Export-Led Growth vs. Domestic Demand-Led Growth:

Export-Led Growth vs. Domestic Demand-Led Growth: A Policy Choice in Indian Context1 By – Dr. Ruby Ojha Associate Professor, Dept. of Economics, PGSR, SNDT Women’s University, Churchgate, Mumbai – 400020

1.

Introduction

There is an extensive discussion on relationship between exports and economic growth in economic development and growth literature. Mercantilist economists believed that a country should accumulate wealth and precious metals through emphasis on achieving trade surpluses. Classical economists argued that trade is a result of comparative advantage which leads to an efficient use of resources in each country and thus increases welfare by transmitting development through trade. As per classical point of view exports are simply the way to pay for imports and are justified for this reason. The neoclassical view has been that growth can be achieved by export-led growth strategy. The export-led growth model was initially upheld with the success of Asia's miracle countries, which achieved extraordinarily high growth between the 1970s and mid-1990s, supposedly through export promotion. The growth records of Asian newly industrializing countries (NICs) - in particular, Hong Kong, Singapore, Korea and Taiwan, second-generation NICs (Malaysia and Thailand) - are cited as such examples. Over the last thirty years these NICs have approximately doubled their standards of living every ten years. China is the latest country to join this group… The World Bank 1

Paper to be presented in the Conference on “Issues in International Trade during PostGlobalisation Era” organized by Shri Ram College of Commerce (University of Delhi) on 19th - 20th November, 2010. 1

(1993) perceives that the experiences of these countries serve as a model for development, a view also supported by the US Agency for International Development and the International Monetary Fund (Giles and Williams, 2000).

2.

The Case for Export-led Growth

In words of Thirlwall, “the growth of exports plays a major part in the growth process by stimulating demand and encouraging savings and capital accumulation, and, because exports increase the supply potential of the economy, by raising the capacity to import” (Thirlwall 1994, 365).There are a number of reasons within trade theory to support the Export Led Growth proposition (Giles and Williams, 2000). First, export growth may represent an increase in demand for the country’s output and thus serves to increase real output. Second, an expansion in exports may promote specialization in the production of export products, which in turn may boost the productivity level and may cause the general level of skills to rise in the export sector. This may then lead to a reallocation of resources from the (relatively) inefficient non-trade sector to the higher productive export sector. The productivity change may lead to output growth. The outward oriented trade policy may also give access to advanced technologies, learning by doing gains, and better management practices (e.g., Hart, 1983; Ben-David and Loewy, 1998) that may result in further efficiency gains. Third, an increase in exports may loosen a foreign exchange constraint (e.g., Chenery and Strout, 1966), which makes it easier to import inputs to meet domestic demand, and so enable output expansion. Outward orientation makes it possible to use external capital for

2

development and may assist with debt servicing. Export promotion may also eliminate controls that result in an overvaluation of the domestic currency. There are some other important justifications also for export promotion. Some of these are (Asian Development Bank, 2005) given below: • Participating in trade, especially export production and promotion, exposes a country to the latest and most advanced production and marketing techniques, and a "learning-by-doing" process that brings about dynamic innovation and technological diffusion into the economy. It also drives a country to higher production and to economies of scale, which lead to increasing returns (Felipe 2003). •

Many development economists use the "two-gap or three-gap" models of Taylor (1993) to justify the need to earn foreign exchange via exports. According to these models, the investment-savings gap and the foreign exchange gap are major obstacles to the growth and development of many developing countries. Since countries need precious foreign exchange for their development needs (capital goods, industrial raw materials, oil, and food), export earnings are a more efficient means to finance these needs than foreign debt since the latter is vulnerable to adverse exogenous shocks and currency risks that may lead to debt defaults.

•

A similar argument (Mc Combie and Thirlwall 1994) claims that large balance-ofpayment deficits, spurred by large import propensities or elasticities, may be a hindrance to growth for many developing countries. Thus, moderate trade 3

deficits, or trade surpluses, are more desired. This, of course, implies that export growth should be in pace with, or ahead of, import growth. •

Felipe (2003) also argues that export-led strategies allow an expansion of aggregate demand without much inflationary pressure and without the danger of a wage-price spiral, compared with strong domestic demand injections. This partly stems from the real appreciation of the currency that result from large export earnings, which tame inflation and allow real wages to rise.

But, the support for export-led growth is not universal. There have been some critics as well. It works till you have someone to export to. Paul Krugman described that there is no "miracle" …. He said: "Asian growth, like that of the Soviet Union in its high-growth era, seems to be driven by extraordinary growth in inputs like labor and capital rather than by gains in efficiency." Critics point out that the experiences in the East and Southeast Asian countries are unique in many ways and not necessarily replicable in other countries (Buffie, 1992). The UNDP report of November 2009, conducted to study the impact of the global financial crisis on the Asia-Pacific region (Chhibber, Ghosh and Palanivel, 2009) concludes that Asia’s export-led growth model is unsustainable.

3.

The problems of export-led growth

The export-led growth (ELG) model, once hailed as an important force behind Asia’s successful economies, is now under fierce attack and may not be Asia’s favourite development policy in the future. A near-collapse in international trade that followed a synchronized global recession in 2008 has seriously dented Asia’s confidence in this growth policy as demand from major developed economies plummeted, leading to the 4

International Monetary Fund anticipating a double-digit contraction in world trade volume (Alias, 2009). Some economists have put together a critique of the export-led growth model and proposed a shift toward domestic demand-led growth. Most of them have argued that the emphasis on export-led growth of most East Asia countries had a series of negative effects. It prevented the development of domestic market growth and has reinforced the dependency of developing countries on the developed world, thus becoming vulnerable to slowdowns in the latter's markets. Export-oriented economies are extremely dependent on foreign (mostly Western) demand. The problem is that any economic recessions in Europe, Japan, or US translate into slow growth in the developing world. To sum up these economists argue that the export-led growth model followed by East Asian countries for several decades is not an optimal strategy any longer and it is risky and dependent on the consumption pattern of others.

Palley (2002) asserts that Export-led growth has been at the center of the Washington consensus, and this focus on exporting and trade liberalization has harmed developing countries in several ways. One widely identified deficiency of export-led growth strategy is the “race to the bottom.” To gain competitive advantage in international markets countries compete across every dimension, including work conditions and the environment. The result is a dynamic which has companies lowering requirements or shifting production to countries in which requirements are lower. Berik (2001) illustrates this through an examination of the Pakistani soccer ball industry which agreed to do away with child labor, only to find that production then moved to India which had no child labor restrictions. 5

Second deficiency concerns developing countries’ terms of trade. The export-led growth model prompts countries to shift even more output onto global goods and commodity markets, thereby aggravating the long-standing trend deterioration in developing country terms of trade. This pattern starts a vicious cycle. Falling export 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 (Prebisch, 1950; Singer, 1950). Third deficiency concerns the impact of export-led growth on financial instability. Developing countries borrow in hard currency, and as their terms of trade deteriorate it becomes even harder to earn the currency needed to service their debts. The net result is the emergence of over-capacity which undermines the financial soundness of these investments. Fourth deficiency concerns issues of autonomy, the quality of development, and dependency. Here, the argument is that export-led growth, especially when associated with export-processing zones, leads to shallow development with weak linkages into the rest of the economy. This includes exploitation of workers and failure to generate widely shared rising incomes, which makes it difficult to develop domestic markets and autonomously sustainable growth. Instead, growth becomes dependent on growth of export demand, making developing countries vulnerable to slow-downs originating in their export markets. The fifth core theoretical criticism of export-led growth is that it suffers from a fallacy of composition (Blecker, 2001) whereby it assumes that all countries can grow by relying 6

on demand growth in other countries. Under the export-led growth strategy one country steals the demand from another. When one country manages to increase its exports it often does so by crowding out the exports of another country. This is the fallacy of composition. Export-led development may work when adopted by one or even a few countries, but it takes on a zero-sum dimension when adopted by all (Palley, 2002). Sixth, it has tilted the focus away from development rooted in domestic market growth and has placed workers in developing countries in conflict with workers in industrialized countries. It has also harmed the global economy by creating an environment of excess capacity and deflation. Looking to the future, the systemic contradictions of export-led growth stand to become sharper. Such growth can work for first-comers, but it falls apart once all try to clamber on board the export-led bandwagon. Particularly ominous is China’s advent on to the world trading scene. China has huge supplies of labor at rock bottom wages, and population growth ensures that this will hold into the future. It is clear that any developing country cannot enter now the system with production costs below those of China, making it impossible for new-comers to enter the hierarchy of export-led growth. If true, the export-led growth paradigm will find itself checkmated while new supplier countries will be unable to compete with China (Palley, 2002).

7

4.

The case for Domestic demand-led growth

Given the deficiencies of export-led growth, developing countries need a new model of development and domestic demand-led growth strategy serves the purpose. Deutsche Bank Research of July 2009 says economic growth in the developed economies will likely be anaemic for several years to come. By contrast, the downturn in the Emerging Markets (EM-6) (Brazil, China, India, Korea, Mexico, Russia) will be short-lived by comparison, and a rapid return to sustained growth in many EMs is likely by 2011. The study further elaborates that the EM-6 have been (or will be) able to engineer a more or less rapid recovery by boosting domestic demand. It is time now for a new development policy agenda that focuses on domestic demand-led growth. Achieving such an outcome will require a new constellation of policies to expand the domestic market.

To rebalance growth, developing Asian countries need to reinforce domestic demand and revitalize their domestic economies. They need to spend more on health, education, and social security to reduce household needs for precautionary savings. They need strategies to transfer more corporate savings to households to encourage greater consumer spending. And they also need the policies that promote small and medium-sized enterprises and service industries to better align domestic production with domestic demand. In place of export-led growth, with its shallow and exploitative characteristics, countries must look to growth based on internal market development. Exporting will remain 8

essential as developing countries will still need to export to earn the funds needed to pay back loans incurred to finance growth. But that said, the global trading system must be made the servant of domestic development, and domestic development must not be foregone for the sake of international competitive advantage (Palley, 2002). The domestic demand led strategy is gaining popularity and the focus on strengthening domestic demand will likely become a key issue among Asian policymakers as they search for a more holistic growth model. In this connection, the speech of Ma Kai, Chinese Minister, National Development and Reform Commission, Explaining the Chinese philosophy that governed the preparation of the 11th plan approach paper can be quoted which incidentally was to rely on the expansion of the domestic demand as an economic model and growth strategy for China in the next five years. Kai stated "we will promote development by relying on the expansion of domestic demand, take the expansion of domestic demand, especially consumption, as a major driving force, and transform economic growth from being driven by investment and export to being driven by consumption, investment, domestic and foreign demand combined in a balanced manner.” According to Palley (2002), the history of the industrialized economies shows that the key to unlocking domestic development is solving the problems of income distribution and imbalance of political power. Deep domestic development requires growing wages and an improved distribution of income. Together, these provide the foundation of a virtuous circle of growth in which rising wages encourage market development, and market development promotes rising wages. Labour standards (prohibitions on 9

discrimination, forced labor, exploitative child labor, and the rights of freedom of association and collective bargaining) are the key to this new model. Advantages of labour standards are as follows (based on Palley, 2002): •

Labour standards are a private sector solution to market failure concerning the huge imbalance of power that exists between individual workers and business particularly in developing countries where workers have few rights and social safety nets are lacking.

•

A second contribution of labor standards is promotion of good governance and reduction of corruption. There is now growing recognition that development depends on transparency, accountability, and good governance that help prevent misallocation of resources and guard against kleptocratic government.

•

Another argument in favor of labor standards is that by promoting good governance, they draw on all elements of civil society which in turn facilitates economic crisis management. (Such reasoning is supported by the experiences of South Korea and Indonesia during the East Asian financial crisis of 1997. In many regards these two countries were similar in terms of stage of economic development, but South Korea had begun a process of democratization and implementation of improved labor standards. As a result, it was able to put together a coherent national response to the crisis, whereas Indonesia found itself politically divided and unable to craft a similar response.)

•

By improving income distribution and increasing the space for domestic consumption, the growing productive capacity of developing countries will be 10

subtly tilted away from world markets. This should help mitigate the problem of declining terms of trade which has so afflicted developing countries, both in their traditional role as primary commodity producers and in their newer role as producers of lower end manufactured goods. •

Labor standards can also help block off the race to bottom. In an export-led growth world every country tries to gain international competitive advantage by exploiting every possible margin. Labor standards can contribute to ruling out the bad competition outcome by blocking countries from gaining competitive advantage by eroding standards.

Not only is it necessary to get the microeconomic structure of labor markets right, domestic demand-led growth also requires that countries get the macroeconomic environment right. This is where design of the international financial architecture and provision of adequate development financing becomes critical. Thus, domestic demand-led growth rests on four pillars: (1) improved income distribution, (2) good governance, (3) financial stability and space for counter-cyclical stabilization policy, and (4) an adequate fairly priced supply of development finance. The policies needed to put these pillars in place are (1) labor and democratic rights, (2) appropriate reform and regulation of the financial architecture, and (3) a combination of debt relief, increased foreign aid, and increased development assistance provided through expanded SDRs. This is an instance where there is no trade-off between ethically right and efficient economic policy (Palley, 2002).

11

In an Asian Development Bank Study by Jesus Felipe (2003), it is observed that governments prefer ELG strategy. The reason is that export-led growth policies can be expansionary without inducing inflationary pressures for the countries that pursue them. Moreover, from the political point of view, ELG weakens labor unions’ ability and legitimacy to demand higher nominal wages. On the other hand, domesticdemand-led policies can result in expansion but with inflation, and the resulting lower real wages of the previously employed workers may induce further wage-price inflation as workers may try to recover their previous real wage rates. From a global perspective, on the other hand, the effects of the ELG strategy are different: unemployment and inflation are simply being passed on to the trading partners whose rising trade deficits lead to depreciating exchange rates. For them, the resulting higher domestic prices for imports translate into a reduction in the purchasing power of the domestic money-wage rate. Unless they are threatened by unemployment, workers in these nations will demand increases in nominal wages, at least to offset the loss due to the depreciation of the currency. But this will create inflationary pressures. If these nations implement policies to maintain employment while workers demand their real wages to be protected, inflationary tendencies will be exacerbated. This leads to a situation at the global level that could be labeled competitive growth. Summing up, the ELG strategy encourages nations to settle problems of unemployment and inflation by pushing them off to their trading partners. If all nations act this way, the end result might be a global recession and stagnation. If one nation acts as the engine of growth and continues expanding (despite running 12

trade deficits, e.g., the US) the trading partners that pursue export led growth will experience an economic miracle that may be attributed to their excellent economic policies.

5. India’s Case In this paper the case of India has been analyzed with respect to export-led growth strategy and domestic demand led growth strategy. It has been tried to find out which strategy has contributed more to the country’s development. For the purpose of analysis, time series data for NNPFC, Exports from India and Private Final Consumption Expenditure at current prices are collected for pre and post reform periods. On the one hand relationship is worked out between NNP and Exports by estimating simple regression and correlation and on the other hand a similar relationship is found out between NNP and private final consumption expenditure (taken as a proxy to domestic demand) using the same tools. The results of the analysis are given below: A. Pre-Reform Relationship between Export and NNPFC Y = NNPFC Current Prices (Rs. Crore) is dependent variable and X = Exports Current Prices (Rs. Crore) is taken as independent variable. The Regression Equation of NNP on Exports is taken as -

Ŷ=

1

+

Particulars

2

Xi Values 1950-51 to 1990-91

i 13

12809.55011 1

15.0922 2

Standard error of

1

(σ

1

Standard error of

2

(σ

2

3648.1689

)

0.40351

)

Table value of Z test for

1

and

2

at 5% level of significance

Table value of Z test for

1

and

2


Calculated value of Z test for Calculated value of Z test for The calculated F ratio is F* R2 Coefficient of correlation ( r )

1.95 2.58 35.112

1

37.4023 2

1398.9595 0.973 0.986

Ŷ = 12809.55011 + 15.0922 Xi Since the number of years is exceeding 30, we have used Z test to verify the

statistical significance of the intercept (

1

) and the regression coefficient (

).

2

The table value of Z at 5% level of significance is 1.95 and at 1% level of significance is 2.58.

Calculated value of Z test for

1

= 35.112

Calculated value of Z test for

2

= 37.4023

The calculated value of Z test for

1

and

2

are greater than the table values

both at 5% and 1% levels of significance. Therefore, we can conclude that both the intercept and slope are statistically significant. The F ratio is calculated to test the significance of overall regression. 14

The calculated F ratio is F = 1398.9595 Table values of F are: F0.01

= 7.56 at 1% level of significance

F0.05


The table value of F at both 5% and 1% levels of significance is found to be less than the computed F ratio. This signifies that the overall regression is statistically significant. R2 (Which stands for coefficient of determination of dependent variable) is found to be 0.973, which is highly significant. The coefficient of correlation (r) between NNP and exports is = 0.986 which indicates very high positive correlation between the two. The entire analysis with very high positive values of R2 and coefficient of correlation indicate that exports are significantly affecting NNPFC of the country in pre reform period.

B.

Post -Reform Relationship between Export and NNPFC

Y = NNPFC Current Prices (Rs. Crore) is dependent variable and X = Exports Current Prices (Rs. Crore) is taken as independent variable in post reform period. The Regression Equation of NNP on Exports is taken as -

15

Ŷ=

1

+

2

Xi

Particulars i 1

Values 1991-92 to 2008-09 531607.0395 5.2525

2

Standard error of

1

(σ

1

)

Standard error of

2

(σ

2

)

64613.44711 0.186812

Table value of t=test for

1

and

2


Table value of t=test for

1

and

2


Calculated value of t=test for Calculated value of t=test for The calculated F ratio is R2 Coefficient of correlation

2.12 2.92 8.2275

1

28.1163 2

790.5263 0.98 0.99

16

i = 1991-92 to 2008-09 1

2

= 531607.0395 = 5.2525

Ŷ = 531607.0395 + 5.2525Xi Standard error of

1

(σ

1

) = 64613.44711

Standard error of

2

(σ

2

) = 0.186812

Since the period of the data is less than 30 years, we have used t - test to find out statistical significance of the intercept and the slope using two tailed test. The table values of “t” at 5% level of significance and 1% level of significance are respectively given below: t0.05 (v=16) = 2.12 (at 5% level of significance) t0.01 (v=16) = 2.92 (at 1% level of significance) The calculated values of “t” are as follows:

1

2

= 8.2275

= 28.1163

Higher calculated values of t=test than the table values show that both the intercept and the slope are statistically significant. 17

The calculated F ratio is F* = 790.5263 Table values of F are:

F0.01


F0.05


On the basis of this we can conclude that the overall regression of NNP on export is statistically significant in post reform period also because calculated F ratio is much higher than its table values. However, when we compare the F ratios of pre and post reform periods, we find that its numerical value in post reform period is much less. This indicates that relative significance of export in NNP has reduced in post reform period though still it is highly statistically significant. Another variable which brings out the

similar result is

2

. Its value in pre-reform period was = 15.0922 whereas it

decreased to 5.2525 in post reform period. In post-reform period the strategy of export-led growth is established but it is not as strong as it was found in prereform period. These results go well against the policies for export promotion during the two periods. Though trade was much more liberalized during the post reform period and exchange rate was made flexible in order to promote export growth but its impact on NNP might be less because other factors must have contributed more prominently to NNP growth as compared to the export growth. 18

However, the measure of coefficient of determination of dependent variable R 2 is 0.98 which shows strong association between exports and NNP. Coefficient of correlation (r) between the two variables in post reform period also is very high at 0.99. C.

Pre- Reform Relationship between Private Final Consumption Expenditure and NNPFC

Y = NNPFC Current Prices (Rs. Crore) is dependent variable and X = Private Final Consumption Expenditure at Current Prices (Rs. Crore) is taken as independent variable in pre reform period. The Regression Equation of NNP on Private Final Consumption Expenditure is taken as -

Ŷ=

1

+

2

Xi

Particulars i

Values 1975-1990-91 4352.14251

1

1.34063 2

Standard error of

1

(σ

1

)

Standard error of

2

(σ

2

)

3740.532 0.021457

Table value of T test for

1

and

2



1

and

2


Calculated value of T test for Calculated value of T test for The calculated F ratio is R2 Coefficient of correlation (r)

2.145 2.98 -1.1635

1

62.4797 2

3903.8115 0.996 0.998 19

i = 1975-76 to 1990-91 1

2

= 4352.532 = 1.34063 Ŷ = 4352.532 + 1.34063 Xi

Standard error of

1

(σ

1

) = 3740.532

Standard error of

2

(σ

2

) = 0.021457

Since number of years is 16 only, we have used t-test to verify the statistical

significance of the intercept (


1

). The table

2

value of t at 5% level of significance is = ±2.145 and at 1% level of significance is = ±2.98.

Calculated value of t-test for

1

= -1.1635


2

= 62.4797

The intercept is found negative and it is statistically significant as -2.145 -1.1635. The F ratio is calculated to test the significance of overall regression. The calculated F ratio is F = 3903.8115 20

Table values of F are: F0.01 F0.05

= 8.862 at 1% level of significance = 4.6 at 5% level of significance

The calculated F ratio is much higher than the table values which indicate that the overall regression of NNP on Private Final Consumption Expenditure is statistically significant. The measure of coefficient of determination of dependent variable R2 is 0.996 which shows strong association between exports and NNP. Coefficient of correlation (r) between the two variables in post reform period also is very high at 0.998. D.

Post-Reform Relationship between Private Final Consumption Expenditure and NNPFC

Y = NNPFC Current Prices (Rs. Crore) is dependent variable and X = Private Final Consumption Expenditure at Current Prices (Rs. Crore) is taken as independent variable in post-reform period. The Regression Equation of NNP on Private Final Consumption Expenditure is taken as -

Ŷ=

1

+

21

2

Xi

Particulars i

Values 1991-92 to 2007-08 275056.423

1

1.5766951 2

Standard error of

1

(σ

1

)

Standard error of

2

(σ

2

)

0.5501 0.05191


1

and

2



1

and

2


Calculated value of T test for Calculated value of T test for The calculated F ratio is R2 Coefficient of correlation (r)

2.131 2.947 -5000011.6761

1

30.37363 2

922.4342 0.984 0.992

22

i = 1991-92 to 2007-08 1

= 275056.423

2

= 1.5766951 Ŷ = 275056.423 + 1.5766951Xi

Standard error of

1

(σ

1

) = 0.5501

Standard error of

2

(σ

2

) = 0.05191

Since number of years is 17 only, we have used t-test to verify the statistical

significance of the intercept (


1

). The table

2

value of t at 5% level of significance is = ±2.131 and at 1% level of significance is = ±2.947.


1

= -5000011.6761


2

= 30.37363

The calculated F ratio is F = 922.4342 Table values of F are: F0.01


23

F0.05


The calculated F ratio is much higher than the table values which indicate that the overall regression of NNP on Private Final Consumption Expenditure is statistically significant in post reform period though it is less than that of prereform period. The measure of coefficient of determination of dependent variable R2 is 0.984 which shows strong association between exports and NNP. Coefficient of correlation (r) between the two variables in post reform period also is very high at 0.992.

5. Conclusions It is argued by Jesus Felipe (2003) that the encouragement of a gradual shift to Domestic Demand Led Growth is a welcome effort. However, perhaps choosing either export-led growth or domestic demand led growth is not the issue. Firstly, because these two strategies need not be incompatible strategies. Secondly, because the countries in the region need some form of export-led growth to achieve economies of scale. The reason is that export-led growth is not simply about exporting, but exporting in the context of a development strategy based on upgrading. It is about achieving a golden combination between export-led growth and domestic demand led growth. And thirdly, because the discussion of the policies to resume growth has to be framed in the more general context of what is constraining growth today Felipe (2003).

24

It is proved on the basis of the above empirical analysis that growth of India is based on a combination of both domestic demand components and exports. It is clear that developing countries should have adequate investment levels in order to grow and develop. There also has to be appropriate growth in consumption so that the population's welfare improves. These can be achieved at the same time that the country succeeds in developing and improving its export sector. In fact, in terms of technology deepening and "learning by doing," growth in both sectors will be complementary and mutually reinforcing. There should be no conflict between growth in exports and in domestic demand: successful and sustained growth requires growth in both domestic demand and net exports. It is when one strategy is overemphasized at the expense of the other that the growth strategy becomes unstable. The conclusion is that, for an export-led development strategy to cover as many countries as possible a more balanced and equitable growth in exports and imports across the world is required. This in turn requires the following two main "pushes": •

All countries, including richer and trade-surplus nations, must open up their markets to poorer countries; and

•

The poorer and late-comer countries need to make extra efforts both to promote their export sector via price and non-price competition, and to develop the necessary technological, physical, and human infrastructure to be competitive.

The first obviously requires the cooperation and participation of rich and tradesurplus countries so that developing countries can access the large world markets 25

and reduce their trade deficits with the surplus countries. Trade liberalization of poor and trade-deficit countries alone (without the opening of the markets of the first group of countries) will obviously lead to perverse results. The second requires twin growth in the domestic demand and tradable sectors and a high level of infrastructure building will be part of domestic demand. In the words of Blecker: “What is not feasible is for all countries to attempt to achieve trade surpluses by promoting their exports while simultaneously restricting their imports or repressing consumer demand” (Blecker 2002, 72). A more balanced and equitable international arrangement in world trade should therefore lead to smaller trade surpluses and smaller trade deficits across countries in the world, since more developing countries will be able to share in the benefits of international trade. What may happen is a move towards greater balance between the external and internal sources of growth and the adoption of a middle-path strategy between Export Led Growth and Domestic Demand Led Growth.

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Development Bank (2005), Export-led growth strategy, Asian

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26

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D.

and

Loewy,

M.B.

(1998)

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and

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Export-Led Growth vs. Domestic Demand-Led Growth:

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