‘Export-Led Growth’ Model
The export-led growth model was widespread in the late 1970s, especially in Latin America, when it substituted the other paradigm that was predominant for thirty years after World War II. Export-led growth aims to develop productive capacity by concentrating on the markets from abroad (Allen, 2001). It has become a significant part of the consensus among economists who dwelled upon the advantages and disadvantages of economic openness discussed in the 1970s.
This new consensus was based on the synthesis of three lines of argument. The first one, based on the theory of comparative advantages, concerns the benefits of trade between economies with different ratios of capital and labor. The second strain argues the advantages of openness to control the search for rent – a problem for which the development of import substitution has been sharply criticized (Allen, 2001). Finally, the third line that developed later stands for the perks of openness to growth. It is argued that trade promotes the spread of technology and knowledge, which contribute to faster productivity growth.
Export-driven growth is a supporting industry within this new consensus applicable to developing countries. The argument is that conscious foreign-market-oriented policies help extract economic benefits from openness to developing countries by encouraging the adoption of best practices, stimulating product development, and creating a competitive environment for firms. The success of Far East Asia (South Korea, Hong Kong, Singapore, and Taiwan) seems to have provided decent evidence for these claims (Allen, 2001). According to economists, growth due to exports provides a win-win result for developing and industrialized economies. Everyone benefits from the global application of comparative advantage, while developing countries benefit further from external attention.
Furthermore, developed countries presumably benefit even if not developed economies subsidize their exports to gain extra exports. Such a situation occurs when some states support their exports, thus grunting this possibility to those obtaining them. Nevertheless, this statement is based on two very dubious assumptions. Primarily, there are no long-term dynamics in expenses in the industries substituted by such subsidies. In addition, there is a shortage of resources and full employment, presuming that the contributions granted are beneficial. The claims about the advantages of trade and economic openness were significant for advancing the new worldwide monetary union’s agenda. It occurred due to their correspondence with the major corporations’ financial interests, which sought to revive globalization based on a modern global economic system.
As a consequence, corporations have adopted the suggestions of economists, as they were useful for shaping shape the global economic structure. This created an alliance of elite corporate opinions that linked globalization with numerous trade approaches. This union contributed to the expansion of the GATT and the further creation of the World Trade Organization (WTO) in 1996 (Allen, 2001). The (International Monetary Fund) IMF, and the World Bank paid particular interest in promoting the new order (Allen, 2001). It was evident because developing states required extra financial help after suffering from the oil shocks of the 1970s. Hence, these organizations decided to aid the dependent countries if governments would accept an openness program.
‘Import Substitution Industrialization’ Model
Import substitution of industrialization, or ISI, is an economic development program in which dependence on imports to a particular country is subordinated to the development of local industry in that country. Developing countries applied this theory throughout the 20th century due to the economic inferiority of countries with significant industrial production (Allen, 2001). They produce manufactured goods locally for local consumption. The industrialization of import substitution is designed to provide employment opportunities for their citizens, reduce dependence on foreign countries to gain benefits or self-sufficiency and stimulate innovation. Methods used to encourage such a shift include protective tariffs and import quotas.
ISI directly contradicts the concept of comparative advantage, which arises when states create lower opportunity costs for producing goods and exporting them. Since the 18th century, the approach has been promoted and greatly encouraged. The model’s policies were widespread in Latin America, Africa, and Asian countries (Allen, 2001). They intended to establish self-sufficiency with the help of domestic market creation. ISI policy is booming due to facilitation by subsidizing significant industries such as agriculture and electricity generation and urging national and trade initiatives.
In Latin American countries, industrial policy was tied to industries such as oil refining, petrochemicals, telecommunications, metallurgy, and aviation, which could be either wholly state-owned or with the participation of private capital. Enterprises that gained state investment, research, and development sources could use state guarantees when borrowing on foreign markets (Allen, 2001). Officials could participate in negotiations to transfer foreign technologies to create new enterprises. State-owned companies had sufficient resources to attract the most gifted scientists, engineers, and managers. They could increase the time horizon of investment projects since they were not required to demonstrate annual profits. The purpose of this policy was not to abandon exports; on the contrary, it was assumed that temporary measures to protect fragile industries would lead to the development of new, competitive products on the world market.
In the late 1970s, a recession began in the United States and Western Europe, leading to a drop in demand, a deterioration in trade, higher interest rates, and a reduction in loans and investments. The period of the rapid growth of Latin American economies has ended, and a series of crises has come, which led to significant losses and prolonged stagnation. The insufficient volume of the domestic market, including due to the poverty of the population, did not allow it to achieve economies of scale.
Attempts to create a common market in the region also failed. In 1980, a debt crisis broke out in Mexico, which spread to most Latin American countries. In addition to the high debt burden, there were severe political and social prerequisites for the crisis (Allen, 2001). First of all, the domestic markets of Latin America were limited. The lack of competition did not contribute to innovation and production efficiency; the quality of national goods remained low while maintaining high prices. Import substitution was carried out by efforts and in the interests of the elite and was supported mainly not by industry but by individual industrialists. Nonetheless, between the 1980s and 1990s, underdeveloped countries decided to reject the model’s tenets after the inception of global liberalization driven by the market.
References
Allen, L. (2001). The global financial system 1750–2000. Reaktion Books.
Frieden, J. (2020). Global capitalism: Its fall and rise in the twentieth century, and its stumbles in the twenty-first. Ww Norton & Co.