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Over the last three decades there has been a dramatic shift in the stance of development policy with import-substitution being replaced by the export-led growth. A significant concern with this latter model is that it may risk turning global growth into a zero-sum game. This can happen if one country’s export growth comes by poaching of domestic demand elsewhere or by displacing exports of other countries.
Rather than focusing on production for domestic markets, countries were advised to focus on production for export. This shift away from import-substitution toward the export-led growth was driven significantly by the economic troubles that emerged in the 1970s. At that time many developing countries, who had prospered under regimes of import-substitution, began to experience slower growth and accelerated inflation.
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This led to claims that the import-substitution model had exhausted itself, and that the easy possibilities for growth by substitution had been used up.second factor fostering adoption of the export-led model was the shift in intellectual outlook amongst economists in favor of market directed economic activity. Import-substitution requires government provided tariff and quota protections, and economists increasingly came to portray these measures as economic distortions that contribute to productive inefficiency and rent seeking.
The shift in policy stance was also propelled by the empirical fact of Japan’s spectacular success in growing its economy in the twenty five years after World War II, and by the subsequent growth success of the four east Asian “tiger” economies - South Korea, Taiwan, Hong Kong, and Singapore. All of these economies relied on increased exports.
The problem is that the export-led growth model suffers from a fallacy of composition whereby it assumes that all countries can grow by relying on demand growth in other countries. When the model is applied globally in a demand-constrained world, there is a danger of a beggar-thy-neighbor outcome in which all try to grow on the backs of demand expansion in other countries, and the result is global excess supply and deflation. In this connection, it is not exporting per se that is the problem, but rather making exports the focus of development. Countries will still need to export to pay for their imported capital and intermediate goods needs, but exporting should be organized so as to maximize its contribution to domestic development and not viewed as an end in itself.
Export led growth model prompts countries to shift ever more output onto global markets, and in doing so aggravates the long-standing trend deterioration in developing country terms of trade. This pattern partakes of a vicious cycle since declining terms of trade and falling prices compel developing countries to export even more, thereby compounding the downward price pressure. This vicious cycle has long been visible for producers of primary commodities. However, as a result of the transfer of manufacturing capacity to developing countries who lack the consumer markets to buy their own output, the same process may now be present in all but highest-end manufacturing.
In the 1950's, Western opinion leaders found themselves both impressed and frightened by the extraordinary growth rates achieved by an Eastern economy, although it was still substantially poorer and smaller than those of the West.
The speed with which it had transformed itself from a peasant society into an industrial powerhouse, and it's perceived ability to achieve growth rates several times higher than the advanced nations, seemed to call into question the dominance not only of Western power but of Western ideology.
The leaders of that nation did not share Western faith in free markets or unlimited civil liberties. They asserted with increasing self-confidence that their system was superior: societies that accepted strong, even authoritarian governments and are willing to limit individual liberties in the interest of the common good, take charge of their economies, and sacrifice short-run consumer interests for the sake of long-run growth that would eventually outperform the increasingly chaotic societies of the West. And a growing number of Western intellectuals agreed.
The rapidly growing Eastern economy was that of the Soviet Union.
China's economic growth has averaged 9pc a year over the past 10 years, compared with a paltry 1.9pc for the British economy. Last year, despite the credit crunch, China posted a remarkable growth rate of 10.7pc against a British contraction of 3.2pc.some are extrapolating present trends forward, and proclaiming that China will usurp the United States as the world's largest economy.
However, in the absence of expanding foreign demand for its exports, it has instead come to rely on a massive surge in domestic bank lending to fuel its growth rate. When measured relative to the size of its economy, the 27pc point jump in bank loans to GDP is unprecedented; at no point in history has a nation ever attempted such an incredible increase in state-directed bank lending.
This appetite for cheap Chinese exports, which had at one point seemed insatiable, means that the West has come to owe China over 2 trillion $. China has become the world's biggest creditor, but creditor nations running persistent trade surpluses has two historical examples. The US economy in the Twenties and the Japanese economy in the Eighties.
In both of the previous examples a failure to allow exchange rates to adjust to the new reality created a large speculative pool of credit that, in turn, led to overvalued domestic assets and, eventually, an economic crisis.
The banks in China are lending money at breakneck speed, but China's state planners have favoured investment over consumption. High-speed rail networks, first-class infrastructure projects and the urban migration of 55 million people every year are common explanations for the ability of the nimble Chinese to overcome the frailties of this global economy. But the goal of economic policy, is to maximise households' wellbeing and consumption. Unfortunately, and China's share of consumption within its economy has fallen relentlessly, reaching 35pc of GDP in 2008.
In China, investment spending has tripled since 2001 and the consequences are staggering. A country that represents just 7pc of global GDP is now responsible for 30pc of global aluminum consumption, 47pc of global steel consumption and 40pc of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment. Over-capacity inevitably plagues many sectors of the economy and Chinese profitability is already low.
Real wealth is founded on the skills and productivity of a country's citizens. This is the central concern regarding the sustainability of the Asian economic model. Power without profit can prove ephemeral. This is an axiom the Japanese are all too familiar with.
Economists who looked seriously at the roots of that growth were putting together a picture that differed substantially from most popular assumptions. Communist growth rates were not magical. The rapid growth in output could be fully explained by rapid growth in inputs: expansion of employment, increases in education levels, and, above all, massive investment in physical capital. The big surprise about Soviet growth was that when closely examined it posed no mystery.
Most of the speculation about the superiority of the communist system--including the popular view that Western economies could painlessly accelerate their own growth by borrowing some aspects of that system--was off base. Rapid Soviet economic growth was based entirely on one attribute: the willingness to save, to sacrifice current consumption for the sake of future production. The communist example offered no hint of a free lunch.
The economic analysis of communist countries' growth implied some future limits to their industrial expansion--in other words, implied that a naive projection of their past growth rates into the future was likely to greatly overstate their real prospects. Economic growth that is based on expansion of inputs, rather than on growth in output per unit of input, is inevitable subject to diminishing returns. It was simply not possible for the Soviet economies to sustain the rates of growth of labor force participation, average education levels, and above all the physical capital stock that had prevailed in previous years. Communist growth slowed down, and drastically.
Popular enthusiasm about China and Asia's boom deserves to have some cold water thrown on it. The future prospects for their growth are more limited than almost anyone now imagines. Few people now remember how impressive and terrifying the Soviet empire's economic performance once seemed. The story of China and Asia will be no different.
Economic expansion represents the sum of two sources of growth. On one side are increases in "inputs": growth in employment, in the education level of workers, and in the stock of physical capital (machines, buildings, roads, and so on). On the other side are increases in the output per unit of input; such increases may result from better management or better economic policy, but in the long run are primarily due to increases in knowledge. Mere increases in inputs, without an increase in the efficiency with which those inputs are used--investing in more machinery and infrastructure--must run into diminishing returns; input-driven growth is inevitably limited.
The Soviet growth was based on rapid--growth in inputs--end of story. The rate of efficiency growth was not only unspectacular, it was well below the rates achieved in Western economies. Indeed, by some estimates, it was virtually nonexistent.
The immense of Soviet efforts to mobilize economic resources were hardly news. Stalinist planners had moved millions of workers from farms to cities, pushed millions of women into the labor force and millions of men into longer hours, pursued massive programs of education, and above all plowed an ever-growing proportion of the country's industrial output back into the construction of new factories.
The big surprise was that once one had taken the effects of these more or less measurable inputs into account, there was nothing left to explain. The most shocking thing about Soviet growth was its comprehensibility.
Claims about the superiority of planned over market economies turned out to .be based on a misapprehension. If the Soviet economy had a special strength, it was its ability to mobilize resources, not its ability to use them efficiently. It was obvious to everyone that the Soviet Union in 1960 was much less efficient than the United States. And it showed no signs of closing the gap.
Second, because input-driven growth is an inherently limited process, Soviet growth was virtually certain to slow down. Long before the slowing of Soviet growth became obvious, it was predicted on the basis of growth accounting. The implosion of the Soviet economy a generation later, was a totally predictable outcome.
The industrializing and industrialized countries of Asia, and especially china, have achieved rapid growth in large part through an astonishing mobilization of resources. Once one accounts for the role of rapidly growing inputs in these countries' growth, one finds little left to explain.
Asian growth, like that of the Soviet Union in its high-growth era, is driven by extraordinary growth in inputs like labor and capital rather than by gains in efficiency.
China's growth has been based largely on one-time changes in behavior that cannot be repeated. Over the past generations the percentage of people employed has almost tripled; it cannot triple again.
A great way to explain skepticism about East Asian growth prospects is the example of Japan. But, there is a big difference. Japan, unlike the East Asian "tigers," has grown both through high rates of input growth and through high rates of efficiency growth. Today's fast-growth economies are nowhere near converging on U. S. efficiency levels.
Japan's historical performance has indeed been remarkable, but the era of miraculous Japanese growth now lies well in the past. Japan has reached a level that is far below what many sensible observers predicted 20 years ago.
In 1973 Japan was still a substantially smaller and poorer economy than the United States. Its per capita GDP was only 55 percent of America's, while its overall GDP was only 27 percent as
large. But the rapid growth of the Japanese economy clearly portended a dramatic change. Over the previous decade Japan's real GDP had grown at a torrid 8.9 percent annually, with per capita output growing at a 7.7 percent rate. Although American growth had been high by its own historical standards, at 3.9 percent (2.7 percent per capita) it was not in the same league. Clearly, the Japanese were rapidly closing the gap.
In fact, a straightforward projection of these trends implied that a major reversal of positions lay not far in the future. At the growth rate of 1963-73, Japan would overtake the United States in real per capita income by 1985, and total Japanese output would exceed that of the United States by 1998! At the time, people took such trend projections very seriously indeed.
Well, it has not happened. Japan did not become an overwhelming an example of economic prowess as is sometimes thought.
Accounting for China's boom is difficult for practical reasons. The practical problem is that while we China reports that it is growing very rapidly, the quality of the numbers is extremely poor. It was revealed in the past that official Chinese statistics on foreign investment have been overstated by as much as a factor of six. The reason was that the government offers tax and regulatory incentives to foreign investors, providing an incentive for domestic entrepreneurs to invent fictitious foreign partners or to work through foreign fronts. This episode hardly inspires confidence in any other statistic that emanates from that dynamic but awesomely corrupt society.
If one measures Chinese growth from the point at which it made a decisive turn toward the market, say 1978, there is little question that there has been dramatic improvement in efficiency as well as rapid growth in inputs. But it is hardly surprising that a major recovery in economic efficiency occurred as the country emerged from the chaos of Mao Zedong's later years. If one instead measures growth from before the Cultural Revolution, say 1964, the picture looks more like the East Asian "tigers": only modest growth in efficiency, with most growth driven by inputs.
The extraordinary record of economic growth in the newly industrializing countries of East Asia has powerfully influenced the conventional wisdom about both economic policy and geopolitics. Many, perhaps most, writers on the global economy now take it for granted that the success of these economies demonstrates two propositions. First, there is a major diffusion of world technology in progress, and Western nations are losing their traditional advantage. Second, the world's economic center of gravity will inevitably shift to the Asian nations of the western Pacific.
Additionally, some claim that the Asian successes demonstrate the superiority of economies with fewer civil liberties and more planning than we in the West have been willing to accept.
All three conclusions are called into question by the simple observation that the remarkable record of East Asian growth has been matched by input growth so rapid that Asian economic growth, incredibly, ceases to be a mystery.
Up until now Asia ex- Japan has been affected but not as badly as other parts of the world from the world recession that started in 2008. Some small countries went into recession; most large countries only saw a deceleration in growth. Twelve to 14 million less jobs will be created annually due to the crisis. This could rise up to 20 million. This is about to change.
Asia can't get out of its old export-led growth model over night, and the model which was built around an unsustainable concept, is broken. Asia's net savings were exported to the developed world where people used this money to consume more products, which Asians exported to them. This was unsustainable and it broke. The reason being that in order to make that kind of export model work, you have to keep wages low, which resulted huge increases in inequality. You had poverty reduction because you had high growth, but you could have had more poverty reduction if you had more equal growth. Currently, wage and price inflation in China and other Asian countries is at record levels, and they simply can't play that game anymore.
Asia’s export-driven growth model is “broken” and nations in the region can't to do more to boost domestic demand, since they kept wages low and directed all investment through currency manipulation and infrastructure projects to the export sectors. Now they have trains and factories but no income to support it. The factories have no one to sell to because of the developing depression in the west. You can't fix that with bridges to nowhere like China is trying.
Asia’s developing economies are almost twice as reliant on exports as the rest of the world, with 60 percent of their overseas sales ultimately destined for the U.S., Europe and Japan.
China and other countries have tried to implement policies to boost domestic consumption as advanced nations are unlikely to absorb the region’s excess production, but just can't boost demand and imports by 80% in one year, since a) it is artificial, and b) it leads to very high inflation.
Exports by developing Asian economies shrank more than 10 percent in 2009, after growing 14.7 percent in 2008, while global trade contracted for the first time since World War II as a result of U.S. and European demand slumps.
Asian policy makers responded the global recession by slashing interest rates and implementing fiscal stimulus packages . Governments in the region have pumped more than $950 billion into their economies through increased expenditure, tax cuts and cash handouts to kick-start local consumer and business spending, which has all resulted in fierce wage inflation.
Asia’s strong reliance on external demand weigh against the prospects of a high growth rate in the future. because governments efforts to invigorate domestic demand, the world will confront with collapse of one more bubble.
Export-led growth models work a treat--as long as you have someone to export to. With a global slowdown in place, many Asian economies felt the pinch. There is no "miracle" in preternaturally high investment rates since the real story lies in the lack of productivity gains made by these countries over time.
When economic activity worldwide is growing at a healthy clip, these nations' higher share of exports to GDP is welcome. When the opposite holds true, those are the ones that suffer the most.
Chinese manufacturing has declined for five straight months up until February of 2009. The story in China has been one of imperiled, marginally profitable enterprises relying on generous state-provided incentives for utilities, credit, etc. now having to deal with slowing global demand. The drying up of trade finance isn't helping, either. The giant stimulus worldwide, and especially in China, helped the world economy for one year but that has now dried up.
And which Asian country fared the worst in 2009? Why, the granddaddy of all growth miracle stories, postwar Japan. Once China infrascture boom gained speed, Japan a sharp rise in export, which will end once China falls.
what about INDIA......can u do a similar write up on INDIA
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