The impact of alternative development strategies: Simulations with a dynamic input-output model

This paper analyzes the implications of two different development strategies: outward-looking strategy led by manufacturing exports and inward-looking strategy focused on import substitution strategy. Our approach is to do counterfactual experiments with a dynamic input-output model in order to explore the impact of the different strategy on economic performance. We apply the model to two different countries (Turkey and Korea), which exemplify the two strategies, and explore the impact in each case of a switching strategy. We impose an export-led strategy on Turkey and inward-looking strategy on Korea. Our results confirm the view that export-led strategy leads to better economic performance. However, we also find that there are risks associated with this choice. An export-led strategy requires high level of foreign capital inflows in the early phase, to be paid back later as export levels rise. The strategy also requires a high level of factor productivity growth. If export growth is not maintained, the country will be left with a dangerous level of foreign debt. If high productivity growth is not achieved, the growth in factor inputs (particularly investment) required to achieve adequate growth of manufacturing is not sustainable. Finally, our results indicate that the dynamic input-output model provides a good framework for exploring the structural implications of a choice of development strategy.