Exports as an engine of Economic Growth – A critical analysis| |
Exports are generally defined as a function of international trade whereby goods produced in one country are shipped to another country for future sale or trade. The sale of such goods adds to the producing nation's gross output. If used for trade, exports are exchanged for other products or services. Prior to the 1991 reforms, Indian government policies focussed on protectionism and import substitution industrialisation. However, today since the Indian economy has opened up to international trade, India’s export cart features goods as varied as food grains, textiles, jewellery to oil products, steel and pharmaceutical products. Following figure demonstrates where exports figure in the grand scheme of things:
In the 4-sector model, the equation for GDP is:
It directly follows from this that higher the exports, higher the GDP. The underlying reasons may be as varied as the following: 1. Higher exports bring in more inflow of foreign exchange and this foreign exchange in turn increases the purchasing capacity of a nation in the international market. Thus, the country is able to import more in order to drive the economy.
2. Exports also facilitate the concept of specialisation wherein countries are able to concentrate more on what they are good at and finally achieve economies of scale in their core competencies for efficient production of goods. 3. A greater market is provided for all goods made and thus the producer is able to get a better price for the goods. This encourages the business to produce more, makes people more enterprising and thus stimulates industry growth. 4. The growth in industry consequently provides for greater employment opportunities which is one of the economic objectives.
A decline or fluctuation in exports may affect the growth in a negative way for the following reasons: 1. Fluctuations in export earnings introduce uncertainties in an economy. These uncertainties influence economic behaviour by adversely affecting the level and efficiency of investment and in turn have a negative effect on growth. 2. Such fluctuations are also expected to raise borrowing costs as they tend to cause balance of payment complexities. This ultimately leads to low confidence of people in the process of maintenance of the exchange rate. 3. Export instability stimulates inflation. The simple rule of the thumb is that as inflation rises in a country, the products and services tend to be costlier, with minor exceptions, of course. A few live examples of exports directly affecting growth are seen through the following headlines: In 2008, the United States exported nearly $1.7 trillion in goods and services. These exports supported more than 10 million full- and part-time jobs and accounted for 12.7 percent of gross domestic product (GDP). President Barack Obama signed an executive order on March 11, 2010, which created the National Export Initiative (NEI). The initiative calls for doubling U.S. exports during the next five years to create 2 million new jobs
Add to this, the case of a rapidly developing country like Singapore which has made export and trade as the major driver of its economy and is doing reasonably well with it.
(World Bank figures for Singapore)
A look at the other side:
Having said the above, there is also the school of thought that believes that the effect of exports on the nation’s economy is not as simple as a linear equation. Proponents of the theory that a nation might be better served by looking at alternatives other than exports sight the following reasons: 1. Unrestricted export may lead to outflow of raw material crucial to domestic industries. This will hurt the growth of the domestic manufacturing sector. Time to time Indian government has stepped in to curb exports of such material, whether it be cotton for the textile...