Handbook of New Institutional Economics

Abstract

Recent Scandinavian work on the relationship between exports and economic growth gives preference to home market factors as opposed to foreign demand, thus strengthening the view that growth is home-led rather than export-led. This article claims that the difficulty in determining the causal role of exports stems from the failure to differentiate between individual industries and macro-economic growth. Addressing the macro-aspect, the argument, called the ‘export specialization theory’, is developed that for small countries trade and pro-trade policies have been central to their economic success; moreover; in these cases it makes no sense to distinguish between home-led or foreign-led development, since by definition trade includes both demand and supply factors. In the light of this clarification the current controversy about the causal role of exports for successful growth in small countries disappears. By way of conclusion, the article argues that country size may prove to have been a critical variable in successful economic growth.