World Development, Vol. 12, No. 9, pp. 931-949, 1984. 0305-750X/84 $3.00 + 0.

00
Printed in Great Britain. 0 1984 Pergamon Press Ltd.

Beyond Export-Led Growth*

IRMA ADELMAN
University of California, Berkeley

Summary. - In light of the adverse conditions in the current international economic environ-
ment, this paper reassesses the feasibility of continuing to rely on manufacturing export-led
growth as the major development dynamic for most LDCs during the next decade. This paper
argues that after the initial stages of industrial development, the emphasis in policy toward
agriculture should shift from surplus extraction to surplus creation and to the generation of
demand linkages with the rest of the economy. The author compares the relative merits of
two alternative open development strategies - export-led industrialization and agricultural-
demand-led industrialization (ADLI) - by means of several simulation experiments. The
experiments are performed with a computable general equilibrium model of a small, low-
income, semi-industrial, open economy which is a stylization of South Korea of 1963. They
are carried out in an international environment assumed to represent the next decade based
on a rate of growth of international demand for imports of about half the 1960-73 rate. The
results support the ADLI approach on all counts.

1. INTRODUCTION the debt-service obligations amounted to 21%

of the exports of the average less-developed
Developing countries are currently at a cross- country (LDC) and were a crushing 53% of
road. They are simultaneously facing major exports of Latin America. Reserves of foreign
short-term adjustment problems to critical currency for the average LDC stood at a little
foreign exchange shortages and the prospects above three months of imports.
of a continuation of a less favourable inter- The results of the second oil-shock recession
national environment in which to carry out hit developing countries particularly hard.
these adjustments. Between 1980 and 1982, total merchandise
The present plight of the developing coun- LDC exports fell by -0.5%; the average annual
tries is the result of both adverse changes in rate of growth of manufacturing exports
the external environment since 1973 and the fell from 12.4% in the previous seven years
policy choices made by the developing coun- to 4.1%; protectionist sentiment and protection-
tries themselves. The two global recessions ist legislation were introduced in the OECD
in the Organization for Economic Cooperation countries, thus leading to lower import
and Development (OECD) countries during elasticities out of stagnant incomes; and the
the 1970s and the early 1980s induced a access of LDCs to commercial credit to support
slowdown in the volume of world trade which exports was severely decreased.
had depressing effects on the prices and export These developments, combined with the
volumes of non-oil developing country exports. need to revise downward projections for
It lowered the ability of developing countries the growth in world demand for non-fuel
to import because of both volume and terms merchandise exports from LDCs, call for
of trade effects. a reassessment of the feasibility of continuing
Despite these adverse conditions in the to rely on manufacturing export-led growth
international environment, developing countries as the major development dynamic for most
chose to continue placing primary emphasis
on rapid industrialization. The implementation *Giannini Foundation Paper No. 711. I am indebted
to the Institute of International Studies for research
of their commitment to this goal required
support and to Bela Balassa, Pranab Bardhan, Albert
increasing capital goods, technology and food Fishlow, Albert Hirshman, Alain de Janvry, Jack
imports from the OECD countries, and the Johnston, Nathaniel Leff, Jack Letiche, Sherman
financing of these imports not only from Robinson, Tibor Scitovsky, Amartya Sen, Hans
exports but also by increasing external debts Singer, Paul Streeten and Larry Westphal for their
and decumulating reserves. As a result, in 1982 most valuable comments.

937
938 WORLD DEVELOPMENT

LDCs during the next decade. Most LDCs its implementation (e.g. investments in water
which are not already newly industrialized control and pesticides) reduce weather depen-
countries (NICs) with established export dence and environmentally induced fluctua-
markets are unlikely to be able to break into tions in agricultural yields and since the strategy
international markets for non-traditional exports substitutes a development dynamic based on
in the next decade. For them, the need to the more controllable increases in domestic
search for an alternative strategy is acute. demand for the less controllable increases in
In searching for alternative strategies, world demand.
one should distinguish between an open- Discussions concerning the relative merit
development strategy, in which trade is an ele- of agricultural versus industrial development
ment of growth, and an export-led strategy in strategies are not new. They were central to
which trade is the major source of growth. The the controversy concerning balanced vs un-
major argument of this paper is that export-led balanced growth. They were also reflected in
growth is not the only potentially promising the debates surrounding the early five-year
open development strategy. A reallocation plans of India (Mellor, 1976, 1968) and the
of investment resources within the economies Soviet Union (Domar, 1957). In the main,
of LDCs in favour of an open development the wrong views favouring emphasis on capital-
strategy which is agriculturally driven rather intensive import-substitution industrialization
than export driven can lead to superior results prevailed, fueled by export, primary terms of
under the economic conditions of the coming trade and domestic linkage pessimism. The
decade. results were highly dualistic development
Pro-agricultural strategies have usually been patterns, slow GNP growth, serious balance-
associated with self-sufficiency and closed- of-payments problems, high capital-output
economy ideologies. It should be emphasized and capital-labour ratios, slow growth in
that this is not the ideology underlying the food production and in employment, and
present proposal. This is not an argument deteriorating distributions of income. The
for a closed development strategy. The last response, once these failures became apparent,
30 years of development experience have was to urge a shift by LDCs toward industrial
clearly demonstrated the inferiority of import export-led growth and toward ‘basic needs’
substitution strategies. It is rather a call for oriented strategies. The adoption of the export-
a shift in sectoral emphasis for public invest- led strategies during the high world-demand
ment toward agriculture while maintaining or growth era of the mid-1960s led to success
even, if necessary, switching to an open develop- in GNP growth, in labour absorption, and in
ment strategy. industrialization. But it was also accompanied
The development strategy advocated in this by increasing international indebtedness and
paper consists of a public investment programme by rapidly rising food imports. As a result,
designed to induce a progressive downward the debate is now starting anew, fueled in
shift in the supply curve of the domestic part by renewed export pessimism, by increased
agricultural sector. The argument in favour of awareness of the vulnerability to shocks arising
this strategy rests both on its linkage effects, from export markets, and by the serious
in creating a domestic mass market for industrial liquidity and foreign-exchange constraints faced
products through intermediate and final by LDCs. A body of economists (Streeten,
demand linkages, and on its distributional 1982; Mellor, 1976; Singer, 1979; Hirshman,
impact, through increasing the supply of wage 1981; de Janvry, 1984) is urging the adoption
goods and the incomes of the poorer members of agrarian, wage-goods strategies.
of society. The proposed strategy is simul- In analysing the prospects for attaining
taneously a growth programme, an employment the Lima target, which stipulated that industrial
programme since agriculture is considerably production in developing countries should rise
more labour intensive than even labour-intensive from 7% of 1975 world industrial production
manufacturing, a basic needs, food security to 25% by the year 2000, Hans Singer (1979,
and income distribution programme, and an p. 27) came to the conclusion that an export-
industrialization programme. It also constitutes led strategy was unlikely to accomplish this
a foreignexchange-saving programme by reduc- goal. Instead, he advocated an alternative
ing the need for food imports which, in the approach which he called (not surprisingly)
1970s have accounted for an average of 13% a balanced-growth approach and which I shall
of total LDC imports. Finally, the proposed call an agricultural-demand-led-industrialization
strategy is also a risk-reducing programme (ADLI) programme. He described this strategy
since some of the investments required for as one of basing ‘national development on
 BEYOND EXPORT-LED GROWTH 939

agriculture as the primary sector and developing international environment intended to repre-
industries with strong emphasis on agriculture- sent the next decade during which the rate of
industry linkages and interactions’. Para- growth of international demand for imports
doxically, the ADLI strategy would stress the is likely to be about half of what it was during
raising of agricultural productivity, especially the 1960-73 period.
that of medium-scale farmers, as a means of The experiments are performed with a
achieving industrialization. It would accomplish computable general equilibrium (CGE) model
the industrialization goal by expanding internal of a small low-income, semi-industrial, open
demand for intermediate and consumer goods economy which is a stylization of South
produced by domestic industry. In arguing for Korea of 1963. The results support the ADLI
this approach, Singer (1979, p. 27) emphasized approach on all counts. In the assumed environ-
the linkage effects of agriculture by writing: ment, the ADLI strategy generates the same
rate of industrialization as does export-led
This is a hopeful approach for a number of reasons. growth but leads to a higher rate of labour
A prosperous farming sector would require a large absorption, a better distribution of income,
volume of inputs from the industrial sector:
better balance-f-payments results, less poverty,
fertilizer, insecticides, weed-killers, water pumps,
agricultural tools and equipment of all kinds and a higher rate of growth of per capita
ranging from hoes and ploughs to trucks and gross national product (GNP) than export-led
tractors. Much of the increased agricultural pro- growth. There is no single reason for the
duction would require industrial processing, or superiority of the ADLI strategy. These results
provide the basis for new resource based industries. are attained in part because of the greater
The development of agriculture will require a good increase in total factor productivity, in part
deal of new construction, with implied demand because of the larger reduction in unemploy-
for a wide range of construction materials and ment, in part because of the higher increase
equipment. Higher agricultural incomes are spent in exports, and in part because of the resource
with progressively more emphasis on industrial
reallocation effects.
consumer goods. Higher incomes from the indus-
trial expansion would in turn provide an expand- The next section describes the model and
ing market for agriculture, especially food, with the stylized economy. The third section pre-
the associated multiplier and feedback effects sents the simulation results. The paper con-
within the agricultural sector itself. cludes with a general discussion.

That agriculture can have important linkage

effects with manufacturing has been recognized 2. THE MODEL
for a long time. Most textbook descriptions
of the role of agriculture in economic develop- The CGE model consists of an economy-
ment stress four functions of agriculture; these wide, simultaneous, multisectoral model that
are the provision of a surplus for investment solves endogenously not only for quantities
in manufacturing, a source of labour, a source of but also for prices (for detailed descriptions
food and a source of demand linkages. What has of the model, see Adelman and Robinson,
not been recognized, however, is that the relative 1978, and Dervis, de Melo and Robinson,
importance of these functions must change 1983). The version of the model used here
dynamically with the economy’s development. was developed by Sherman Robinson and
And the conflict between agriculture as a Jeffrey Lewis, in 1982, as part of a World
source of surplus and agriculture as a source Bank research project. (For a full description,
of demand for industrial output has not been see Kubo et al., 1983.) The core of the model
sufficiently stressed in the non-Marxian litera- consists of the reconciliation of potential
ture (Lipton, 1977, is a notable exception). demand and supply imbalances in the factor
It is the argument of the present paper that, and commodity markets by price adjustments
after the very initial stages of industrial develop- which simulate the workings of the markets
ment, the emphasis in policy toward agriculture of labour, commodities and foreign exchange.
should shift from surplus extraction to surplus The technological and behavioural functions
creation and to the generation of demand are non-linear and incorporate substitution
linkages with the rest of the economy. possibilities among factors in production and
The present paper compares the relative among commodities in final demand. Imports
merits of two alternative open development and domestic production in a given sector are
strategies - export-led industrialization and neither perfect substitutes nor complete
ADLI - by means of several simulation experi- complements; rather, there is an elasticity of
ments. The experiments are carried out in an substitution among them which lies between
940 WORLD DEVELOPMENT

zero and unity. The model solves for: wages, plus foreign savings. This closure rule gives
profits, product prices and the exchange rate; maximum intermediate-run sensitivity to
sectoral production, import, export, employ- balance-of-payments fluctuations arising in
ment, consumption and investment; the flow international markets. It also makes investment
of funds, GNP and the balance-of-payments maximally sensitive to the domestic savings
accounts; and for the functional and personal rates of households and to changes in the
distributions of income. domestic distribution of income. Since antici-
Production technology is represented by pated drops in domestic savings rates when
fixed input-output coefficients for inter- the functional distribution of income shifts in
mediate goods and CES functions for labour favour of farmers have been used to argue
and capital. In the factor markets, labour against agricultural strategies, the closure rule
demand arises from profit-maximizing behaviour adopted for the present experiments allows
of producers. The supply of labour is disaggre- a conservative evaluation of the ADLI strategy
gated by skill type. It is assumed fixed within by biasing the experimental results against
a given period and only its sectoral allocation it on this count.
is allowed to vary. Farmers and service workers
are immobile within each period although
mobile between periods. The model determines 3. SIMULATION RESULTS
market-clearing wages for skilled workers and
their sectoral allocation; unskilled wages are In 1963, Korea was in a ‘pre-takeoff’ stage.
fixed, and unemployment is allowed to develop. It was a very poor country, whose per capita
The existence of such unemployment is not income was around $80 (1963 dollars), con-
critical to the results, as will be apparent from verted at the official (overvalued) exchange
the sources of growth decomposition given rate. It was an open economy with a very
later. large trade deficit; exports were 6% of GDP,
The demand for commodities is responsive and the trade deficit accounted for 16% of GDP.
to relative price and income variations. The About half of its labour force was employed
price responsiveness arises both because of the in agriculture, 30% in manufacturing, and the
use of LES consumption functions and because rest in services. It was a consistent food-deficit
of the trade specification which induces price- country; its cereal imports accounted for about
sensitive substitution among imports and a quarter of its total consumption. Thus, the
domestic production. The incomes of con- Korea of our study is a poor, open, negative
sumers are determined in the factor markets balance of trade, large food-deficit country
after subtracting taxes. The demand for com- typical of a large class of low-income LDCs.
modities by sector is determined from these Table 1 summarizes the results of the simula-
incomes (given the household savings pro- tion experiments. The actual, high-world-
pensities) and from the government consump- demand evolution of the economy is summarized
tion function. Relative prices that clear as Experiment I. To derive the counterfactual
commodity markets are then solved so as base run, II, the rate of growth of world demand
to equate demand and supply. The wholesale was cut in half; and the price elasticity of world
price level is taken as numeraire and main- demand was increased by 20% to simulate in-
tained at unity to set the level of absolute creased competition. The export demand specifi-
prices. The balance of trade determines the cation used in both runs I and II assumed a
net demand for foreign exchange. The exchange logistic demand curve for exports with an inflec-
rate adjusts so as to maintain a predetermined tion point which shifted over time but at a
level of foreign capital inflow in the base run. slower rate in Experiment II than in Experi-
In the experiments, the exchange rate was ment I. The results were to decrease the rate of
fixed to the initial period value, and foreign growth of per capita GNP by 15% while cutting
capital inflow was allowed to adjust. The the rate of growth of exports by 60% and the
latter specification was adopted for the experi- rate of growth of manufacturing by 30%. The
ments in order not to allow a progressive structure of production and of exports became
overvaluation of the exchange rate (which more agriculture-oriented indicating that, under
characterized the base run) to bias incentives lower rates of growth of world demand, the
against exports in these experiments. comparative advantage of agriculture rises -
Several macro-closure rules are possible for a fact consistent with the proposed strategy.
the model. The one chosen for the ADLI Foreign capital inflow rose by 30%, and the
experiment forces investment to adjust directly exchange rate fell by 35%. Urban unemploy-
to the enlarged or diminished supply of domestic ment rose from 0 to 14%, but the distribution
 BEYOND EXPORT-LED GROWTH 941

improved very slightly as the incomes of the It was assumed that the doubling of invest-
fourth to ninth deciles fell by less than did the ment in agriculture increased the rate of growth
incomes of the richest and the poorest. of total factor productivity in agriculture by
The export-led growth strategy was simulated 50% over its base-run rate of growth, from 2%
by giving 60% export subsidies to exporting annually in the first 10 years and 1.5% in the
sectors. In addition, the bias against exports last 5 years to 3 and 2.25%, respectively. The
in the low-worlddemand base run was removed assumed ADLI rates of growth of agricultural
by a combination of abolishing tariffs and productivity are relatively modest and merely
a 10% devaluation. Finally, to simulate the bring the rate of growth of productivity in
productivity-improving effects of exporting agriculture in Korea up to the average for all
which arise from economies of scale and developing countries during the 1970s.
learning, the rate of growth of total factor No trade incentives were given to any sector
productivity in the exporting sectors was of the economy in this run; all tariffs and
increased by 50% (from between 1.3 and 2.4% subsidies were removed. In addition, the
annually to between 1.8 and 3.6%). This exchange rate was held fixed at its base-year
strategy increased the rate of export growth value. The result is a neutral set of trade incen-
by 45% while increasing import growth by tives as indicated by the domestic resource
only 38%. Nevertheless, the foreign capital costs in Table 1.
inflow increased slightly. Urban unemployment To simulate the potentially negative produc-
was reduced from 14 to 8%, the rate of growth tivity effects of not focusing primarily on
of wages increased by SO%, and the distribution the export market, the rate of growth of total
of income improved substantially because factor productivity in the manufacturing
agricultural terms of trade rose and farmer export sectors was cut in half from the base
incomes and agricultural wages improved run, from between 1.3 and 2.4% to between
significantly. The rate of growth of GDP in- 0.6 and 1.2%. It is doubtful whether these
creased somewhat; in the terminal year, GDP negative effects of not pushing manufacturing
was 2.5% higher than in the base run. exports would materialize in practice were the
The ADLI strategy was implemented by postulated ADLI strategy to be pursued as
shifting the investment structure in favour of assumed. The negative effects on productivity
agriculture. Such a shift appears to be indicated associated with not exporting are usually
on the basis of the rates of return to capital the result of two effects not present in the
in the various sectors in the base run (see current experiment: high rates of protec-
Table 2). While one cannot be confident about tion, which shelter domestic industries from
the absolute magnitudes of the rates of return foreign competition, and a scarcity of imported
in the base year because of the conceptual intermediates arising from foreign exchange
and measurement errors inherent in the evalua- rationing. Nevertheless, this postulate allows
tion of capital stocks, what is more significant conservative evaluation of the ADLI strategy.
is that both the base and the export-led growth To maintain the domestic agricultural terms
runs indicate a rising gap between the rate of of trade, a grain trading facility was established
return in agriculture and the rate of return in which buys up the excess domestic supply
the manufacturing export industries. Indeed, at a relative price of unity and then uses the
when the investment allocation is allowed to excess supply both for import substitution
respond to deviations from the average rate and for exports. During the experimental
of return to capital in the base run, it imple- conditions, no subsidies are involved in this
ments an ADLI strategy more extreme than activity since the improvements in agricultural
that implemented in the current ADLI runs productivity raise the domestic resource costs
(see Table 2, base run II). of agricultural exports above the domestic
For the present ADLI run, the share of resource costs of imports. It is, however,
agricultural investment in total investment was possible that, if all countries were to implement
doubled in the initial period and then gradually ADLI strategies, the world price would fall.
brought back to the base-run composition Then, in the implementation of the strategy,
over 15 years. Total investment was maintained a balance would have to be struck between
at its export-led value throughout the ADLI allowing the domestic agricultural terms of
experiment. The results of the comparison of trade to decline (thus generating a smaller
the ADLI with the export-led growth experi- rise in farmer incomes) and the magnitude
ments, therefore, indicate the return per won of the implicit subsidy. Since, with the ADLI
diverted to investment in agriculture under strategy, farmer incomes rise by 60% over the
the ADLI experimental conditions. base (and by 33% over the export-led strategy),
942 WORLDDEVELOPMENT

Table 1, Experiment results

Low demand Export promotion ADLI

Terminal year (1978) High demand base (low demand) (low demand)

Real gross domestic product* 2706 2305 2397 2666

Merchandise exports* 775 162 208 387
Merchandise imports* 457 392 473 242
Foreign capital inflow* 310 230 248 -120
Domestic savings ratio (%) 19 16 16 16
Foreign savings total (%) -64 60 38 -30
Gross domestic product ICOR 2.9 3.1 2.6 2.2
Agricultural terms of trade 0.91 0.89 1.05 1.00
International terms of trade 85 85 85 85
Exchange rate? 0.130 0.141 0.120 0.130

Domestic resource costs

Exports 0.118 0.119 0.122 0.124
Imports 0.146 0.165 0.122 0.124
Tariffs* 92 78 0 0
Subsidies* 0 0 95 0
Total unemployment (%) 0 7.0 4.0 3.0

Structure of value-added (%)

Primary 29 32 34 44
Consumer manufacturing 19 10 9 11
Producer manufacturing 17 14 18 16
Infrastructure 8 9 9 7
Services 27 35 30 22

Structure of exports (%)

Primary 1 28 11 83
Consumer manufacturing 80 42 53 9
Intermediate manufacturing 15 25 30 7
Capital goods 4 5 6 1

Share of exports in domestic

production (%)
Primary 3.6 2.6 1.9 6.6
Consumer manufacturing 3.1 3.6 7.5 3.4
Producer manufacturing 1.5 4.2 7.9 3.9
Infrastructure 4.6 4.4 3.4 5.5
Services 6.6 3.6 2.7 3.8
Total share of exports 15.2 3.5 5.0 4.8

Structure of imports (%)

Primary 20 22 27 1
Consumer manufacturing 10 8 7 10
Intermediate manufacturing 42 42 41 54
Capital goods 28 28 25 35

Growth rates to terminal year

(annual %)
Real gross domestic product 5.8 4.7 5.0 5.7
Agriculture 4.0 3.4 3.5 5.5
Manufacturing 9.1 6.6 7.6 5.3
Construction 6.1 5.2 5.1 4.8
Social overhead 4.7 4.6 4.8 8.3
Services 4.7 4.3 4.4 4.7
Private consumption 3.9 4.7 5.2 5.2
Investment 7.2 6.0 6.0 6.0
Exports 18.0 5.5 8.0 15.5
Imports 7.0 5.3 7.3 5.0
 BEYOND EXPORT-LED GROWTH 943

Table 1 (cont.)

Low demand Export promotion ADLI

Terminal year (1978) High demand base (low demand) (low demand)

Primary 2.4 2.5 2.6 2.8

Consumer manufacturing 4.3 a.1 -0.1 0.9
Producer manufacturing 7.0 5.1 6.3 5.2
Infrastructure 1.0 1.4 1.2 2.1
Services 3.0 3.0 3.0 2.8
Primary 0.3 -0.1 0.9 2.0
Manufacturing 4.0 4.0 5.0 5.0
Services 2.5 3.5 4.5 2.0

Distribution, terminal year

real per capita incomes*
Farmers 12 12 13 17
Marginal labour 31 25 27 29
Organized labour 68 44 53 53
Service labour 35 40 38 32
Industrial capital 249 169 194 72
Service capital 78 80 85 52
GINIC, 0.487 0.507 0.497 0.415

Share of income (%)

Bottom 40% 11.9 10.9 11.5 14.8
Next 40% 35.6 34.0 34.1 38.5
Next 20% 52.5 55.1 54.4 46.7
Top 10% 22.3 38.5 38.2 20.1
Mean income of bottom 40%5 12.4 13.1 14.9 18.5
Ratio of top 10% to bottom 40 3.4 3.5 3.2 2.1
Ratio of bottom 40% to
mean income 0.54 0.54 0.57 0.59

*In 100,000 won of 1963.

t In 1,000 won per US dollar.
*In 10,000 won of 1963.
SCalculated assuming log normality.

there is plenty of scope for a decline in the is 26% less than in the export-promotion
terms of trade while still allowing farmer strategy, despite a dramatic increase in the
incomes to increase and the linkage effects rate of growth of agricultural wages and un-
through industrial demand to materialize. changed rate of growth of wages in manu-
The results of the ADLI strategy are facturing, primarily because of a fall in the
portrayed in column IV of Table 1. The growth rate of growth of wages in services. The distri-
rate of the GNP increases by 0.7 percentage bution of income becomes significantly more
points over the base. The strategy shifts the equal because farmers are a very large per-
structure of exports toward agriculture but centage of the poverty population and their
does not result in a deindustrialization of the incomes rise by 30%.
economy indicating that the linkage effects The results of the ADLI strategy can be
of the ADLI strategy through increased con- analysed in several ways: the sources of growth,
sumer and intermediate demand of farmers the sources of industrial demand, and the
are working. Exports increase substantially sources of improvement in the distribution of
while imports fall leading to a dramatic improve- income. We have just discussed the sources
ment in the level of foreign capital inflow. of the improvement in the distribution of
Indeed, by the last period, there is a large income. The source of industrial growth must
balance-of-trade surplus. Unemployment falls be found in increases in domestic demand since
to 6%. The rate of growth of average wages industrial value added is 18% higher in ADLI
944 WORLD DEVELOPMENT

Table 2. Real rates of return on capital and investment shares

Low Low
Real rates of 1963 High demand, demand, Export
return on capital level demand base I base II led ADLI
(%I

Annual growth rate,

1963-78
Primary 40.5 0.21 0.62 -0.53 1.43 1.97
Food processing 32.3 -1.52 -2.08 -3.0 -1.64 -0.11
Consumer manufacturing 33.8 -1.16 -4.5 1 -6.8 -5.03 -2.9
Intermediate goods 33.6 3.35 2.54 -0.30 3.19 3.2
Capital goods 33.7 -0.26 -1.54 -3.0 -0.19 -0.82
Construction 33.4 0.19 0.41 -0.30 0.40 0.89
Social overhead 4.5 -1.31 -0.01 4.17 0.21 -7.51
Services 10.5 1.27 3.60 7.23 3.94 2.69
Average 20.5 0.15 0.43 1.70 1.02 1.41

Investment share, 1963

Primary 13.0 13.0 13.0 13.0 13.0 26.0
Food processing 2.25 2.25 2.25 2.25 2.25 2.25
Consumer manufacturing 14.85 14.85 14.85 14.85 14.85 12.85
Intermediate goods 6.70 6.70 6.70 6.70 6.70 6.70
Capital goods 3.50 3.50 3.50 3.50 3.50 3.50
Construction 1.70 1.70 1.70 1.70 1.70 1.70
Social overhead 26.0 26.0 26.0 26.0 26.0 22.10
Services 32.0 32.0 32.0 32.0 32.0 25.00

Growth rate of
investment share,
1963-78
Primary * 0 0 8.0 0 -4.52
Food processing 0 0 1.41 0 0
Consumer manufacturing 0 0 0.15 0 0.97
Intermediate goods 0 0 6.0 0 0
Capital goods 0 0 2.1 0 0
Construction 0 0 4.3 0 0
Social overhead 0 0 -10.0 0 1.12
Services 0 0 -4.0 0 1.66

*Blanks indicate not applicable.

than in the base and the share of exports in 4. DISCUSSION

manufacturing is somewhat lower. Further-
more, because the large beneficiaries of the
ADLI strategy are the rural households whose The ADLI strategy consists of building
income is 42% higher under the strategy while a domestic mass-consumption market by
urban groups, on the average, just maintain improving the productivity of agriculture
their base period income, there is a strong and letting farmers share in the fruits of the
presumption in favour of the supposition that improved productivity. Even though this
it is the rural groups who give rise to the strategy is, to some extent, motivated by a
industrialization benefits of the strategy. certain amount of export pessimism, the
As to the sources of GDP growth, pre- ADLI strategy is not to be viewed as an old
liminary calculations based on individual runs style import-substitution strategy which oper-
changing one feature at a time suggest that ates by biasing the system of incentives in
the improvement in overall factor productivity favour of domestic ‘infant’ industries. The
accounts for 33% of the increase in the rate of ADLI strategy does not call for changing
growth of real GDP; the rise in exports accounts commercial incentives in favour of import
for 30%; the increase in employment accounts substitution. The relevant simulation experi-
for 12%; and resource reallocation for the ment was performed with a neutral system of
remaining 25%. commercial incentives. But the ADLI strategy
 BEYOND EXPORT-LED GROWTH 945

is also compatible with a system of incentives A continued stream of technological improve-

biased in favour of exports. ments can only be expected from farmers if
The emphasis of the ADLI strategy should they experience continuing improvements in
be on improving the productivity of small- their incomes. Otherwise, they will neither
and medium-scale agriculture rather than of continue to improve productivity nor will
large-scale agriculture even though the experi- they have the wherewithal to provide the
ments did not differentiate farmers by farm industrial linkages which this policy aims at
size. Small- and medium-scale agriculture has fostering. The appropriate dynamic incentives
larger linkage effects with domestic industry will not materialize if shifts in domestic terms
than does large-scale agriculture while having of trade against agriculture are allowed to
at least as high a productivity level. Large negate the income benefits of productivity
farms often use capital-intensive methods, improvement. Therefore, what is required as
imported tractors, harvesters, etc. Smaller part of the productivity-improving package
farms are labour-intensive and use domestic is a terms-of-trade policy which allows farmers
implements and machinery. On the consump- to improve their incomes while improving
tion side as well, linkages between domestic output. For example, if we assume an increase
consumer goods industries and prosperous in agricultural productivity of 2%, price and
middle-class farmers are stronger than with income elasticities which are both 0.6, and
large rich farmers: small farmers have a larger no increases in income other than those that
marginal propensity to consume, and a larger would be induced by the increases in agri-
marginal share of their consumption is devoted cultural productivity, the fall in the terms of
to locally produced textiles, clothing, and trade required to absorb the increase in agri-
footwear and simple consumer durables such as cultural output would just negate the income
refrigerators, bicycles, sewing machines and effects of the increase in productivity. If
simple electronics. Also, they tend to invest either the income elasticity or the price elasticity
heavily in the buildup of human capital, devot- is lower, the improvement in productivity will
ing a large share of their incremental income actually reduce the incomes of the farmers.
to education, thereby laying the foundations Terms of trade must, therefore, be fixed by
for increasing the future productivity of both policy so that the ultimate fall in agricultural
industry and agriculture. prices, taking both price and income effects
How is the improve-the-productivity-of- into account, will be less than the rate of
agriculture strategy to be accomplished? This increase in agricultural productivity. Otherwise,
strategy requires improving the physical and the necessary income effects in the farm sector
institutional infrastructure of agriculture in will not materialize, and the ADLI strategy
order to effect shifts in the agricultural produc- will not be put into effect. The terms of trade
tion functions. In the Southeast Asian sub- policy can, of course, be implemented in-
continent, the primary requisite is water directly through international trade rather
control. Increasing irrigation, improving the than through price controls and subsidies.
management, maintenance and design of In most LDCs, an open-economy policy of
existing irrigation systems, and investing in letting the world market price set the internal
tube wells, hand pumps and irrigation ditch terms of trade would suffice.
maintenance could all play a role. Other partial The incentive effects of the strategy will
steps toward the goal of improving agricultural also not materialize if tenurial conditions in
productivity would include roads and terracing, agriculture are sufficiently unfavourable. For
selective mechanization, technological improve- example, assume a sharecropping arrangement
ments, easing credit terms for the smallholder, in which the landlord gets 50% of the crop.
the development of institutions for marketing With the price and income elasticities of the
and for the distribution of improved seed and above example, a 2% increase in productivity,
fertilizer, and developing institutions for the half of which is appropriated by the landlord,
effective dissemination of knowledge. In will actually reduce the income of the share-
Korea, there is little scope for irrigation systems; cropper by one-half of the productivity increase.
and marketing, extension and credit institutions In this case, either tenancy arrangements or
already exist. There, the primary productivity- terms-of-trade policies, or both, must be
raising investments would be in terracing, adjusted to more than compensate for the
transport, selective mechanization and agri- adverse income effects upon the innovator-
cultural research. farmer. Otherwise, the ADLI strategy will
Particular attention would have to be paid turn out not to have been implemented.
to the system of incentives facing the farmers. There may also be a case for direct
946 WORLD DEVELOPMENT

production subsidies to agriculture. The major in developing countries rose by 70%. If one
economic argument for a subsidy is when the looks at the performance during the 1970s
social benefits exceed the private benefits. of those non-oil-developing countries that
This circumstance will arise when there are had maintained or improved their growth
pecuniary externalities and lags and institu- rates during the decade 1970-81 over the
tional constraints on internalizing them. Sub- previous decade (Table 3), one finds that 60%
sidies should then be given up to the point of the low-income economies, 89% of the
at which the social benefits just outweigh lower middle-income, and 66% of the upper
the social costs. When the ADLI strategy is middle-income economies had rates of agri-
implemented in an economy with surplus or cultural growth which were above average
unemployed labour, the social benefits clearly for their respective groups. The corresponding
outweigh the private benefits to the farmers. figures for the rate of change of export shares
They operate through the industrial output- were 58% for low income, 40% for lower middle
multiplier of the income and intermediate income and 33% for upper middle income.
demand linkages with industry. If this multiplier Over the whole sample of the countries with
is about 1.4, for example, a not unreasonable improving rates of growth of gross domestic
value given marginal budget shares and inter- production (GDP), 80% had above average
mediate input-output coefficients for the farm performance in agriculture and only 44% had
sector, subsidies up to 40% (including the above average performance in exports. For
indirect subsidies through terms of trade lower income, lower middle-income, and
support, if any) could be justified on that upper middle-income economies, the rank
ground. Of course, the social benefits must be correlation coefficients between the rate of
compared with the social costs of withdrawing growth of GDP and agricultural output are
the resources from subsidies to or investment 0.5 138, 0.9317 and -0.5, respectively; and
in industry. The ultimate socially justifiable between those of GDP and the changes in
subsidy to agriculture will, therefore, be much export share, -0.0282, 0.9274 and 1, respec-
smaller than 40%. But the case for a production tively. Thus, the rank correlation between
subsidy when there is surplus labour cannot export share growth and GDP growth is higher
be ruled out a priori. Again, an appropriate for only the upper middle-income countries.
balancing between sharing the sum of direct Furthermore, in a cross-section study of
and indirect benefits of the ADLI strategy 68 LDCs for 1970-79, Hwa (1983) found that
between farmers and the urban-industrial the contribution of agricultural growth to the
complex must be worked out. economy’s overall productivity growth (0.8%)
Various pessimistic attitudes have domin- was greater than that of export growth (0.6%).
ated the design of development strategy. The The 1982 World Bank study of Agriculture
initial implementation of import substitution in Developing Countries confirms the view of
strategies was born out of export pessimism agriculture as a potentially dynamic sector.
and out of a desire for a more controllable The report notes that:
development strategy. The export pessimism
proved unjustified for economies that have . . . where prices have not been kept artificially
attained certain levels of industrialization and low, and where other conditions for growth have
for countries facing favourable demand con- been favourable, farmers have responded by increas-
ditions for their exports, and the adverse ing output. The responsiveness of farmers to
incentives - in contrast to the outmoded and
balance-of-payments effects of the import-
mistaken view that peasants are set in traditional
substitution strategy led to less rather than
ways - has been observed in societies with diverse
more control over the growth path of the social systems and levels of development (pp.
economy. The current stress on the need for 4647).
export-led growth as the major means of
capitalizing on economies of scale, competition, The World Bank also found a strong correlation
and (more dubiously) capturing allocative between the rate of growth of agricultural
efficiency is born partly out of agricultural output and the rate of growth of GNP during
pessimism on both the output and the savings the last 20 years. But, in interpreting that
fronts. Agricultural pessimism on the output correlation, the World Bank sees the agri-
side is, also, not warranted. During the decade cultural sector primarily as a responding sector
of the 1970s agricultural output rose at an rather than as a potentially dynamic driving
average annual rate of 2.3% in low-income force for economic growth and industrialization
economies and 3% in middle-income economies. (Hwa, 1983, is an exception). The study says:
Between 1960 and 1980, agricultural output ‘the parallels between agricultural and GDP
 BEYOND EXPORT-LED GROWTH 941

Table 3. Selected characteristics of countries whose growth did not deteriorate during the 1970s

Change in the share of gross

domestic product repre-
Average annual growth rate* sented by exports of goods
Gross domestic product Agriculture and non-factor services,
Countries 1960-70 1970-81 (%)1970-81 1960-81*

Low-income economies
Bangladesh 3.1 4.2 2.4 -3
Burma 2.6 4.8 4.1 -11
Afghanistan 2.0 3.9 3.2
Mali 3.3 4.6 4.0 6
Malawi 4.9 5.6
Upper Volta 3.0 3.6 1.4 4
Rwanda 2.1 5.3 0
India 3.4 3.6 1.9 2
Somalia 1.0 3.9
China 5.2 5.5 2.8
Haiti 0.2 3.4 1.1 6
Benin 2.6 3.3 19
Niger 2.9 3.1 -3.0 13
Sudan 1.3 4.1 2.3 -1
Average? 4.6 4.5 2.3 2

Lower middle-income economies

Lesotho 5.2 8.4 4.3
Egypt 4.3 8.1 2.9 14
Philippines 5.1 6.2 4.9 8
Morocco 4.4 5.2 -3
Cameroon 3.1 6.3 3.9
People’s Republic of the Congo 2.3 5.1 2.1 41
Dominican Republic 4.5 6.3 3.2 -6
Colombia 5.1 5.1 4.1 -4
Tunisia 4.1 7.3 4.1 22
Syrian Arab Republic 4.6 10.0 8.2
Paraguay 4.2 8.8 7.0 -11
Average (non-oil producing)? 5.0 5.6 3.2 8

Upper middle-income economies

Republic of Korea 8.6 9.1 3.0 36
Malaysia 6.5 7.8 5.2 -1
Algeria 4.3 6.9 3.9
Brazil 5.4 8.4 5.2 4
Uruguay 1.2 3.1 1.2
Trinidad and Tobago 4.0 5.5 -1.8 8
Average? 6.4 5.6 2.6 5

Source: World Bank, World Development Report, 1983 (Oxford, U.K.: Oxford University Press, 19831,
Tables 2 and 5.
*Blanks indicate no data available.
tIncludes all countries in a given income group, not only those listed.

growth suggest that the factors which affect of income originating in agriculture is 1.4,’
agricultural performance may be linked to a 3% rate of growth of agricultural incomes
economy-wide social and economic policies’ would generate demand linkages that would
(P. 44). permit an 8.4% rate of growth of industrial
To bring out the dynamic potential of output.2
agricultural expansion-induced industrializa- The input-output based decomposition
tion, one should note that if, for example, calculations of sources of growth started by
agriculture is 50% of GNP and manufacturing Chenery and various collaborators in the 1960s
is 25% and if the industrial-demand multiplier lend support to the view that internal demand
948 WORLD DEVELOPMENT

changes are an important source of growth. In are: industrial capitalists (63% lower income),
analysing the sources of industrial growth service capital (39% less income) and service
in Japan from 1914-65, Chenery and Watanabe labour (16% lower income). Thus, an agrarian
(1976) found that demand effects accounted landlord- and/or farmer-dominated political
for 58%, trade effects for 15%, and techno- scene would strongly favour the ADLI strategy.
logical change for 26% of the growth. During However, the coalition supporting the ADLI
this period, Japanese industrial production strategy could also include some urban workers
rose from 17% of GNP to 47%, GNP increased as well as those industrial interests producing
by a factor of 28, and industrial production investment and intermediate goods for agri-
increased by a factor of 50. The importance culture and the producers of industrial wage
of domestic demand effects in generating goods for domestic consumption. The opposi-
growth has been confirmed by subsequent tion would come mainly from industrial
studies. Nishimizu and Robinson (1983) capitalists producing industrial export goods
analysed the sources of growth from the early inappropriate for domestic consumption and
1950s to the early 1970s in South Korea, luxury goods and services purchased by high-
Turkey, Yugoslavia, and Japan and found income urban consumers.
that increases in domestic demand accounted The ADLI strategy is recommended pri-
for between 63 and 95% of GDP growth marily as a strategy for the 1980s and early
while export expansion accounted for between 1990s to allow time for implementing the
6 and 38%. structural changes which must be introduced
It should be emphasized that the ADLI in industrial countries. Technological change,
strategy is not suggested as a strategy for all the growth of the NICs and differential rates
time and for all places. The strategy should of adoption of industrial innovations during
be considered primarily by countries which, the 1960s and 1970s in the various OECD
during a given period, are not anticipating countries have vastly altered the comparative
a sufficiently rapidly expanding growth in advantage of the industrial countries. The
world demand for their non-traditional exports. OECD countries must adapt to their altered
Furthermore, the ADLI strategy would appear patterns of comparative advantage. If the
most promising for countries with potentially OECD countries succeed in making the appro-
large domestic markets and in which there priate structural changes through industrial
already exists an industrial base with an estab- policies aimed at creating economic conditions
lished supply responsiveness. In practice, this propitious for the expansion of industrial
means most middle-income and large low- ‘winners’ rather than by protecting ‘losers’,
income countries which are not already NICs the appropriate industrialization strategy for
with proven export potential. the LDCs in the latter part of the 1990s may
It may be appropriate to speculate on the well again become one of export-led growth.
political conjuncture which would be favour- Meanwhile, it is important to point out that
able to the implementation of the ADLI potentially productive alternatives to export-led
strategies. Assuming rational self-interest, a growth and export-led industrialization exist,
comparison of the differences between the that these alternatives do not consist solely
functional distributions of income under the of import substitution, and that the arsenal
export-led and the ADLI strategies in the of policy options currently open to developing
terminal year should provide a clue. The countries for adjusting to their current crisis
gainers from the strategy are, in order: farmers can profitably be enlarged by adding the option
(30% higher income under ADLI), and marginal of agricultural-demand-led industrialization.
labour (7% income improvement). The losers

NOTES

1. This multiplier is based on the marginal budget a 3 X 1.4 = 4.2% increase in expenditures for indus-
share of industrial goods in the expenditures of trial products. In an economy in which agricultural
farmers. It assumes supply responsiveness in the output is $50, this means an increase in industrial
industrial sector. demand of $2.1 which, when applied to an industrial
sector of $25, translates to a growth rate of 8.4% for
2. A 3% growth of agricultural income generates the latter sector.
 BEYOND EXPORT-LED GROWTH 949

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