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Working Paper Summaries (WP/93/1 - WP/93/54)
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Summary of WP/93/41: “Exports and Economic Development”

Author(s):
International Monetary Fund
Published Date:
August 1993
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Exports affect, and are affected by, long-term economic growth through various mechanisms, including production and demand linkages, learning effects and improvement of human resources, adoption of superior technology embodied in foreign-produced capital goods, and the general easing of the foreign exchange constraint associated with the expansion of the export sector. After surveying these mechanisms, this paper formally incorporates one--the learning effect that leads to the improvement of human capital--into a modified neoclassical growth model via the dependence on exports of labor-augmenting technological progress and vice versa.

A key analytical result is that, both in the short run and in the long run, an increase in export activity will raise the growth rate of output. Although the short-run transitional dynamics in the standard neoclassical analysis of the relationship between exports and economic growth remain valid, the modified model’s long-run result is at variance with the standard proposition that the growth rate of output is independent of export activity. Another important result is that, for the level of long-run real consumption per unit of effective labor to be maximized, the rate of return to capital should be higher than the population growth rate adjusted for any exogenous labor-augmenting technical change. Capital is thereby partially compensated for its additional effect on the long-run growth rate of output through learning effects and improvement of human resources brought about by the positive externalities of export activities and their interaction with investment and capital accumulation.

Because of the central role of exports in the absorption of the latest technology and the interdependence of investment, technical change, and the size of the export sector, several important policy implications can be drawn for the external area. First, a key policy objective should be to adopt an outward-looking strategy to export manufactures early in the process of industrial development. High protective tariffs tend to create an inefficient industrial sector, prevent the introduction of modern techniques, and stunt factor productivity. Second, a crucial policy instrument is a competitive, market-determined or market-related exchange rate, complemented by low, nondiscriminatory tariffs and the elimination of nontariff import barriers. Third, strong anti-inflationary financial policies are essential to keep domestic input prices and wages lower than those in competitor countries, so as to maintain external competitiveness. These policies would necessitate strict limits on fiscal subsidies, tax exemptions, and credit expansion.

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