Import substitution vs export promotion

Import-substitution policies are intended to promote the establishment of industries with higher rates of technology growth by offering protection as an incentive, but that very same protection reduces the competition which serves as an incentive for firms to innovate, invest and apply new technologies.

Import Substitution vs. Export Promotion

In contrast, before the opening up of the economy, the market is constrained to the domestic consumers only. So we will begin our paper by analyzing the arguments in favor and against ISI policies. It is a usual practice of the governments to subsidize the exporting industries.

Production of manufactured goods for export requires and stimulates efficiency Import substitution vs export promotion the economy. This strategy focuses on export-promotion, whereby policy measure such as export subsidies, encouragement of skill formation in the labour force and the use of more advanced technology, and tax concessions generate more exports, particularly labour intensive manufactured exports in accordance with the principle of comparative advantage.

Theory of comparative advantage principally asserts that every country irrespective of its size can benefit from trade. Empirical evidence strongly suggests that pragmatism and eclecticism rules over any other single purpose approaches to trade.

The broad range of tariffs, quotas and outright prohibitions on imports that are part of IS policies are clearly not a form of infant industry protection.

The growing intensity of competition from the rest of the world ROW forces specialisation in areas where low-wage LDCs have a comparative advantage, such as in the production of labour-intensive commodities. A huge amount of resources has to be devoted for necessary skill formation and knowledge acquisition.

The countries that pursue IS strategies tend not to apply high tariffs to capital goods. Developed nations often provide a high level of effective protection for their industries producing simple labour-intensive commodities in which LDCs already have or can soon acquired a comparative advantage.

International firms often play a positive role in helping enhance efficiency. Therefore the aforementioned argument is valid in the short-run only as in long-run it balances out its own effect on BOT 4 as shown below with the aid of diagram. As a consequence, producers of exportable goods become less competitive in world market, causing a negative impact on the BOP.

As such, imported capital goods are used extensively in domestic production. Seen in this light, import substitution is at best a temporary measure for increasing economic growth. Finally, a strong-inward-oriented economy MO if the incentives biased production slightly toward serving the home market rather than exports, effective rates of protection were relatively low, and the exchange rate was only slightly biased against exports i.

These subsidies will be financed either by an increase in taxes or by reducing the expenditure on public and merit goods such as health, education, infrastructure, national defense and other social services.

Proponents of EP mainly argue that free trade utilizes previously unused resources such as land and labor, creates a vent for surplus of unused resources and allows a country to operate on its Production Possibility Frontier PPF. It is the ability to produce the most efficient product as compared to other countries.

The only way a firm can succeed in the face of intense international competition is to produce what consumers want, at the quality they want, and at the lowest possible costs. Import substitution can lead to inefficient industries because the narrow size of the domestic market in many LDCs does not allow them to take advantage of economies of scale.

On the other hand, under inward-looking strategy foreign exchange is lost temporarily because the replacement of imports of final goods by domestic production requires imports of raw materials, capital equipment, and components.

In contrast, an outward-looking strategy emphasises participation in international trade by encouraging the allocation of resources in export-oriented industries without price distortions. Moreover, empirical evidence suggests that outward orientation rather than inward orientation may lead to more equal income distribution.

A country was classified as a strongly outward oriented economy SO if it had few trade controls and if its currency was neither overvalued nor undervalued relative to other currencies and thus did not discriminate between exports and production for the home market in incentives provided.

In the post-Second World War period, many LDCs, after achieving independence, tried to reduce their reliance on imports, focused on IS policies, and a few, like Brazil, had a short period of success following that strategy.

During the s, s and s, most developing nations made a deliberate attempt to industrialise rather than continuing to specialise in the production of primary commodities food, raw materials, and minerals for export as prescribed by the traditional trade theory.

Import Substitution and Export Promotion | Economics

Foreign firms are induced to establish so-called tariff factories to overcome the tariff walls of LDCs.In the ultimate analysis, it seems that the two trade strategies—import substitution and export promotion—are not mutually exclusive. They may go hand in hand and may reinforce each other.

So, what is called for is a strategy which seeks to combine the virtues of the two strategies. Free Essay: Import Substitution vs. Export Promotion Econ Term Paper Group (19) Members: Amjad Hussain () Awais Javed () Fahd Mukaddam. EXPORT PROMOTION VS. IMPORT SUBSTITUTION HAKAN YILMAZKUDAY W hy do some countries develop more than others?

Do their strategies on international trade have a role on this? In this paper two different industrialization strategy, import substitution (IS) and export promotion (EP), will be introduced. Thinking just in terms of an all out import substitution or an export promotion strategy can pose as an impediment to one’s clear understanding of the relationship between these strategies and growth.

Import Substitution Industrialization (ISI) Definition Government strategy that emphasizes replacement of some agricultural or industrial imports to encourage local production for local consumption, rather than producing for export substitutes are meant to generate employment, reduce foreign exchange demand.

This paper will attempt to discuss the relationship between exports, economic growth and development and the differences between export promotion and import substitution industrialization.

Those advocating export led growth strategy usually do so on the basis that it is the rational and efficient alternative to other strategies of development.

Import substitution vs export promotion
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