Estimated reading time: 5 minutes
Exporting has been widely touted as a means of economic development, with many nations, particularly across Asia, growing rapidly through export-led industrialisation.
However, many nations that follow this model experience slower internal growth despite their rapid ascent within global markets.
This article explores four reasons why the export-led path to economic development in a range of countries – including Japan, Germany, and China – has led to slower growth internally.
These are a disproportional emphasis on export-oriented industries, reduced domestic consumption, vulnerability to external market conditions, and a level of specialisation that hinders internal diversification.
Disproportional emphasis on export-orientated industries
Export-led growth often leads to a disproportionate allocation of resources towards export-oriented industries through an array of industrial national policy measures such as subsidies and tax incentives.
While these measures can be a boon for exporters, they often come at the cost of neglecting other sectors, particularly those catering to domestic markets. Such imbalanced resource allocation can lead to inefficiencies and a lack of holistic economic development.
This is why export-led economies often exhibit a dual nature, with efficient export-focused firms – propped up by an efficiency-evoking concoction of government policies and external competitive pressure – juxtaposed against inefficient domestic-orientated firms that lack support and competitive incentives.
This can create a significant divide between the two sectors, which can be detrimental to internal growth in the long run as the nation’s efficient firms are focused on serving international customer needs.
Reduced domestic consumption
Additionally, the focus on exports can divert national attention and investment away from the institutional safety nets essential for long-term sustainable growth and consumer spending, such as healthcare, education, and infrastructure.
In China, for example, low spending is driven by high savings rates necessitated by weak welfare systems, including poor public health, education, retirement, and aged care systems. This effectively means that citizens have no choice but to stifle consumption to compensate for the possibility of paying these sometimes unexpected expenses out of pocket.
This involuntarily inhibited consumption adds another layer of difficulty for businesses catering to the domestic market. However, in nations pursuing export-led growth, citizens are often culturally encouraged to save in lieu of consumption.
In Germany and Japan, for example, many individuals are predisposed towards savings from experiences of postwar deprivation and insecurity when saving was considered patriotic.
Whether by necessity or patriotic cultural propensities, high savings will perpetuate a weak domestic consumption base and serve to slow internal growth.
Vulnerability to external market conditions
Export-led growth strategies rely on external demand for goods and services, both by definition and due to decreased domestic spending. Such foreign dependence makes economies vulnerable to global market fluctuations and external economic conditions beyond their control.
In periods of reduced external demand, the very nature of an export-led model can inhibit a nation’s ability to supplement demand with an adequately robust domestic market.
This is not a simple situation to remedy, as increasing domestic consumption enough to absorb external shocks would require large increases in wages to boost domestic purchasing power. Such changes, however, would irreparably reduce the nation’s export competitiveness.
As such, an exporting nation must be willing to commit to a deliberate change in its long-term growth strategy to take such a measure. Even if a nation is willing to make such a change, it would be difficult and costly to execute as government tools for redressing past economic distortions are limited for many nations.
Ultimately, this inherent vulnerability to external market conditions, paired with an inability to rapidly change tactics should the need arise, contributes to slower internal growth for many nations pursuing an export-led growth strategy.
Specialisation hindering internal diversification
Nations seeking an export-led development model are also often drawn to specialisation in production afforded by the large size of the global market.
Since they are no longer constrained by the size of their domestic market, exporting economies often opt to produce goods where they have the greatest comparative advantage. However, concentrating on a few key industries hinders economic diversification, limiting the economy’s ability to adapt to changing global market conditions.
Further, this specialisation compounds citizens’ high savings propensity since, even if consumers were to begin spending more on domestically produced goods, there is only so much of a homogenised product that they can gain utility from buying.
For example, in 2022, Germany produced 3.4 million automobiles, while only 2.6 million cars were newly registered in the country. Even if Germany could increase domestic spending and get citizens to buy only German-made cars, Germans would need to purchase nearly 50% more new cars per year to support a domestic auto industry.
It would not take long for diminishing marginal utility to erode the benefits that Germans ascribe to cars. Hence, a specialised export-led model also erodes an economy’s ability to grow internally.
Ultimately, while successful in propelling nations like Japan, Germany, and China to the forefront of the global economy, the export-led growth model presents significant challenges for sustaining internal economic development.
The model’s challenges – disproportionate emphasis on export-oriented industries, reduced domestic consumption, vulnerability to external market conditions, and a tendency towards over-specialisation – can collectively hinder a nation’s ability to foster a balanced and resilient economy.
While export-led growth can be a powerful engine for economic ascent, it is not a panacea for all economic woes, and nations should strive for a more balanced approach that nurtures both export and domestic sectors, encourages healthy consumption patterns, and fosters economic diversification.
As the global economic landscape continues to evolve, adapting and refining growth strategies will be essential for nations to thrive in an increasingly interconnected and dynamic world economy.