Export-Led Development in China: Examining the Role of Exports in Driving Economic Growth

Abstract: This research examines the relationship between Exports and GDP Growth as China transitioned from Import Substitution (IS) to Export Promotion (EP) as their strategy to industrialize. China has experienced remarkable economic growth over the years, becoming one of the world’s largest economies. A common claim is that China’s economic success is due to increased Exports. According to the Export-Led Growth (ELG) theory, Exports play a critical role in boosting economic growth. The research aims to test if the ELG-theory holds in China. To examine the relationship between Exports and GDP Growth, a Time Series Vector Autoregression (VAR) is performed, taking into account the effects of additional factors such as Foreign Direct Investment, Gross Fixed Capital Formation, Population Growth, and Imports. Further, a Granger Causality test is conducted to examine the causal effect between Exports and GDP Growth, and vice versa, to test the ELG-theory. The analysis is based on data from 1979 to 2019. The VAR results show that Exports and GDP Growth have a moderate positive relationship, however, there is no statistical significance in determining GDP Growth when controlling for additional factors’ impact. The causal relationship is proven to be asymmetrical, and Exports do not have a causal effect on GDP Growth, while the opposite test exhibits causality. This suggests that in the case of China, the ELG-theory may not hold, implying that other factors may have played a more prominent role in boosting China’s economic growth.