THE WORLD BANKPOVERTY
REDUCTION
AND ECONOMIC
MANAGEMENTNETWORK (PREM)

Economic Premise
MARCH 2010 • Number 3

Export-Led Growth v2.0
Otaviano Canuto, Mona Haddad, and Gordon Hanson

The U.S. recession could hurt the South, particularly in oil and apparel exports, and Latin America andthe Caribbean. But South-South trade is partly picking up the slack. Middle-income countries are driving export
diversification of low-income countries. Developing countries may be moving toward a new version ofexport-led growth.

The Global Financial Crisis (GFC) has led to the sharpesttrade contraction ever and the deepest since the Great Depression of the 1930s. Between 2007Q4 and 2009Q2, world
merchandise imports fell by a whopping 36 percent. Although trade levels began a modest recovery in the 2009Q3,
they are still far below precrisis highs.
Rapidly industrializing countries, such as China in the1990s and 2000s and the “Asian tigers” before it, have reliedheavily on overseas import demand—especially in developed
countries—to fuel growth. But in light of the current need for
global macroeconomic rebalancing, and in particular a durable
contraction of U.S. final consumption, concerns have emerged
about reliance on exports for recovery and growth.
How dependent are developing countries’ exports on demand in developed countries? This note shows that much of
the recent growth in developing countries’ exports wasdriven by demand in other developing countries. This meansthat developing countries may continue to rely on SouthSouth trade to recover from the crisis. In fact, countries like
China are leading the recovery through strong import demand. Over the medium term, the development of an “export-led growth v2.0,” in which South-South trade plays amore important role, will be essential. Policy makers can sup-port this process by continuing to liberalize South-South
trade, focusing in particular on nontariff measures.

1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK

www.worldbank.org/economicpremise

The U.S. Recession Could Hurt the South,
Particularly in Oil and Apparel Exports, andLatin America and the Caribbean . . .
Dependence on the United States as a destination for developing country exports varies considerably across countries
and sectors. This point is important in light of the global trade
collapse, since it suggests that impacts may differ considerably from one country to the next.
On a regional basis, low-income countries in Latin America and South Asia are the most dependent on high-incomecountries’ import demand. Mexico (an upper-middle-incomecountry) and Central America rely heavily on U.S. final demand. The United States also plays a relatively important rolein Sub-Saharan Africa’s exports due to its close relationshipwith Nigeria on oil and to preferences through AGOA (theAfrican Growth and Opportunity Act that significantly enhances U.S. market access for 39 Sub-Saharan African countries). The European Union (EU), by contrast, is a relatively
more important market for developing Europe and Central

Asia, and the Middle East and North Africa based on geographical and historical ties.
More generally, the United States and the EU-25 each absorbed about 20 percent of low-income countries’ export
growth from 2000 to 2008. They absorbed 15 percent and19 percent respectively of lower-middle-income countries’
export growth over the same period. It is important to keepthese numbers in perspective, however. Of the 20 percent
figure, nearly 10 percent comes from just one sector: petroleum products. Apparel accounts for an additional 4.3 percent, followed by other products (1.9 percent) and food (1.1percent). Similar dynamics are present in the EU-25 data,with the exception of iron and steel imports (2.7 percent versus 0.4 percent in the United States). More generally, developing country export growth has been impressive, althoughwith some sectoral differences according to income level (figure 1) (low-income, lower-middle income, and upper-middleincome). All three income groups have seen strong growthin exports of food products, and iron and steel. The same istrue for apparel in low-income countries, and for electronics
in middle-income countries.
. . . But South-South Trade Is Partly Picking
Up the SlackPrior to the GFC, some proponents of the decoupling hypothesis argued that the risk of global contagion was relatively low due to different business cycles in the North andthe major Southern economies. The idea was that a negative
demand shock in the North could be ridden out thanks to
demand in the South.
Recent experience has provided a reality check on thesekinds of ideas. There is still great potential for demand shocks
in the North to propagate globally via the trade channel. Thisis particularly true for a shock like the GFC, where output

drops have been very strongly correlated across all major
Northern markets.
This picture is gradually changing. Northern markets, particularly the EU-25, are still important, but low- and middleincome countries are increasingly a source of import demand(figure 2). The BRIC countries (Brazil, Russia, India, andChina) import share nearly doubled, from 9 percent to 17percent, over the 1996–2008 period. Other low- and middle-income countries increased their share from 8 percent to19 percent over the same timeframe. In relative terms, theimportance of the high-income countries as a direct sourceof import demand is decreasing, from a total share of 88 percent in 1996 to 69 percent in 2008. This dynamic remains
true even though the numbers partly reflect derived demand
from the North channeled through international production
networks.
Rapid GDP growth is behind a significant proportion ofthe growing import demand in low- and middle-income
countries, and particularly in the BRICs. A gravity model–
based decomposition of trade growth shows that higher
growth rates in low- and middle-income countries explain
51 percent of export growth in low-income Middle East andNorth Africa, 42 percent of export growth in low-income
Europe and Central Asia, and 21 percent of export growth
in low-income Sub-Saharan Africa (figure 3). All of these effects exceed the combined contribution of GDP growth in
the United States and EU.
As GDP fell simultaneously in the North and the Southduring the GFC, the overall effect on final import demand
could have been huge. However, this effect was greatly mitigated—and international trade supported—by effective
stimulus packages in the major Southern economies. China
has led the way on this front. China’s imports doubled between January and September 2009, whereas the UnitedStates’ increased by less than one third (figure 4). The return

Figure 1. Exports Grew Fast across All Income Groups for Key ProductsState of growth in exports attributable to each product group, 1998–206; excludes petroleum products

30food products

apparelelectronics

chemicals

nonmetalic minerals

transport equipment

textilesiron and steel

other products

wood and paper products

machinery

25

percent

20151050low income

lower middle income

upper middle income

Source: Authors' calculations based on UN-COMTRADE data.

2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK

www.worldbank.org/economicpremiseFigure 2. Developing Countries Account for an Increasing Share ofWorld Trade
World import shares, 1996–2008
100

percent

80
60
40
2001996

1998

2000

2002

2004

2006

2008

year
BRIC

USA

other LMICs

other HICs

EU-25

Source: Authors’ calculations based on UN-COMTRADE data.
Note: BRIC = Brazil, Russia, India, China; LMICs = low- and middleincome countries; HICs = high-income countries.

to relatively rapid growth in Brazil, China, and India is clearlyan encouraging development for the trading system, andcould exert a significant stabilizing influence on the international economy.
Middle-Income Countries Are Driving Export
Diversification of Low-Income Countries
The GFC and trade collapse also need to be understood froma supply-side perspective. The world export share of low- andmiddle-income countries has been increasing more or less inline with their import share. For low-income countries, thebulk of this growth has been concentrated in a small numberof labor- or resource-intensive sectors: petroleum products,food, and iron and steel. Together, these three sectors accountfor 76 percent of low-income countries’ export growth between 1998 and 2006.
Developing countries’ exports have become more diversified over time, driven in part by changing South-South
trade patterns. The export diversification index based on theHerfindahl-Hirschman Index (HHI) of concentration shows
an improvement of around 10 percent for low-income countries between 1997 and 2007. In absolute terms, this change
is equivalent to exports moving from being spread evenly
across four products to seven products. There is a tension between specialization—which is beneficial from a resource allocation perspective—and diversification that can havedevelopment and stability benefits. The optimal trade-off be3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK

tween the two is an important question for policy makers
and researchers, but the evidence suggests that specialization
does not dominate until countries are well into the high-income group.
China’s import pattern prior to the crisis reflects the way
in which diversification is partly being driven by South-South
trade: its share of capital equipment and consumption goods
imports from the low- and middle-income countries nearly
tripled between 2000 and 2008. An example of what is happening on a micro level is that low-income countries are increasingly filling the apparel niche previously occupied bymiddle-income countries; they are shifting away from raw
textiles like cotton, towards simple manufactured clothing.
Higher middle-income country demand for petroleum, iron,and steel is also helping low-income countries diversify awayfrom their traditional reliance on food exports to Northernmarkets (figure 5).
Thus, not only are low-income countries succeeding in exporting natural resources, but they are also moving into laborintensive manufacturing. One striking feature of the recent
evolution of developing country exports is that the UnitedStates does not appear to be a central actor. Rather, income
growth in middle-income countries appears to be a driving
factor behind changes in the international pattern of specialization. If internally generated productivity advances arelargely responsible for these income gains and a “growthtrend decoupling” by LMICs is at play (Canuto 2009), concerns about weak consumption growth in the United States

Figure 3. Much of Export Growth in Low-Income Countries Is Drivenby GDP Growth in BRICs and Other LMICs
Export growth in LICs due to GDP growth inmajor import markets, 2000–08
Latin America and Caribbean
East Asia and PacificSouth Asia
Sub-Saharan Africa
Middle East and North Africa
Europe and Central Asia
0102030405060percent
BRICUSAother LMCs

EU-25

other HICs

Source: Authors’ calculations based on UN-COMTRADE data.
Note: BRIC = Brazil, Russia, India, China; LMICs = low- and middleincome countries; HICs = high-income countries.

www.worldbank.org/economicpremiseFigure 4. China’s Import Growth Is a Driver for Developing
Countries’ Recovery
150

Import growth from United States and China todeveloping and high-income countries

percent

100
50
0–50
–100

Jul. 2008–
Feb. 2009

Feb. 2009–
Sep. 2009

United Statesdeveloping countries

Jul. 2008–
Jan. 2009

Jan. 2009–
Sep. 2009

China
high-income countries

Source: Authors' calculations based on International Trade Commission forthe U.S. and Chinese Customs data.
Note: BRIC = Brazil, Russia, India, China; LMICs = low- and middleincome countries; HICs = high-income countries.

and other developed countries undermining the viability ofexport led development may be exaggerated.
Moving toward Export-Led Growth v2.0
China, the Asian tigers, and even post-war Japan pursued
broadly similar approaches to export-led growth. Outward
orientation was key, even though the precise degree of openness versus protection remains subject to debate. As theglobal economy stabilizes post-GFC, concerns have remainedabout limits to the extent to which other developing countries can pursue the same export-led growth strategies as before. One such concern questions the ability of the UnitedStates—where the GFC started—to remain a major importmarket for developing countries. But as this Note has argued,
there remains plenty of scope for leveraging international integration as an engine of growth. Over the coming years, a
new type of export-led growth strategy is likely to emerge.

4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK

What will the new export-led growth look like? It will
surely pay greater attention to South-South trade than in thepast. This rebalancing is only natural in light of the BRICs’rise, and their increasingly important role as a source of import demand. It also reflects the likely macroeconomic rebalancing in the United States. However, this shift in demand
patterns by no means signals a “sudden stop” to export-ledgrowth. It has been taking place gradually over at least thelast decade, and will probably intensify in coming years.1
Policy makers can facilitate South-South export-ledgrowth. Protection rates in the South are generally high compared with those in the North. For instance, low-income
countries face an overall level of protection of nearly 15 percent when they export to upper-middle-income countries,
compared with 9 percent for high-income markets. SouthSouth preferential tariff schemes—if fully implemented—
would only be one part of the solution. Nontariff measures
account for nearly two thirds of the protection rate faced by
low-income exporters to upper-middle-income markets. So
from an export-led growth perspective, liberalizing nontariffmeasures should probably be a higher priority than extending
tariff preferences.
Note
1. More reliance on South-South trade tends also to bring
implications for the composition of foreign demand for developing countries. See Kaplinsky and Farooki (2010).
About the Authors
Otaviano Canuto is the Vice President and Head of the Poverty
Reduction and Economic Management (PREM) Network,
Mona Haddad is Sector Manager of the Trade Department(PREM), and Gordon Hanson is Director of Center on Pacific
Economies in the School of International Relations and PacificStudies at the University of California, San Diego.

www.worldbank.org/economicpremiseFigure 5. Lower-Middle-Income Countries Offer Growing Diversification Opportunities for Developing Countries
State of growth in exports attributable to each product group, 1998–206; excludes petroleum products
food products

wood and paper

machinery

petroleumapparelelectronics

chemicals

nonmetallic minerals

transport equipment

textilesiron and steel

other products

destination

LICs to LMICs

LICs to HICs

LMICs to LMICs

LMICs to HICs

–100102030

405060percent
Source: Authors’ calculations based on UN-COMTRADE data.
Note: LICs = low-income countries; LMICs = low- and middle-income countries; HICs = high-income countries.

References
Anderson, James E., and Eric van Wincoop. 2004. “Trade Costs.” Journal of
Economic Literature 42 (3): 691–751.
Canuto, O. 2009. “Decoupling, Reverse Coupling and All That Jazz.”
http://blogs.worldbank.org/growth, 09/01/2009. World Bank, Washington, DC.
Feenstra, Robert C. 2004. Advanced International Trade. Princeton, NJ:Princeton University Press.
Feenstra, Robert C., and Gordon H. Hanson. 2003. “Global Production andInequality: A Survey of Trade and Wages.” In Handbook of International
Trade, ed. E. Kwan Choi and James Harrigan, 146–185. Blackwell.
Hausmann, Ricardo, Jason Hwang, and Dani Rodrik. 2007. “What You Export Matters.” Journal of Economic Growth 12 (1): 1–25.
Imbs, Jean, and Romain Wacziarg. 2003. “Stages of Diversification.” American Economic Review 93 (1): 63–86.

Kaplinsky, R., and M. Farooki. 2010. “What Are the Implications for Global
Value Chains when the Market Shifts from the North to the South?”
Policy Research Working Paper 5205, World Bank, Washington, DC.
Leamer, Edward E. 1984. Sources of Comparative Advantage. Cambridge,MA: MIT Press.
Rodrik, Dani. 2006. “What’s So Special about China’s Exports?” China &World Economy 14 (5): 1–19.
———. 2009. “Growth after the Crisis.” Mimeo, Harvard University.
Rose, Andrew K., and Mark M. Spiegel. 2009. “Cross-Country Causes andConsequences of the 2008 Crisis: International Linkages and AmericanExposure.” Working Paper No. 15358, NBER, Cambridge, MA.

The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. It is produced by the Poverty
Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarilyreflect those of the World Bank. The notes are available at www.worldbank.org/economicpremise.