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Sunday, September 14, 2008

Dani Rodrik on export-led growth

Even as the race to emulate the export-led growth model of East Asian economies and China continues, Haravrd professor Dani Rodrik has now cast doubts on the prospects for this development model.

He finds two militating factors against it in the developed economies - the weak economic conditions and the growing discontent against the manifest consequences (job losses/migration etc) of high trade deficits. Given the relatively similar nature of products and the high import tariffs, he sees limited prospect for developing economies exploiting the massive opportunities presented by the emerging markets.

On closer scrutiny, both assumptions are questionable. The slowdown in US and Europe may be not be as deep as assumed, and with commodity and energy prices falling, the rebound may be faster than expected. Further, developed economies will not suddenly stop buying basic consumer durables like toys, clothes, electronic goods, shoes and cosmetics, which form the major share of developing country manufacturing exports. The outsourcing of services to emerging economies is vital to the competitiveness of American companies, and any effort to roll back the process will adversely affect the productivity of these firms.

In any case, high trade deficits are not new to American economy - Japan in the late eighties is a previous example. Despite all the protectionist sentiment against Japan, the massive trade deficit continues. The large deficit with China may narrow slightly, but not by much.

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