A nation pursuing export-led growth seeks to expand its economy by producing goods for sale overseas. Successfully executed, this strategy generates a flow of money from abroad that the country can then use to strengthen its domestic economy and raise living standards. While this strategy has helped some nations develop rapidly -- China, for example -- it does come with significant risks.
Dependence on Foreign Markets
To achieve export-led growth, a country first has to make something that people in another country want to buy, so the strategy is highly dependent on foreign demand. It's also highly dependent on having access to foreign markets where that demand exists. A country may have a plan to produce a million cars for export, but that plan can work only if people in other countries want to buy a million of its cars -- and only if the governments of those countries allow the cars in without import taxes that make them so expensive as to kill the demand.
Neglect of Domestic Priorities
Production capacity that's being used to make goods for export cannot be put to use meeting domestic needs. Highly developed economies produce goods both for export and for domestic consumption, and they import goods that would be more expensive (or impossible) to produce at home. Countries seeking export-led growth, however, have production primarily geared toward the needs of foreign consumers, not their own. As long as there's a steady market abroad and the money keeps flowing, this may not be a problem, as that money can finance domestic development and pay for imports of the things people do need. But if export markets shrink or close off, the country may be left with production capacity that can't be applied to domestic needs -- a million cars with no one to drive them.
Developing countries' primary advantage in export markets is cheap labor, which translates into lower-priced products. That inexpensive T-shirt you're wearing may have been made in a country such as Vietnam or Honduras. That's not because Vietnamese or Honduran workers make better shirts than American workers, but because their pay is so much less that it's cheaper for the T-shirt company to make shirts there and ship them to the U.S. than it is to simply make shirts here. To sustain export-led growth, then, a country has to keep labor costs down so that its exports remain competitive. That can stunt wage growth and keep the people of the country from enjoying the very prosperity that export-led growth is supposed to bring about.
Limited Opportunity and Sustainability
Exports are what economists call a zero-sum game. Every item that's exported by one country has to be imported by another. If every country is trying to grow through exports, then growth will be impossible because no one will be importing. This effectively limits the number of countries for which export-led growth is a viable option at any one time. Export-led growth is also not a long-term strategy. Countries want economic growth so they can raise living standards, which means higher wages, which erodes their cheap-labor advantage in export markets. Production moves around the world in search of cheaper labor. The question is whether the political and business leadership of the country will be wise enough to use the money brought in from exports to develop the economy so it's less dependent on exports, and so wages and living standards can rise without cracking the economy.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.