Import Substitution vs. Export Promotion

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Import Substitution vs. Export Promotion
Econ 240 Term Paper

Group (19) Members: Amjad Hussain (13020031) Awais Javed (13020529) Fahd Mukaddam (13020407) Haider Shah (13020528) Hassan Jamil (13020023) Muhammad Bilal Ayub (13020413) Words (using page 2): 371*7 = 2597

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How do the strategies of international trade affect growth? Why at times countries adopted different strategies of international trade? How does Import Substitution Industrialization weigh against Export Promotion as a trade strategy? How does the empirical evidence help us understand this? Trade strategies are classified into two broad strategies, outward-looking development policies and inward-looking development policies. Outward-looking development policies encourage free trade and free movement of the factors of production. While inward-oriented development policies encourage greater self-reliance and restricted trade. Within these two broad approaches lies the debate between Import Substitution (protectionism) and Export Promotion (free trade). Import substitution (IS) is a well tested way to industrialization which has been followed by most of the currently developed and industrialized countries. Alexander Hamilton’s “Report on Manufactures” (1791) argued in favor of tariffs to protect American manufacturers from inexpensive imports from Britain. In the mid 19th century, Germany, Russia and Japan also practiced protectionism to develop their domestic industries. After the great depression of 1930’s, LDCs particularly Latin American and some Asian economies started practicing ISI and in 1960’s IS became a dominant strategy for development. However in the next decade, when industries protected through import substitution failed to achieve targeted productive and allocative efficiencies, countries switched to export promotion strategies. Hong Kong, South Korea, Taiwan and Singapore were among the first to adopt the export promotion strategy. Later, Chile, Thailand and Turkey also joined in. Over the years, the stance of countries has shifted from protectionism to free trade and globalization. So we will begin our paper by analyzing the arguments in favor and against ISI policies. Then we will discuss the benefits and drawbacks faced by the countries that switched to the export promotion strategy. The paper also explains the reasons for this transition. Finally, it concludes by giving empirical evidence of the real world regarding the effects of these strategies. It has always been in the vested interest of the economies to protect country’s large and strategic markets from foreign competition so that the local industry not only becomes self sufficient but also is in a position to induce industrialization led economic growth. In order to accomplish such goals, trends have shown (as mentioned above) countries’ increased dependence on Import

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substitution policies. Government plays a vital role in the implementation of these policies by imposing tariffs and quotas or altering the exchange rate and interest rate, using macroeconomic policies, to shield its local industries from the competitive foreign producers. Simultaneously, the foreign direct investments (FDIs) are expected to fill the gaps in technology and technical skills between the domestic and foreign industry. The introduction of IS policy can be attributed to the Infant Industry Argument (Import Substitution In General Equilibrium can be used to demonstrate that how the IS works in infant industry) 1, which favors the protection of domestic industry from international competition. The aim is to remove distortions between the out-dated locally produced goods and the industrialized high quality imports of similar products. Policies which governments adopt includes introduction of tariffs 2; discouraging cheaper import and at the same time encouraging production of the same goods domestically. Mostly consumer goods are produced under this strategy which...
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