BY

SHWETA
 Ongoing debate on the best way to use trade and
industrial policies to support economic
development.
 Import-substituting industrialization
 The strategy of encouraging domestic industry by limiting
imports of manufactured goods.
 Have been pursued by many less-developed countries.
 Often justified by the infant industry argument.

 Export-promoting industrialization
 Associated with the policies of certain Asian countries that
became industrialized while exporting to world markets.
 E.g., Hong Kong, Taiwan, South Korea, and Singapore.
 Controversy among economists whether the high growth
experienced by these countries can be attributed to free-trade
oriented policies or something else.
 Market Failure Arguments for Infant Industries
1. Imperfect (financial) capital markets
 New industries cannot borrow as much as they need, which
restricts investment and growth.
 If improving the functioning of financial markets is unfeasible,
import protection might be a second-best policy.
2. The problem of appropriability
 Firms may not be able to fully appropriate the benefits of their
investment because they are partly public goods.
 Firms that invest in new technology or in technology adoption generally
create knowledge that other firms can use without paying for it -- an
example of an externality: benefits or costs that accrue to parties
other than the one that generates it.
 Governments may want to actively encourage such investment.
 If establishing a system of property rights is unfeasible, tariffs
might be a second-best policy.
 Many countries pursuing import substitution have not
shown any signs of catching up with the advanced
countries.

 Why didn’t it work the way it was supposed to?

 The infant industry argument was not as universally valid as
many people assumed.
 Import substitution promoted wasteful use of resources:
 involved complex, time-consuming regulations.
 involved high tariff rates for firms that needed to buy imported inputs
for their products.
 promoted inefficiently small industries.
 There is some evidence that countries with relatively free trade
had higher average economic growth than those following import
substituting industrialization.
 But this claim is a matter of debate.

 By the mid-1980s many governments had lost faith in import

substituting industrialization and began to liberalize trade.

 Has trade liberalization promoted development?

 The evidence is mixed.
 Growth rates in Brazil and other Latin American countries have been
slower since trade liberalization, but unstable macroeconomic policies
and financial crises have contributed to slower growth.
 Other countries like India have grown faster since liberalizing trade in
the 1980s, but it is unclear to what degree liberalized trade have
contributed to growth.
 Instead of import substituting industrialization, several
countries in East Asia adopted trade policies that
promoted exports in targeted industries.
 Japan, Hong Kong, Taiwan, South Korea, Singapore, Malaysia,
Thailand, Indonesia and China are countries that have
experienced rapid growth in various export sectors and rapid
economic growth in general.
 These economies or a subset of them are sometimes called “high
performance Asian economies” (HPAEs)

 It is however debatable to what degree these economies

established “free trade”.
 Some trade restrictions were still in effect during different
times.
 Unclear if trade caused or was merely correlated with rapid
economic growth.
 Some argue that growth was mainly driven by high saving and
investment rates, leading to rapid economic growth in general as well as
in export sectors.
 The high performance Asian economies have experienced rapid growth
in education.

 Some East Asian economies have implemented industrial policies:

policies intended to promote certain industries.
 Include policies like subsidized loans and subsidized research and
development (R&D).
 Not all high performance Asian economies implemented these policies
and there is little evidence that countries that did had more rapid
growth in the targeted industries than those that did not.
 There are some examples of industrial policies that failed.
 Chemicals, steel, automobiles were promoted by South Korea in the 1970s, but
the polices were later abandoned because they were too expensive and did not
produce desired growth.
Export incentives are a widely employed
strategy of export promotion. The main aim
of these incentives is to increase the
profitability of export business. Important
export incentives in India includes rebate of
duties, income tax concession, freight
subsidiary etc.

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 As we have earlier talk about Import &
Export by comparison that Import
Substitution is good in every sense and
Export Promotion help to ,in hence the
economics growth globally by increasing GDP
of a country.
So, Export Promotion is good and
Import Substitution is also more beneficial
for economical growth & development of
country.

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