As I noted in chapter 6, countries like the People's Republic of China (PRC), Thailand, or Malaysia have been advised to shift their growth model from one based on export-led growth (ELG) to one based on domestic demand–led growth (DDLG). In this chapter, I elaborate upon this issue by analyzing both growth models and their policy implications, and discuss the possible dilemmas that policy makers face.

How Is Export-Led Growth Usually Understood?

In general, the ELG strategy consists of the encouragement and support of production for exports. The rationale, going back to the classical economists, is that trade is the engine of growth, which can contribute to a more efficient allocation of resources within countries as well as transmit growth across countries and regions. Exports, and export policies in particular, are regarded as crucial growth stimulators. Exporting is an efficient means of introducing new technologies both to the exporting firms in particular and to the rest of the economy, and exports are a channel for learning and technological advancement. In the words of Thirlwall (1994, 365): “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.” In developing Asia, the Republic of Korea's President Park Chung Hee in the 1960s was probably the first one to try the ELG strategy as a mechanism to break the vicious cycle of poverty and stagnation. The country took advantage of its cheap labor to manufacture shoes and clothes and sold them to consumers in the rich countries. The strategy proved successful. Whether or not it can be emulated by other countries today is a different matter.

Indeed, as a development strategy, the classical belief was that development could be transmitted through trade. This has been confirmed by the experience of some countries that today are among the richest in the world. Traditionally, ELG has been presented as the opposite of import substitution policies, based on closing the economy to imports and encouraging domestic production, which many developing countries followed for years, and which ended up in a dead end.