Exports, Outward-Oriented Development, and Economic Growth

• Author: Bruce E. Moon
• DOI: 10.1177/106591299805100101
• Published date: 01 March 1998
• Date: 01 March 1998
• Subject Matter: Articles

Exports, Outward-Oriented
Development, and Economic
Growth
BRUCE E. MOON, LEHIGH UNIVERSITY
The World Bank has urged poor nations to adopt development strate-
gies which emphasize export expansion, dismissing the caution against
excessive trade dependence voiced by political economists. In reexamin-
ing the Bank’s much-cited analyses which suggest that "outward-oriented"
nations have experienced more rapid growth, this study uncovers three
findings which challenge its apparent implications. First, nations charac-
terized as following outward-oriented development do not trade notably
more than those regarded as inward-oriented. Second, outward-oriented
nations do not expand their trade at a rate strikingly different from other
countries. Third, it is not apparent that export expansion is the principal
source of the superior macro-economic performance of so-called "out-
ward-oriented" nations. These findings raise questions about what is meant
by "outward-oriented development." Moreover, because the structural
claims of political economists concerning the dangers of trade depen-
dence cannot be easily refuted, the counsel that nations should focus
development efforts on expanding exports needs to be very carefully
circumscribed.
Theorists have long debated the relative merits of development strategies
which accord priority to expansion of the foreign sector in contrast to those
which emphasize inward-oriented development (Bhagwati 1986; Reidel 1988).
Among economists, the balance has swung in favor of acknowledging the
superior growth performance of nations that have opted for outward-oriented
development (OOD), particularly in recent years with the discrediting of im-
port-substituting industrialization (ISI), the most visible branch of more
inward-oriented strategies (Bhagwati 1978; Krueger 1978).
However, political economists have been more reluctant to endorse a strat-
egy supported by such limited historical precedent. Senghaas (1985) observes
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that European development success was largely internally generated while Frank
(1966) notes that such advice is also at variance with the experience of Latin
America, which grew most rapidly during periods of delinking from the global
economy. Both caution against the potential dangers of trade dependence.
Meanwhile, policymakers have juggled competing theoretical ideas while ac-
commodating both domestic political forces, which on balance drive policy in
an inward direction, and international forces, which generally incline policy
toward a more outward orientation.
The World Bank, which has advocated OOD strategies for some time, has
published much-cited analyses that demonstrate that &dquo;outward-oriented&dquo; na-
tions have experienced especially rapid growth (World Bank 1987: ch. 5).
The mission of this article is to re-evaluate the evidence supporting OOD and
the policy advice which seems to flow from it. To accomplish that mission,
this study probes the causal mechanisms which underlie the superior growth
performance of nations pursuing OOD. It also confronts the case for outward-
oriented development with the case against trade dependence.
This article contains three findings which challenge the apparent implica-
tions of the World Bank studies. First, nations characterized as following out-
ward-oriented development do not manifest levels of trade notably higher
than those regarded as inward-oriented. Second, outward-oriented nations
expand their trade, but not at a rate strikingly different from other countries.
Third, it is not apparent that export expansion is the principal source of the
superior macro-economic performance of outward-oriented nations. Taken
together, these findings raise questions about what is meant by &dquo;outward-
oriented development.&dquo;
Accordingly, the counsel that nations should focus development efforts
on expanding exports needs to be very carefully circumscribed, especially
because the structural claims of political economists concerning the dangers
of trade dependence cannot be easily refuted. Thus, the World Bank study
does not settle the question of the relative merits of outward- and inward-
oriented development, though it does steer the discussion in a very helpful
direction.
EXPORTS, IMPORTS, AND GROWTH
The role of the foreign sector in fostering macro-economic growth has
long been controversial. According to the orthodox economic view, imports
should be welcomed because exposure to the competitive pressures of inter-
national trade stimulates growth by encouraging the efficient allocation of
resources and by introducing innovation and learning from abroad (Corden
1971; Bhagwati and Srinivasan 1979; Pack 1988). Exports expand aggregate
demand, encourage full employment of resources, and earn revenues to pay
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for the imports which enhance consumption and facilitate technological
progress. The orthodox position is exemplified by Nurkse’s (1961) character-
ization of trade as the &dquo;engine for growth&dquo; that drove the global economy of
the nineteenth century.
More structural theorists have questioned the wisdom of relying heavily
on external markets, particularly for contemporary Third World economies
(Myrdal 1957). Because their traditional exports frequently lie in sectors that
offer unattractive demand prospects and limited inter-sectoral linkages (such
as primary products and very low wage assembly), significant expansion of
existing industries may be neither possible nor desirable (Prebisch 1962; Cline
1982). Meanwhile, a flood of imports from more established foreign firms
may prevent the development of new domestic industries. Thus, trade depen-
dence may lead to distortions which compromise future growth opportunities
(Galtung 1971; Frank 1966; Emmanuel 1972). Moreover, heavy reliance upon
trade may leave a nation dangerously vulnerable to market disruption or po-
litical pressures, particularly if that trade is concentrated in a small number of
products and a small number of trade partners (as is typical for small and
poor economies). At the extreme, national autonomy may be compromised.
In between these two positions is Kravis (1970), whose challenge to
Nurkse’s interpretation depicts trade as only a &dquo;handmaiden of growth.&dquo; Kravis
contends that trade was as much a consequence as a cause of growth, that
trade was only one cause among many for economic growth, that it worked
only for some nations under some conditions, and, most importantly, that
&dquo;the mainsprings for growth were internal&dquo; (1970: 859). In support of Kravis’s
pessimism about the role for exports, Lewis (1978) adds another analogy, &dquo;the
engine of growth should be technological change, with international trade
serving as a lubricating oil and not as fuel.&dquo;
Many advocates of outward-oriented development, confident of the pure
economic theory which underlies OOD, derisively dismiss the reservations of
social scientists. Buoyed by the evident limitations of Latin American ISI in
the 1970s, they question whether import restrictions can ever be reconciled
with export expansion and whether growth can occur without an emphasis
on
the foreign sector. Still, the empirical evidence remains inconclusive. Overall,
trade levels are not consistently linked to economic growth (Rubinson 1977;
Delacroix 1977; Mahler 1980) and the best evidence suggests that, contrary
to theory, trade does not enhance resource allocation, though it is associated
with higher investment levels (Levine and Renelt 1992). Even the interpreta-
tion of the statistical relationship between export growth and GDP improve-
ment
is contested, owing to the difficulty in definitively separating the presumed
two-way causation (Crafts 1973; Smith 1975; Michaely 1977; Ram 1985; Jung
and Marshall 1985; Hsiao 1987).
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The empirical evidence concerning the performance of contemporary
nations pursuing alternative strategies is even more ambiguous, principally
because it has not been possible to devise a reliable measure of adherence to
&dquo;outward-oriented development&dquo; or &dquo;export-oriented policies&dquo; (EOP), as it is
sometimes known (Harrison 1991; Leamer 1988; Milner 1988). In place of a
direct measure of policy orientation, many prior analyses have relied upon
the actual volume of trade to infer the presence of policies designed either to
expand trade or to restrict it (Choi 1983). This approach, of course, makes
the dubious assumption that state policy is entirely responsible for the differ-
ences in propensities of nations to engage in trade. In fact, trade policy ac-
counts for only modest differences in export levels, which are dominated by
cross-national variance in economic size and resource endowments and cross-
time variation in effective external demand as well as supply conditions.
THE WORLD BANK STUDY
Without a direct measure of policy, it has been difficult to assess system-
atically the performance of alternative development strategies. The World Bank
sought to overcome this obstacle by employing a new measure of &dquo;trade ori-
entation&dquo; constructed independently of trade volumes. The coding scheme
was
first introduced in the Bank’s World Development Report 1987 but was origi-
nally constructed in a background paper by Greenaway (1986). He codes
forty-one nations into one of four categories for the time periods 1963-1973
and 1973-1985 based upon the criteria of effective rate of protection, the use
of direct trade controls and export incentives, and the degree of exchange rate
overvaluation (Greenaway...