Export Promotion Strategy vs. Import Substitution Strategy
1. Introduction It was the export promotion (EP) strategy that accounted for East Asian's states' success of economic development. Meanwhile, many other developing countries such as Latin America countries had committed to an alternative strategy, import substitution (IS). The IS strategy yielded disappointing results: most of these countries did not succeed in either industrialization or economic growth while export-oriented industrializations (EOIs) sustained fast economic development. Data from the World Bank (1993) showed that the real GDP of EOIs (7.6%) grew faster than IS countries (3%) during 1965-1990. There is no doubt that EOIs outperformed countries that adopted IS strategy in terms of economic development. However, are there any other aspects that EP is better than IS?
In this essay, the detailed comparisons between these two strategies will be discussed in three main parts: (1) industrial sector; (2) agriculture and service sector; and (3) international trade policy. Also, the merits of IS and the limits of EP will be mentioned.
2. Comparisons between EP and IS
2.1 Definition of IS and EP: The IS strategy prescribed by structuralists such as Presbish (1950) and Myral (1957) favored expansion of the industrial sector in the domestic market to substitute for imports. The key idea is to protect "infant industries", especially heavy industries, by substituting the imported goods with the locally produced goods via government intervention to the whole economy. The structuralists believe protection is necessary for most developing countries to establish a strong base for domestic industry while it develops into a mature local industry. The government can make this protection not only via tariffs, quotas but also via exchange rates, prices of the factors of production and interest rate. Opposite to the IS strategy, EP is a trade and economic policy aiming to speed-up the industrialization process of a country through exporting goods for
In this essay, the detailed comparisons between these two strategies will be discussed in three main parts: (1) industrial sector; (2) agriculture and service sector; and (3) international trade policy. Also, the merits of IS and the limits of EP will be mentioned.
2. Comparisons between EP and IS
2.1 Definition of IS and EP: The IS strategy prescribed by structuralists such as Presbish (1950) and Myral (1957) favored expansion of the industrial sector in the domestic market to substitute for imports. The key idea is to protect "infant industries", especially heavy industries, by substituting the imported goods with the locally produced goods via government intervention to the whole economy. The structuralists believe protection is necessary for most developing countries to establish a strong base for domestic industry while it develops into a mature local industry. The government can make this protection not only via tariffs, quotas but also via exchange rates, prices of the factors of production and interest rate. Opposite to the IS strategy, EP is a trade and economic policy aiming to speed-up the industrialization process of a country through exporting goods for
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