Can developing countries benefit from export promotion?

Purpose – Although economic theory generally does not support government intervention in international trade, casual observation shows that many developing countries adopt certain trade policies to promote their exports. The objective of this paper is to answer the question that whether developing countries can benefit from export promotion. Design/methodology/approach – This paper considers a developing country which has to import new technology from the world market to improve its productivity. If it has certain economic rigidities, the country is short of foreign exchange and domestic firms cannot import an adequate amount of new technology. Even if there is no rigidity, domestic firms may not have sufficient incentive to invest in new technology. Therefore, the government can step in to subsidize exports. Through an analytical model, this paper investigates in what conditions the measures of export promotion can stimulate production and employment, and improve efficiency and social welfare. Findings – This paper analyzes two effects of export promotion: raising the incentive of capital investment and reducing capital goods shortage caused by foreign exchange constraint. These effects might be the economic rationale for developing country governments to promote exports. It is found that export promotion can definitely raise employment and productivity, but whether these measures can stimulate the supply to the domestic market and improve domestic welfare depends on the sufficient and necessary condition given in the paper. Originality/value – Establishes an analytical model to investigate in what conditions the measures of export promotion such as export subsidies and domestic currency devaluation can stimulate production and employment, and can improve efficiency and social welfare.