Introduction: Several studies focus mainly on the effects of export expansion on economic growth and development in emerging countries. These studies ignore the contribution of import-substitution in the same countries. It is necessary to investigate the relationship between trade and economic growth with emphasis on the role of import and export. A study on the separate impacts of export, import and import-substitution allows policy-makers to observe the influence of each on economic growth.
Analysis of the effect of “improved trade” on growth and development provides insight if growth is driven mainly by export and import or import-substitution activities. The result helps to confirm the existence of relationships between growth and export. It may also show the link between growth and import as well as growth and import-substitution. Studies indicate that a unilateral focus on “export only” tends to be misleading.
This is crucial in developing strategies to enhance growth. If export drives economic growth, policy should be directed more towards export orientation and likewise towards import and import- substitution. Here, import-substitution should be understood as local production of commodities to substitute imports with the objective of saving foreign exchange. This, however, requires an initial allocation of foreign exchange for importing technology or equipment for producing import-substitutes.
The question is whether trade liberalization may boost economic growth in the long run. In answering this question, the relationship between trade and growth has received much attention especially from the academics and policy makers. In liberalization, it is proposed to curtail the role of government in the economy, thereby encouraging private entrepreneurs to operate freely. Such questions are among the oldest puzzle in the economics field. Many studies on trade focus primarily on the effect of export, ignoring the contribution of import and import-substitution. Recent studies have shown that singular focus on the role of export as an engine for growth might be misleading.
Empirical studies sought to test the validity of four strategies: export led growth (ELG), growth led export (GLE), growth led import (GLI) and import led growth (ILG). The studies show “mixed results and often contradictory ones.” What is the situation in Ethiopia regarding these strategies? This is a question that has to be answered by Ethiopian policy makers and planners. Which one of these strategies is relevant and beneficial to our economic conditions?
Alternative strategies
1. Expor-led-growth: Studies on export-led-growth (ELG) indicate that export is one of the main determinants of production. It is also a key factor in promoting economic growth. This indication is made based on the argument that growth of a country does not only rely on the quantity of labor and capital only, but also on the “expansion of export.” The positive relationship between growth and export is attributed to gains in foreign market or competitiveness. According to its advocates, export can be regarded as an “engine of growth” in three dimensions.
Firstly, export serves as a catalyst of output growth through the expansion of aggregate demand as suggested by Silverstovs and Herzer. Increase in “demand for domestically produced export items can be transformed” into high value domestic production. This will stimulate both income and employment within the economy. It is also argued that export expansion will lead to optimum use of resources. It further enhances productivity by allocating resources to the most productive uses and sectors. Secondly, the positive relationship between export and growth can be explained through “learning by exporting” effect.
The specific firms that are involved in the export market gain new knowledge and expertise. Such benefits will promote technological improvement and skill upgrading. This allows firms to improve their overall efficiency compared to non-exporters. According to Feder, the “spillover effect” from export activities enables the country to reap the advantages of economies of scale, which is saving in cost gained by “increased level of production.” The combinations of both international and domestic markets facilitate a larger scale of operation compared to the domestic market “alone.”
Thirdly, the expansion of export that leads to high foreign exchange earnings increases demand for import of intermediate goods or means of production. It would enhance capital formation in the economy and stimulate output growth in developing countries.
2. Import-led-growth: Regarding the strategy of import-led-growth, the arguments were made based on several considerations. First, the transfer of technology via import from a developed country to a developing country can serve as one of the sources of economic growth. In a study made by Grossman and Helpman, import serves as a channel for long-run economic growth since it provides domestic firms an access towards foreign technology and knowledge. Import activity allows for the exchange of foreign R&D knowledge since cutting edge technologies are usually bundled with “imported intermediate” goods and services such as precision machines, computers and similar equipment.
In other words, foreign import can be a source of technology-intensive intermediate factors of production. Second, import can promote growth and enhance domestic innovation via foreign competition. Exposure of domestic firm to foreign market will spur innovation of competitive products. The domestic producer will respond to the technologically competitive external pressure. Given the arguments on the contribution to the economy of both export and import, the question on whether export or import is a driver of growth remains unsettled. Both could be factors that contribute to growth!
3. Export, import and economic growth, an overview: Empirical evidences on ELG prove that there exists a link between GDP and export growth. Yet, controversies still surround the issue of causality. Earlier studies examined the relationship between trade and growth based primarily on the role of export.
Most of the studies found positive relationship between export performance and growth in national output. Export expansion caused growth in most countries of Asia. This causality is either bidirectional or unidirectional. In the latter case, for example, causality could be “from growth to export and not vice versa.” Growth is the contributor to export expansion. In the case of bidirectional causality, “both growth and export contribute to each other’s expansion.”
What is the nature of causality between growth and export in Ethiopia? Is growth driven by export or is it the other way around? What do the development planners say about these causalities? Studies confirm that in some developing countries economic growth causes export growth. This means “export is not the engine of growth” for these countries.
Economists employ methods for investigating the relationship between export, import and growth. They found a bidirectional relationship between GDP and Import, GDP and Export but no link between import and export. But, this conclusion is not applicable for all countries. Does it apply to Ethiopia or not? The causality for export led growth (ELG) may give rise to a misleading result if imports are excluded in the system being analyzed.
Investigations on the contribution of trade to economic growth support ILG strategy. Import is more relevant for some economies compared to export.
Some studies support ILG for some countries arguing that importing foreign technology is important for long run growth of the economy. It is argued that import plays an important role to stimulate productivity and not export.
In short, different strategies apply in different countries. In other words, ELG and ILG strategies apply differently to different countries. Studies also reveal that both strategies have been used simultaneously in some countries.
Despite the extensive studies analyzing the relationship between export and growth, no clear conclusion has emerged from all these studies. However, an alternative approach is needed to test for the existence of a stable relationship between output, export, import, import-substitution and exchange rate.
Import-substitution strategy: Import-substitution involves, as mentioned earlier, importing technologies. It also requires the capacity to manage the economy. It depends on local skills that are highly developed. The ultimate objective of import-substitution strategy is to satisfy local demand with locally produced goods and services. It should be able to curb demand for imports. The details of this strategy could not be presented in this short article.
Conclusion and recommendations: In recent years, attention has been given to international trade as an engine of growth. Evidences suggest that both export and import contribute towards economic growth. However, earlier studies had focused only on the role of export, ignoring the potential growth-enhancing contribution of import. Recent studies indicated that both export and import contribute to economic growth in the developing countries. These studies focused on the dynamic causal relationship between GDP, export, import and import-substitution.
First, these studies confirm that there is a bi-directional (two-way) causal relationship that exists between export and economic growth where export leads economic growth and also growth leads export. Second, the studies also confirmed the existence of bi-directional causal relationship between import and economic growth supporting both import lead growth (ILG) and economic growth. This suggests that competitive pressures and learning from foreign rivals are important conduits for growth.
In summary, the findings confirmed that the exclusion of import and the singular focus on role of export as the engine of growth may be misleading or at best incomplete. Although export plays a significant role for economic growth, reliance on the exports only is incomplete. The bidirectional relationships between growth and export as well as growth and imports play an important role to enhance growth. In both export and import the exchange rate is a variable, which is subject to external factors or influences. The weaker the international trade, the weaker is the capacity to earn foreign exchange.
These situations reveal several policy implications for the developing countries. First, a policy that enhances export should be comprehensive in the sense that it caters for both “domestic and external” factors such as government strategies on export promotion and “economic diplomacy.” One of the key objectives that government could achieve is to strengthen economic diplomacy in general, such as trade agreement with trading partners. This is one way to tackle both benefits of trade stability and export competitiveness.
Given the conditions of the developing countries, access to technology and knowledge is only possible through imports. But, this requires earning foreign exchange from exports. In other words, both import and export are closely interlinked. Therefore, if government wishes to promote export as part of its strategy to enhance growth while at the same time imposing “import constraints,” it would only be a defective approach.
Whatever approaches are adopted by the governments of developing countries, monitoring of entities participating in export and import activities is very crucial. These entities or individuals deter development through trading of both export and import. They tend to cheat in reporting “export and import prices” in collaboration with their foreign counterparts. These cheaters are also successful because of the full cooperation of irresponsible officials of the financial institutions responsible for international trading.
It is strongly recommended that the national banks of developing countries, including that of Ethiopia should closely follow-up international market prices to “prevent cheating” by impudent and indiscreet exporters and importers. Exporters may underreport foreign exchange earnings by means of “under-pricing.” Similarly, importers may “inflate import prices” to exploit the domestic consumers.
The financial institutions should be technologically well-equipped with staff proficient in information technology (IT). IT helps identify daily quotations of commodity prices in the international markets. There is no loophole for cheating, provided that the “executives and employees” of the concerned banks and institutions operate judiciously, cautiously and prudently as duty conscious professionals. They should, of course, be paid fairly in relation to their contribution to foreign exchange earnings and savings to their country, Ethiopia.
The Ethiopian Herald Sunday Edition 17 Novebmer 2019
BY GETACHEW MINAS
