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“The view that efforts to expand exports by developing countries will lead to a decline in their terms of trade because of an inability (due to weak demand) or unwillingness (expressed via protection) of developed countries to absorb these exports.”
Export Pessimism indicates the pessimism about the demand for exports in developing nations in the markets of developing countries. The exports from developing nations do not have sufficient demand from developed nations, and thus, trade between the nations is disadvantageous to the developing nation. in the 1950s, researchers such as Bhagwati Jagadish and Ragnar Nurkse(1907–1959) identified that the exports of developing countries were weaker as compared to the developed nations; thus, trade between these two categorisations of nations did not encourage economic growth of the developing nations.
In the period between the depression and the second world war, a growing concern among many economists was developing nations exported a significant bulk of raw materials to developed countries.. However, the goods that came from the developed nations were above the purchasing power of much of the population in the developing countries. As such, the more exports that the wealthier nations had in the international market and less in international trade, due to the deterioration of the primary products. In the 1960s and 1950s, many developing countries took on a strategy that enforced import-substituting industrialisation (ISI). This strategy came from a pessimistic view on the primary products of exports of these nations that arose from low price elasticity, fluctuation of export receipts, low-income elasticity and double factorial of trade
Economists focused on formulating theories for protectionist arguments for the ISI. One of the approaches that were against the dictates of the statistical comparative advantage theory states that the growth theory has at least four underlying assumptions on the economies of underdeveloped nations and thus, was inherently different from those posted under the comparative advantage theory. First, the complementarity among commodities was dominant for consumer and producer demand. Secondly, economies of scale were subject to the size of existing markers and thus, were essential factors in the sectors of production. Thirdly, due to the production process, the quantity and quality of factors of production were subject to change drastically over time. Lastly, inaccuracy exists between factor priced and opportunity costs, in that they do not reflect each other.
These premises would make a case for protectionism, not through logical and rational arguments, but due to the learning effects of infant industries and factor market disequilibrium. The use of export pessimism as a mode of operation coupled with the ISI strategy was precipitated by the need to actualise balance of payments, which was an area of critical concern among policyholders, as well as the social and political forces that the policymakers had to put into consideration. The implementation and use of the ISI were problematic in that as opposed to nations using instruments of economic policy such as overvalued exchange rates. The small industries in developing nations produced too much output of inferior quality, through underutilised capital and consequently, the industrial structure became monopolistic or oligopolistic. Hence very few firms could realise Protection as Export Promotion.
Many nations used the ISI strategy and thus, they adopted an export orientation program. The change in policy was due to the reemergence of neo-classical economics. Policy makers had to overcome the negative impacts of the ISI strategy to realise an increase in growth rates, increase employment. Developing nations were seeking autonomy. They were trying methods that would decrease their dependency on foreign aid, donors, grants and borrowing that was due to a shortage of foreign exchange. Consequently, nations adopted policies that would boost the export sector by reducing protectionism that would discriminate against imports. Again, there was the liberalisation of the foreign trade regime. Newly industrialised nations, on the other hand, took on incentives that supported exports. These measures included but were not limited to the use of direct tax reductions from income earned through exports, generous waste allowances from imported raw materials, drawback systems and the indirect domestic tax exemptions on intermediate goods necessary for the production of exports. As such, nations began to focus on playing an active role in the world market forces.
The impact of these efforts was a higher level of collaboration between the private sector and the state. Marketing and economic decisions would undertake a more integrated approach whereby the two sectors create a market-oriented economy. Nations could, therefore, be competitive in the world market. Countries, both developed and developing could control inflation, fall in the real effective exchange rate and uptake and use of multinational companies for technology and marketing. Newly industrialised nations such as Singapore, Taiwan, South Korea and Hong Kong began to enjoy rapid economic growth due to the use of the export-oriented industrialisation. They experienced a high rate of overall growth and increasing employment and industrialization.
Forms of export pessimism
One of the core arguments according to Bhagwati in relation to this concept is that the secular deterioration of the terms of trade of primary products, which were the products of the developing nations against the manufactured goods of the developed nations. This deterioration was exogenous to the policies articulated by the developing nations. Nurkse, one of the experts in this field illustrated that the low rate of growth in the exports of the developing countries was due to the lower levels of income and elasticity of demand in agricultural products. An increase in the development of the developing nations could create difficulty for the larger and developed countries to acquire large quantities of raw materials and exports churned out by the developing nations. Export costs would therefore decline.
The second line of thought on this issue occurs in the 1980s. This New Export pessimism was a result of the inabilities of the developing nations to enlarge their exports based on the hypothesis of Nurkse. Bhagwati opposed the assertions of Nurkse by exploring that an increase in exports would come from newly industrialising nations and thus, it was improbable that all developing nations would see an increase in their exports in at a similarly high rate. Secondly, the meagre contribution of the developing nations to the raw material market or world trade was 2% back in the 1980s. Hence, even if the value would be tripled of doubled, developed nations would have the capacity to absorb the exports of the less developed counterparts. The third premise on which Bhagwati rejected the hypothesis of Nurkse was the increase in growth in intra-industry trade between developed nations and developing nations, as well as each of these classes themselves.
The third type of export protectionism was based on the protectionist argument. The developed nations, due to an increase in the number of goods and services they had the capacity to export would have a protectionist reaction. To some scholars such as Bhagwati and Baldwin, this need for protection was not justified as there are possible ways in which developing nations can circumvent the protectionist policies of their developed counterparts. Again, its application is not as practical as its proponents would wish to indicate.
Averting protectionisms would require developing nations to engage in foreign direct investments. The investors would create economic and political pressure that would encourage the developing countries to desist from protectionist stances. Again, foreign direct investment could encourage free trade among nations, thus reduce the capacity of wealthier nations to enforce policies to protect its trade. The last and potential most effective tool against protectionism would be the use of the World Trade Organization. This agency would resist efforts of wealthier nations to have protections against their developing counterparts.
According to this theorist, developed nations may lack the capacity to absorb the increased imports in primary products from developing nations. The factors that contributed to his arguments were based on the events in the post-war period. Primally, there has been a change in the industrial structure in developed nations. Post-war, developed countries focused on the growth of heavy industries. These enterprises required low contents of raw materials. Consequently, the developing nations would no longer need to supply the developed countries with raw materials at the rate at which they did before the war. The increased share of services in advanced nations led to the diminution of the demand for imported raw materials from developed countries. Thirdly, the low-income elasticity of demand for agricultural product was low. Hence, the likelihood of an increase in the exports of agricultural products had been depressed and was predicted to remain as such. Again, due to the development of new technologies and industries, there was an increase in the economy use of raw materials. Industries in developed nations begin to engage in the reprocessing of waste materials and scrap. Again, the development of synthetics caused a decline in the demand for products from the less developed nations, as their developed counterparts had found ways to substitute them. Lastly, agricultural protectionism led to the decline in the uptake of products exported to developed countries. The European Union and America took measures to protect their agricultural business through subsidies and price supports. Imported products thus became expensive, and developed nations saw a decline in their exports.
Scholars have always debated on export pessimism and optimism. Both differ in the factors that cause the correlation between economic growth and exports. Under the optimism approach, the international competitiveness of a nation drives an increase in exports and consequently, growth. This school of thought is emphatic on supply factors. The availability of resources, technology, skills and institutions contributes heavily to the increase in the exports of a nation and thus, their appeal on the international market. Exports increase the competition and specialisation that enhances the productivity of a country. Export pessimism is agreeable to the standard trade theory. This line of thought articulates that improvement of welfare levels of a nation contributes to their engagement in international trade. Exports within any society benefit it as they can sell off the goods that their domestic market cannot absorb and thus, they can address this illimitation. The exportation of surpluses stimulates economic growth and helps them achieve a comparative advantage through the optimisation of resource allocation and capacity utilisation.
The export optimism model is often said to be the success factor in the industrialisation and growth of several Asian economies. The Tiger nations focused on exports and creating institutions that can support export growth. The use of export promotion has precipitated industrial advances where governments can build their reliance on their economic power as opposed to donor support and aid. The World Bank endorses this model as a critical factor in the promotion of development in developing nations.
On the other hand, pessimists assume that the link is demand based. The exporters of goods and services, based on the pessimistic view, can only promote growth when ready markets for their products and services exist. Pessimists assert the asymmetrical trading relationships that exist between the developed and the developing nations.
Some scholars assert that export pessimism and export optimism exist in a duality. This argument is, however, considered simplistic. There is supporting evidence for both sides of the debate. Some nations can effectively engage in export promotion at a rate that other developing countries cannot. Again, the degree of export promotion, for instance, may not go beyond a certain level to encourage import penetration, because nations that engage in this practice may face external resistance from developed countries. Export promotion must also come with the streamlining of other factors within the production process of a nation. For instance, there would be a need for institutional overhaul and the availability of resources that would ensure an increase in the capacity of a country to produce in surplus, hence causing exports. The duality in these two concepts demonstrates that perhaps there exists not only one way of linking exports to economic growth, but rather multidimensional methods that exist on either side of the optimism and pessimism argument.
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