Import Substitution vs. Export Promotion

2959 Words May 7th, 2013 12 Pages
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)
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IS vs. EP

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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
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Aristotle has said “What we have to learn to do, we learn by doing”; import protection is the best way to initiate this learning process because the economy is now producing goods that it previously imported - a process of development and learning by doing sets up. The economy can then move towards higher efficiency. This eventually improves the balance of payments as fewer consumer goods are now imported. It is essential that the learning process is followed by accumulation of capital. This requires the manipulation in Interest rates so as to encourage savings, and these savings can then be invested back in the protected industry. There are some macroeconomic gains associated with this policy, including reduced unemployment and increased tax revenue for the government; increased local production is expected to generate job opportunities and at the same time, tariff on imports become a source of income for the government.

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See Appendix 1.4.1 & 1.4.2 See Appendix 1.2

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IS vs. EP

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However, the IS policies have been criticized by economists for various reasons. According to them, the protection provided to the industries makes the industries inefficient because the firms start to rely on the provision of subsidies. They have no incentive to cut down costs to achieve minimum efficient scale of production and to increase productivity. Bhagwati in “Import substitution - a survey of policy issues” said that,

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