Phase I Phase II Phase III
Capital Currency devaluation.
Mostly Foreign Direct Investments (FDI).
Surge in FDI, but growing share of national capital. Pressures to revalue currency.
Drop in FDI. National capital dominant. Providing FDI to other markets.
Production Numerous comparative advantages. Focusing on labor intensive activities. Gradual shift to added value production. Loss of comparative advantages in labor intensive activities. Growing importance of the national market.
Trade Growth of exports and widening trade balance (imports versus exports). Peak trade growth and imbalances. Re-balancing. Relative decline of the share exports in relation to imports.
Phases of the Export-Oriented Paradigm
A common strategy for economic growth that has been followed be several Pacific Asian economies is the export-oriented model. It can be divided into three phases:
  • Phase I (Development of Comparative Advantages). A set of conditions are put in place to make the host country attractive in terms of its comparative advantages. For countries that were relatively closed to multinational interests, this involves a form of openness such as the setting of special economic zones where foreign direct investments can take place or more generally financial and trade reforms facilitating the transactional environment. The national currency is devaluated, particularly in relation to the main importers. The initial sectors where production takes place tends to be labor intensive activities since they involve lower risks and concern the highest benefits in comparative advantages. Exports will slowly increase and the balance between exports and imports will start to widen after an initial phase of imports of capital equipment.
  • Phase II (Exploitation of Comparative Advantages). Comparative advantages induced by the first stage are brought in full motion, implying a surge of FDI, but also of national capital as savings start to accumulate into new economic opportunities. As the national economy becomes more integrated to the global economy and that local expertise is developed there is a gradual shift towards added value production. The imbalance between exports and imports increases.
  • Phase III (Re-balancing). An export-oriented development strategy appears to be a transitory phase as it cannot endure indefinitely. Mainly due to the associated trade imbalances, there are strong pressures to revalue the currency of the exporter. National capital provides the dominant share of investments and the nation starts to become a net provider of FDI for other markets. Mainly due to rising living standards, production costs in many labor intensive sectors are losing their comparative advantages, while the national market takes a growing share of the production. A re-balancing of trade takes place with the share of exports declining in relation to imports.
Japan represents a good example of an export-oriented economy that went through all these stages.