabilization policy an adequate fairly priced supply of development finance. The policies needed to put these pillars in place are: (1) labor and democratic rights, (2) appropriate reform and regulation financial architecture, and This is an instance of the where there is no (3) a combination of debt relief, trade-off between increased foreign aid, and increased assistance provided ethically right and development 11 efficient economic through expanded SDRs.

INDIAS CASE:
In this paper the case of India has been analyzed with respect to export-led growth strategy and domestic demand led growth strategy. It has been tried to find out which strategy has contributed more to the countrys development.
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PRE-REFORM RELATIONSHIP BETWEEN EXPORT AND NNPFC


Particulars i
^1 ^2

Values 1950-51 to 1990-91 12809.55011 15.0922 3648.1689 0.40351 1.95 2.58 35.112 37.4023 1398.9595 0.973 0.986
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Standard error of 1 ( 1) Standard error of 2 ( 2) Table value of Z test for 1 and 2 at 5% level of significance Table value of Z test for 1 and 2 at 1% level of significance Calculated value of Z test for 1 Calculated value of Z test for 2 The calculated F ratio is F* R2 Coefficient of correlation ( r )

POST -REFORM RELATIONSHIP BETWEEN EXPORT AND NNPFC


Particulars i
^1 ^2

Values 1991-92 to 2008-09 531607.0395 5.2525 64613.44711 0.186812 2.12 2.92 8.2275 28.1163 790.5263 0.98 0.99
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Standard error of 1 ( 1) Standard error of 2 ( 2) Table value of t=test for 1 and 2 at 5% level of significance Table value of t=test for 1 and 2 at 1% level of significance Calculated value of t=test for 1 Calculated value of t=test for 2 The calculated F ratio is R2 Coefficient of correlation

PRE- REFORM RELATIONSHIP BETWEEN PRIVATE FINAL CONSUMPTION EXPENDITURE AND NNPFC
Particulars i
^1 ^2

Values

1975-1990-91 4352.14251 1.34063 3740.532 0.021457 2.145 2.98

Standard error of 1 ( 1) Standard error of 2 ( 2) Table value of T test for 1 and 2 at 5% level of significance Table value of T test for 1 and 2 at 1% level of significance

Calculated value of T test for 1


Calculated value of T test for 2 The calculated F ratio is R2 Coefficient of correlation (r)

-1.1635
62.4797 3903.8115 0.996 0.998
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POST-REFORM RELATIONSHIP BETWEEN PRIVATE FINAL CONSUMPTION EXPENDITURE AND NNPFC


Particulars Values i
^1 ^2

1991-92 to 2007-08 275056.423 1.5766951 0.5501

Standard error of 1 ( 1)

Standard error of 2 ( 2)
Table value of T test for 1 and 2 at 5% level of significance Table value of T test for 1 and 2 at 1% level of significance Calculated value of T test for 1 Calculated value of T test for 2 The calculated F ratio is R2

0.05191
2.131 2.947 -5000011.6761 30.37363 922.4342 0.984

Coefficient of correlation (r)

0.992

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CONCLUSIONS
It is argued by Jesus Felipe (2003) that the encouragement of a gradual shift to Domestic Demand Led Growth is a welcome effort. However, perhaps choosing either export-led growth or domestic demand led growth is not the issue. Firstly, because these two strategies need not be incompatible strategies. Secondly, because the countries in the region need some form of export-led growth to achieve economies of scale. It is about achieving a golden combination between export-led growth and domestic demand led growth. And Thirdly, because the discussion of the policies to resume growth has to be framed in the more general context of what is constraining growth today
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CONCLUSIONS

CONTD.

It is proved on the basis of the above empirical analysis that growth of India is based on a combination of both domestic demand components and exports. In fact, in terms of technology deepening and "learning by doing," growth in both sectors will be complementary and mutually reinforcing. successful and sustained growth requires growth in both domestic demand and net exports. It is when one strategy is overemphasized at the expense of the other that the growth strategy becomes unstable. 18

CONCLUSIONS CONTD.
In the words of Blecker: What is not feasible is for all countries to attempt to achieve trade surpluses by promoting their exports while simultaneously restricting their imports or repressing consumer demand
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THANK YOU
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