What are the disadvantages of export LED growth?

Export-led growth, also known as export-oriented industrialisation, has been touted as a way for developing economies to grow and mature. Export-led growth encourages countries to focus on exporting goods to the rest of the world as the primary driver of the country's economy. Countries such as China, South Korea and Taiwan have implemented successful export-led growth policies. However, recessions, such as the 2007-2010 global recession, have begun to cast doubts on the effectiveness of export-led growth due to its emphasis on a specialised, globally focused economy vulnerable to global shifts in demand.

Export-led growth focuses on a country encouraging the development of specific industries for the purpose of exporting the goods abroad. Exports in this context typically refer to manufactured goods or raw materials, not services, according to Shahid Yusuf, a development economist at the World Bank. Governments attempt to identify industries in which the country has a comparative advantage, which means those industries in which the country is relatively more efficient and productive compared to other countries. This means the economy gears itself toward producing the goods that should do best on the global market. With this advantage identified, governments encourage firms to enter these industries by offering a variety of subsidies and incentives.

An export-led economy, by definition, relies on other countries to sustain its growth. This leaves countries especially vulnerable to the fluctuations of other economies. During periods of economic crisis in which global demand drops, an export-led economy may find its economy suffers worse compared to a country that depends less on exports. Other than specific economic crises, export-led growth economies require sustained demand, especially from larger consumer sources such as the United States and Western Europe. Because the demand for imports dropped in the United States after a recession began in 2007, economic recovery for export-led economies may be slower.

Export-led growth economies, by encouraging specific industries, simultaneously discourage other industries, resulting in less economic diversification. This exposes the economy to risk if global demand shifts away from the goods the country exports. This becomes especially important in agriculture-based economies that move from a self-sustaining economy to one focused on exports. For example, if a country's farmers stopped growing food for subsistence and started growing tobacco for export, this country would not only suffer economically if global demand for tobacco dropped, it may no longer be able to feed itself.

Because the government actively encourages specific industries by offering subsidies and other monetary incentives, it runs a risk of encouraging the wrong industries. Comparative advantage is difficult to ascertain in practice because determining the relative efficiency of an entire industry requires a large amount of data that can be beyond the scope of a government to collect. In addition, leaders of certain industries may sway politicians to support their industries instead of more economically sound industries.