6

## countries with lower trade restrictions.

There are a number of reasons why the difference in orientation could affect growth, both in the short and long run. Outward orientation generally results in a more rapid growth of exports. Competition with foreign producers raises efficiency and there mav be externalities associated with exporting that cause open economies to grow more rapidly over long periods of time. There is considerable evidence that the process of exporting, combined with easy availability of imported inputs and machinery, accelerates technological advance in developing economies. '° Outward orientation also leads to diversification of imports. High level of exports create an equally high level of demand for imports of various capital and intermediate goods. At the same time, higher income leve!s associated with higher exports induce demand for additional consumer goods imports that were either previously restricted or faced stiff tariff barriers. Under the new liberalized regime, no single import item (for example, oil) constitutes a large share of the total irnports. Thus, just as export diversification leads to relatively stable export price index so does import diversification impart sonie stability to the aggregate import price index.

Outward orientation therefore makes it possible to use external capital for development, without encountering serious problems in servicing the corresponding debt. Inward orientation of production is considered one of the reasons why Latin American and African economies have experienced "debt crises' that have inhibited growth in the 1980ss

# (2) Adjustment **to** External Shocks

Second, the successful countries treated adverse exogenous shocks as permanent and promptly undertook adjustment, thereby avoiding recourse to borrowing in excess of their capacity to repay. By contrast, those that considered these shocks to W-e temporary aberrations and postponed adjustment - continuing with normal levels of expenditure financed by ex.ernal borrowing - now face severe payment difficulties as the borrowed resources were used mainly for consumption. Clearly, countries must be prepared to react rapidly and sharply to negative shocks. Furthermore, being less dependent on commodity exports, Asian countries were able to better withstand the decline in commodity prices.

The timeliness with which countries are able to react to these shocks and the strength and adequacy of the adjustment seem to be a moot point. Those countries which take early remedial action are eventually better **6JA'i** th4U tl i A 90 W -- ;104 :AJ't-6 :1- lproractcd isnacto,,.. and 11vv ;iJi: W;b;3L' Ul 'tAlt 0 gOt; kgglaVatou.

Malaysia recognized the gravity of the international economic environment early on in the 1981-1982 period and took corrective measures to turn around both the fiscal deficit and the current account deficits very significantly. Indonesia, becoming aware of the softening in oil markets, started the process of drastic adjustment in 1983 to help restore the competitiveness of non-oil exports. Korea decided to retrench its ambitious heavy ilUusLIy **CApalIbiUll plUgrani WeCn** it lealiia; that ihe economy was in serious troubie.

9 Edwards, S. (1990) 'Operness, Outward Orientation, Trade Liberalization and **Econonmic Performance** in **developing** countries.' (World Bank PRE Working Paper 191;.

l°Mieko Nishimizu and Sherman Robinson, 'Trade Policies and Productivity Change in semi-industrialized countries.' Joumal of Development Economics, (September - October 1984)