Export Promotion Strategy vs. Import Substitution Strategy

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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…show more content…
But in practice the results are opposite to this view. Studies show that many industries could not reach maturity even after 20 years of protection. Moreover, according to Bell et al., even if some industries reached maturity in their technology, it seems that they soon lost it again. This phenomenon indicates the failure in the application of infant industry theory and thus the failure of IS strategy. Under the IS strategy, the degree of government intervention was unprecedently high, rivaling that of the central planning economies. It would not be a surprise that an often-cited criticism of IS is misallocation (or distortion). The empirical evidences showed that in the long run IS strategy led to over-intrusive, bloated and inefficient state-owned enterprises (SOEs). Large SOEs and private sector companies operated as monopolies/oligopolies within a protected market. Also, the inefficiency and corruptness of the government bureaucracy limited the scope of action and reforms. IS was aimed at replacing imports from abroad, but nevertheless in most Latin American countries the import of manufactured goods in fact increased. The terms of trade got worse, caused by low prices for exported raw materials and expensive imports. The industrialisation could not keep up with the technical and innovative development of the free world markets. As a result, new

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