Trade Orientation and Macroeconomic Performance in LDCs: An Empirical Study

Abstract

There exist several cross-country studies that seek to establish the superiority of export-oriented policies (EOPs) over import-substitution policies (ISPs).' With few exceptions, these studies use growth rates of exports as proxies for trade policies, on the assumption that EOPs lead to higher rates of export growth.2 A positive correlation between export growth and output growth is then interpreted as evidence of the superiority of EOPs over ISPs. In studies using a production function framework, a positive association between export growth (sometimes weighted by export shares) and output growth is taken to imply a positive contribution of EOPs to growth of total factor productivity.3 While results of these studies are frequently cited in the literature, J. Bhagwati has pointed out that they do not bear directly on the question whether the EP [export promotion] strategy is productive of more growth, because the incentive-related EP strategy is not the one used to examine the question of income or growth performance. It is necessary to identify whether the superior export growth rates (or higher export magnitudes) belong to the EP countries.4 It should be pointed out here that cross-country studies occasionally do refer to evidence in support of their use of export growth rates as proxies for trade policies. One such study by J. B. Donges and J. Riedel, based on a time series analysis of 12 countries, found partial support for such a relationship; in four of the countries the shift toward EOP was attended by a decline in the trend rate of export growth, and for a fifth country the positive shift in export growth was statistically insignificant.5 Similar results were obtained by B. Balassa for an overlapping group of countries.6 While these studies suggest a connection between trade policies and export growth over time for individual countries, they do not constitute evidence of such a connection across