Export-oriented industrialization
Encyclopedia
Export-oriented Industrialization (EOI) sometimes called export substitution industrialization (ESI) or export led industrialization (ELI) is a trade
and economic
policy
aiming to speed up the industrialization process of a country by export
ing goods for which the nation has a comparative advantage
. Export-led growth implies opening domestic markets to foreign competition in exchange for market access in other countries.
However this may not be true of all domestic markets, as governments may aim to protect specific nascent industries so they grow and are able to exploit their future comparative advantage and in practise the converse can occur. For example, many East Asia
n countries had strong barriers on imports from the 1960s to the 1980s.
Reduced tariff
barriers, a floating exchange rate
(a devaluation
of national currency
is often employed to facilitate exports), and government support for exporting sectors are all an example of policies adopted to promote EOI and, ultimately, economic development. Export-oriented Industrialization was particularly characteristic of the development of the national economies of the Asian Tigers
: Hong Kong
, South Korea
, Taiwan
, and Singapore
in the post-World War II
period.
, which makes the economies potentially unstable if demand for their specialization
falls; this is something which occurred during the financial crisis of 2007–2010 and subsequent global recession.
Other criticisms include that export orientated industrialization has limited success if the economy is experiencing a decline in its terms of trade
, where prices for its exports are rising at a slower rate than that of its imports. This is true of many economies aiming to exploit their comparative advantage
in primary commodities as they have a long term trend of declining prices, noted in the Singer-Prebisch thesis
though there are criticisms of this thesis as practical contradictions have occurred.
Primary commodity dependency also links to the weakness of excessive specialization
as primary commodities have incredible price volatility, given the inelastic nature of their demand, leading to a disproportionately large change in price given a change in demand for them.
The problem is that EOI presupposes that a government contains the relevant market knowledge to judge whether or not an industry to be given development subsidies which will prove a good investment in the future. The ability of any government to do this is limited as it will not have occurred through the natural interaction of market forces of supply and demand
. Also to exploit a potential comparative advantage requires a significant amount of investment which governments can only supply a limited amount of. In many LEDCs, it is necessary for multinational corporation
s to provide the foreign direct investment
, knowledge, skills and training needed to develop an industry and exploit the future comparative advantage
.
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
and economic
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
policy
Policy
A policy is typically described as a principle or rule to guide decisions and achieve rational outcome. The term is not normally used to denote what is actually done, this is normally referred to as either procedure or protocol...
aiming to speed up the industrialization process of a country by export
Export
The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"...
ing goods for which the nation has a comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
. Export-led growth implies opening domestic markets to foreign competition in exchange for market access in other countries.
However this may not be true of all domestic markets, as governments may aim to protect specific nascent industries so they grow and are able to exploit their future comparative advantage and in practise the converse can occur. For example, many East Asia
East Asia
East Asia or Eastern Asia is a subregion of Asia that can be defined in either geographical or cultural terms...
n countries had strong barriers on imports from the 1960s to the 1980s.
Reduced tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
barriers, a floating exchange rate
Floating exchange rate
A floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency....
(a devaluation
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....
of national currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
is often employed to facilitate exports), and government support for exporting sectors are all an example of policies adopted to promote EOI and, ultimately, economic development. Export-oriented Industrialization was particularly characteristic of the development of the national economies of the Asian Tigers
Asian Tigers
The Asian Tigers is a Pakistani militant group, first publicised when they claimed credit for the kidnapping of former Pakistani intelligence officers Khalid Khawaja, Colonel Imam, British journalist Asad Qureshi and Qureshi's driver Rustam Khan in March 2010. Khawaja was killed in April 2010....
: Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
, South Korea
South Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...
, Taiwan
Taiwan
Taiwan , also known, especially in the past, as Formosa , is the largest island of the same-named island group of East Asia in the western Pacific Ocean and located off the southeastern coast of mainland China. The island forms over 99% of the current territory of the Republic of China following...
, and Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
in the post-World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
period.
Limitations
Despite its support in mainstream economic circles, its success has been increasingly challenged over recent years due a growing number of examples in which it has not yielded the expected results. EOI increases market sensitivity to exogenous factors, and is partially responsible for the damage done by the 1998 economic crisis to the economies of countries who used export-oriented industrialization. It is also criticized for its lack of product diversity as economies pursue their comparative advantageComparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
, which makes the economies potentially unstable if demand for their specialization
Departmentalization
Departmentalization refers to the process of grouping activities into departments.Division of labour creates specialists who need coordination. This coordination is facilitated by grouping specialists together in departments....
falls; this is something which occurred during the financial crisis of 2007–2010 and subsequent global recession.
Other criticisms include that export orientated industrialization has limited success if the economy is experiencing a decline in its terms of trade
Terms of trade
In international economics and international trade, terms of trade or TOT is /. In layman's terms it means what quantity of imports can be purchased through the sale of a fixed quantity of exports...
, where prices for its exports are rising at a slower rate than that of its imports. This is true of many economies aiming to exploit their comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
in primary commodities as they have a long term trend of declining prices, noted in the Singer-Prebisch thesis
Singer-Prebisch thesis
The Singer–Prebisch thesis postulates that terms of trade, between primary products and manufactured goods, deteriorate in time...
though there are criticisms of this thesis as practical contradictions have occurred.
Primary commodity dependency also links to the weakness of excessive specialization
Departmentalization
Departmentalization refers to the process of grouping activities into departments.Division of labour creates specialists who need coordination. This coordination is facilitated by grouping specialists together in departments....
as primary commodities have incredible price volatility, given the inelastic nature of their demand, leading to a disproportionately large change in price given a change in demand for them.
The problem is that EOI presupposes that a government contains the relevant market knowledge to judge whether or not an industry to be given development subsidies which will prove a good investment in the future. The ability of any government to do this is limited as it will not have occurred through the natural interaction of market forces of supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
. Also to exploit a potential comparative advantage requires a significant amount of investment which governments can only supply a limited amount of. In many LEDCs, it is necessary for multinational corporation
Multinational corporation
A multi national corporation or enterprise , is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation...
s to provide the foreign direct investment
Foreign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
, knowledge, skills and training needed to develop an industry and exploit the future comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
.