Phases of the Export-Oriented Paradigm

Phases of the Export Oriented Paradigm

A common strategy for economic growth that has been followed by several Pacific Asian economies is the export-oriented model. It can be divided into three phases:

  • Phase I (Development of Comparative Advantages). A set of conditions is put in place to make the host country attractive in terms of its comparative advantages. For countries relatively close to multinational interests, this involved a form of openness such as setting special economic zones where foreign direct investments could take place or, more generally, financial and trade reforms facilitating the transactional environment. The national currency is devaluated, particularly in relation to the main importers. The initial sectors where production occurs tend to be labor-intensive since they involve lower risks and the highest benefits in comparative advantages. Exports will slowly increase, and the balance between exports and imports will start to widen after an initial phase of imports of capital equipment.
  • Phase II (Exploitation of Comparative Advantages). Comparative advantages induced by the first stage are brought in full motion, implying a surge of FDI and national capital as savings accumulate into new economic opportunities. As the national economy becomes more integrated into the global economy and local expertise is developed, there is a gradual shift towards added value production. The imbalance between exports and imports increases.
  • Phase III (Re-balancing). An export-oriented development strategy appears to be a transitory phase, as it cannot endure indefinitely. Mainly due to the associated trade imbalances, there are strong pressures to revalue the currency of the exporter. National capital provides the dominant share of investments, and the nation becomes a net provider of FDI for other markets. Due to rising living standards, production costs in many labor-intensive sectors are losing their comparative advantages while the national market takes a growing share of the production. A re-balancing of trade takes place with the share of exports declining in relation to imports.

Japan and South Korea represent good examples of export-oriented economies that went through all these stages. More recently (post-COVID-19), China reached Phase III, which was associated with substantial disruptions in its internal economy.