The U.S. recession could hurt the South, particularly in oil and apparel exports, and Latin America and the 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 of export-led growth.recession, South-South, oil, apparel, exports, Latin America, trade, export diversification, developing countries, low-income

Canuto, Otaviano

Haddad, Mona

Hanson, Gordon

English

Research Papers in Economics

1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise
MARCH 2010  • Number 3
Economic Premise
POVERTY
REDUCTION
AND ECONOMIC
MANAGEMENT
NETWORK (PREM)
THE WORLD BANK
Export-Led Growth v2.0
Otaviano Canuto, Mona Haddad, and Gordon Hanson
The Global Financial Crisis (GFC) has led to the sharpest
trade contraction ever and the deepest since the Great De-
pression of the 1930s. Between 2007Q4 and 2009Q2, world
merchandise imports fell by a whopping 36 percent. Al-
though trade levels began a modest recovery in the 2009Q3,
they are still far below precrisis highs.
Rapidly industrializing countries, such as China in the
1990s and 2000s and the “Asian tigers” before it, have relied
heavily 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 de-
mand in developed countries? This note shows that much of
the  recent  growth  in  developing  countries’  exports  was
driven by demand in other developing countries. This means
that developing countries may continue to rely on South-
South trade to recover from the crisis. In fact, countries like
China are leading the recovery through strong import de-
mand. Over the medium term, the development of an “ex-
port-led growth v2.0,” in which South-South trade plays a
more 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. 
The U.S. Recession Could Hurt the South,
Particularly in Oil and Apparel Exports, and
Latin America and the Caribbean...
Dependence on the United States as a destination for devel-
oping 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 consider-
ably from one country to the next.
On a regional basis, low-income countries in Latin Amer-
ica and South Asia are the most dependent on high-income
countries’ import demand. Mexico (an upper-middle-income
country) and Central America rely heavily on U.S. final de-
mand. The United States also plays a relatively important role
in Sub-Saharan Africa’s exports due to its close relationship
with Nigeria on oil and to preferences through AGOA (the
African Growth and Opportunity Act that significantly en-
hances U.S. market access for 39 Sub-Saharan African coun-
tries). The European Union (EU), by contrast, is a relatively
more important market for developing Europe and Central
The U.S. recession could hurt the South, particularly in oil and apparel exports, and Latin America and 
the 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 of 
export-led growth.Asia, and the Middle East and North Africa based on geo-
graphical and historical ties.
More generally, the United States and the EU-25 each ab-
sorbed about 20 percent of low-income countries’ export
growth from 2000 to 2008. They absorbed 15 percent and
19 percent respectively of lower-middle-income countries’
export growth over the same period. It is important to keep
these numbers in perspective, however. Of the 20 percent
figure, nearly 10 percent comes from just one sector: petro-
leum products. Apparel accounts for an additional 4.3 per-
cent, followed by other products (1.9 percent) and food (1.1
percent). Similar dynamics are present in the EU-25 data,
with the exception of iron and steel imports (2.7 percent ver-
sus 0.4 percent in the United States). More generally, devel-
oping country export growth has been impressive, although
with some sectoral differences according to income level (fig-
ure 1) (low-income, lower-middle income, and upper-middle
income). All three income groups have seen strong growth
in exports of food products, and iron and steel. The same is
true for apparel in low-income countries, and for electronics
in middle-income countries.
...But South-South T rade Is Partly Picking
Up the Slack
Prior to the GFC, some proponents of the decoupling hy-
pothesis argued that the risk of global contagion was rela-
tively low due to different business cycles in the North and
the 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 these
kinds of ideas. There is still great potential for demand shocks
in the North to propagate globally via the trade channel. This
is 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, par-
ticularly the EU-25, are still important, but low- and middle-
income countries are increasingly a source of import demand
(figure 2). The BRIC countries (Brazil, Russia, India, and
China) import share nearly doubled, from 9 percent to 17
percent, over the 1996–2008 period. Other low- and mid-
dle-income countries increased their share from 8 percent to
19 percent over the same timeframe. In relative terms, the
importance of the high-income countries as a direct source
of import demand is decreasing, from a total share of 88 per-
cent 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 of
the 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 and
North 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 ef-
fects exceed the combined contribution of GDP growth in
the United States and EU. 
As GDP fell simultaneously in the North and the South
during the GFC, the overall effect on final import demand
could have been huge. However, this effect was greatly mit-
igated—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 be-
tween January and September 2009, whereas the United
States’ increased by less than one third (figure 4). The return
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30
25
20
15
10
5
0
low income lower middle income upper middle income
Figure 1. Exports Grew Fast across All Income Groups for Key Products
Source: Authors' calculations based on UN-COMTRADE data.
food products
chemicals
textiles
wood and paper products
apparel
nonmetalic minerals
iron and steel
machinery
electronics
transport equipment
other products
State of growth in exports attributable to each product group, 1998–206; excludes petroleum productsto relatively rapid growth in Brazil, China, and India is clearly
an encouraging development for the trading system, and
could exert a significant stabilizing influence on the interna-
tional economy. 
Middle-Income Countries Are Driving Export
Diversification of Low-Income Countries
The GFC and trade collapse also need to be understood from
a supply-side perspective. The world export share of low- and
middle-income countries has been increasing more or less in
line with their import share. For low-income countries, the
bulk of this growth has been concentrated in a small number
of labor- or resource-intensive sectors: petroleum products,
food, and iron and steel. Together, these three sectors account
for 76 percent of low-income countries’ export growth be-
tween 1998 and 2006.
Developing countries’ exports have become more diver-
sified over time, driven in part by changing South-South
trade patterns. The export diversification index based on the
Herfindahl-Hirschman Index (HHI) of concentration shows
an improvement of around 10 percent for low-income coun-
tries 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 be-
tween specialization—which is beneficial from a resource al-
location  perspective—and  diversification  that  can  have
development and stability benefits. The optimal trade-off be-
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-in-
come 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 hap-
pening on a micro level is that low-income countries are in-
creasingly filling the apparel niche previously occupied by
middle-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 away
from their traditional reliance on food exports to Northern
markets (figure 5).
Thus, not only are low-income countries succeeding in ex-
porting natural resources, but they are also moving into labor-
intensive manufacturing. One striking feature of the recent
evolution of developing country exports is that the United
States 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 special-
ization. If internally generated productivity advances are
largely responsible for these income gains and a “growth
trend decoupling” by LMICs is at play (Canuto 2009), con-
cerns about weak consumption growth in the United States
3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise
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year
100
80
60
40
20
0
1996 1998 2000 2002 2004 2006 2008
Figure 2. Developing Countries Account for an Increasing Share of
World Trade
Source: Authors’ calculations based on UN-COMTRADE data.
Note: BRIC = Brazil, Russia, India, China; LMICs = low- and middle-
income countries; HICs = high-income countries.
BRIC
other LMICs
USA
other HICs
EU-25
World import shares, 1996–2008
percent
Latin America and Caribbean
East Asia and Pacific
South Asia
Sub-Saharan Africa
Middle East and North Africa
Europe and Central Asia
0 10 20 30 40 50 60
Figure 3. Much of Export Growth in Low-Income Countries Is Driven
by GDP Growth in BRICs and Other LMICs
Source: Authors’ calculations based on UN-COMTRADE data.
Note: BRIC = Brazil, Russia, India, China; LMICs = low- and middle-
income countries; HICs = high-income countries.
BRIC
other LMCs
USA
EU-25
other HICs
Export growth in LICs due to GDP growth in 
major import markets, 2000–08and other developed countries undermining the viability of
export 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 open-
ness versus protection remains subject to debate. As the
global economy stabilizes post-GFC, concerns have remained
about limits to the extent to which other developing coun-
tries can pursue the same export-led growth strategies as be-
fore. One such concern questions the ability of the United
States—where the GFC started—to remain a major import
market for developing countries. But as this Note has argued,
there remains plenty of scope for leveraging international in-
tegration as an engine of growth. Over the coming years, a
new type of export-led growth strategy is likely to emerge.
What will the new export-led growth look like? It will
surely pay greater attention to South-South trade than in the
past. This rebalancing is only natural in light of the BRICs’
rise, and their increasingly important role as a source of im-
port demand. It also reflects the likely macroeconomic rebal-
ancing in the United States. However, this shift in demand
patterns by no means signals a “sudden stop” to export-led
growth. It has been taking place gradually over at least the
last decade, and will probably intensify in coming years.1
Policy  makers  can  facilitate  South-South  export-led
growth. Protection rates in the South are generally high com-
pared with those in the North. For instance, low-income
countries face an overall level of protection of nearly 15 per-
cent when they export to upper-middle-income countries,
compared with 9 percent for high-income markets. South-
South 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 nontariff
measures 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 de-
veloping 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 Pacific
Studies at the University of California, San Diego. 
4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise
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United States China
150
100
50
0
–50
–100
Figure 4. China’s Import Growth Is a Driver for Developing 
Countries’ Recovery
Source: Authors' calculations based on International Trade Commission for
the U.S. and Chinese Customs data.
Note: BRIC = Brazil, Russia, India, China; LMICs = low- and middle-
income countries; HICs = high-income countries.
developing countries high-income countries
Import growth from United States and China to 
developing and high-income countries
Jul. 2008–
Feb. 2009
Feb. 2009–
Sep. 2009
Jul. 2008–
Jan. 2009
Jan. 2009–
Sep. 2009References
d
e
s
t
i
n
a
t
i
o
n LICs to LMICs
LICs to HICs
LMICs to LMICs
LMICs to HICs
–10 0 10 20 30 40 50 60
Figure 5. Lower-Middle-Income Countries Offer Growing Diversification Opportunities for Developing Countries
Source: Authors’ calculations based on UN-COMTRADE data.
Note: LICs = low-income countries; LMICs = low- and middle-income countries; HICs = high-income countries.
food products
petroleum
chemicals
textiles
wood and paper
apparel
nonmetallic minerals
iron and steel
machinery
electronics
transport equipment
other products
State of growth in exports attributable to each product group, 1998–206; excludes petroleum products
percent
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 necessarily
reflect those of the World Bank. The notes are available at www.worldbank.org/economicpremise.
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