QUESTION The economy of XYZ recently gained independence from their colonial masters. The first president Dr.

Yebeyebi embarked on a massive imported substitution drive as a way of promoting growth and development. Industrialization became a vital off shoot of this policy and in the process the country concentrated on inward activities and restricted through several tools the importation of certain products. Would you as a consultant support their initiative viz ±a- viz the supposed gains and the welfare implications of international trade.

Introduction Import substitution and trade protectionism are tools or strategies that have been adopted by many a country to promote economic growth and development when independence is gained. Countries like Ghana, China, India, Malaysia and many other countries have all used these tools or strategy in one way or the other for their economic growth. To appreciate the strategy being adopted by Dr. Beyeebi and to support it or not, it would be advisable to understand what import substitution and trade protectionism are, the benefit to be derived if the economy is closed or restricted and the benefit international trade provides which will be absent if trade is restricted. Import Substitution Import substitution is the strategy of encouraging domestic industry by limiting imports of manufactured goods. In economics, an import is any good (e.g. a commodity) or service brought into one country from another country in a legitimate fashion, typically for use in trade. Import goods or services are provided to domestic consumers by foreign producers. The strategy is inward oriented in that trade and industrial incentives favor production for the domestic market over the export market An import in the receiving country is an export to the sending country. If a country practices import substitution, then the country is restricting free trade of certain goods and services. Free trade refers to the trade that is free from all artificial barriers to trade like tariffs, quantitative restrictions, exchange controls, etc. Industrialization A process of socio-economic change whereby a human group is transformed from a pre-industrial society into an industrial one. A part of a wider modernization process, where social change and economic development are closely related with technological innovation, particularly with the development of large scale energy and metallurgy production Trade protectionism Protection refers to the government policy of according protection to the domestic industries from foreign competition. Any form of restriction imposed on international trade, especially the importation of goods, eg tariffs, quotas, exchange control, etc. The action by the president The import substitution and trade protectionism drive embarked on by the president Dr. Yebeyebi has both advantages and disadvantages for the country and the citizenry. As already explained above, import substitution is encouraging domestic industry by limiting imports of manufactured goods. Import Substitution involves extensive use of trade barriers to protect domestic industries from import competition. There are a lot of benefits to be derived from such a policy drive. In the first place the policy can assist the president and the country to protect infant industries. According to Alexander Hamilton and Frederick List a new industry having a

potential comparative advantage may not get started in a country unless it is given temporary protection against foreign competition. An established industry is normally much stronger than an infant one because of the advantageous position of the established industry like its longstanding experience, internal and external economies, resource position, market power, etc. Hence, if the infant is to compete with such a powerful foreign competitor, it will be a competition between unequals and this would result in the ruin of the infant industry. Therefore, if a new industry having a potential comparative advantage is not protected against the competition of an unequally powerful foreign industry, it will be denying the country the chance to develop the industry for which it has sufficient potential. The intention is not to give protection for ever but only for a period to enable the new industry to overcome its teething troubles. The policy of protection has been well expressed in the following words: "Nurse the baby, protect the child and free the adult". This practice is evident in China when China closed it economy and protected its infant industries to mature before opening up to the rest of the world. This has given China a very good advantage as it is now counted as one of the giant industrialized countries. Another good aspect of import substitution and trade protectionism is the fact that the country would have diversified industries producing different goods and services for the benefit of the citizenry. It is necessary to have a diversified industrial structure for an economy to be strong and reasonably self-sufficient. An economy that depends on a very limited number of industries is subject to many risks. A depression or recession in these industries will seriously affect the economy. A country relying too much on foreign countries runs a number of risks. Changes in political relations and international economic conditions may put the country into difficulties. Hence, a diversified industrial structure is necessary to maintain stability and acquire strength. It is, therefore, advised to develop a range of industries by according protection to those which require it. Therefore the president Dr. Yebeyeebi adopting this trade protectionism and import substitution will help the country to achieve diversification. For instance when Ghana gained independence in 1957, the president Osagyefo Dr. Kwame Nkrumah embarked on massive industrialization establishing over a hundred factories to produce different kinds of products. Mismanagement however, has led to the collapsed of all this wonderful factories leading many people to be unemployed. Again XYZ can improve its balance of payment account if the economy is protected. By restricting imports, a country may try to improve its balance of payments position. The developing countries, especially XYZ, may have the problem of foreign exchange shortage. Hence, it is necessary to control imports so that the limited foreign exchange will be available for importing the necessary items. In developing countries, generally, there is a preference for foreign goods. Under such circumstances it is necessary to control unnecessary imports lest the balance of payments position become critical. Another benefit is that employment could be created if import is restricted. The domestic economy could be stimulated and employment opportunities expanded if trade is protected. Restriction of imports will stimulate import competing industries and its spread effects will help the growth of other industries. These, naturally, create more

employment opportunities. For instance the massive industrialization embarked upon by Ghana¶s first president led many people to gain employment and this reduced the unemployment situation in the country. Protection could also help the country to develop its own key industries. If we do not have our own source of supply of key inputs, we will be placing ourselves at the mercy of the foreign suppliers. The key industries should therefore be given protection if that is necessary for their growth and survival. For instance as Ghana was a leading producer of gold and continues to be a leading producer after South Africa, the first president thought of having a key gold refinery industrial in the country which was sited at Tarkwa in the Western Region but was never put into use when Nkrumah¶s government was overthrown. There are however benefits of international trade that XYZ as a country and its citizenry may not enjoy as a result of the trade protection and import substitution. One benefit that international trade presents is the availability of variety of goods and services. Often it is either impossible or not economically feasible to produce certain goods within a country even though the demand for them may be great. Importation results in availability at a lower cost which in turn presents the possibility of more widespread consumption. Hence the restriction to import will result in the citizenry not having this variety of imported products. For instance Nigeria does not produce salt so if the country restricts trade how will the citizenry enjoy the importance of salt in food production. Another benefit may be the transfer of technology. Even when the foreign market is serviced by producing abroad there are advantages for domestic consumers and producers. Since both from the transfer of products and technology among countries helps countries especially developing countries like XYZ to acquire new and improved ways of doing things. By adopting import substitution and trade protectionism, XYZ as a country may lack this transfer of technology. For instance after China had opened its market to the rest of the world, many big companies have moved their production plant to the country and this will help the country and the citizenry to learn the foreign technology as well as how certain things are done. So with trade restriction and import substitution, citizens of XYZ may not enjoy this amazing transfer of technology.

Another benefit of international trade is the wider market availability which leads to low cost of production. International trade leads to the expansion of plant size. If such expansion in trade leads to scale economics there is a good possibility that the benefits of lower cost will be available to either or both the domestic and foreign consumers. The presence and the degree of domestic competition will be available to either or both the domestic and foreign consumers. The presence and the degree of domestic competition will determine whether and how much of the savings will be passed on to consumer. This lower cost may further broaden the domestic market and make luxury products available to lower income segments. As a result of the wider market availability and the cheap labour in China, cost of production has gone down and many companies want to

establish their plant there. This may not happen in a country such as XYZ as a result of trade restriction and import substitution. Another benefit which international trade provides but will be absent in an import substitution and trade protectionism country like XYZ is the enhancement in the standard of living of the citizenry. It provides new consumption experiences plus the possibility of buying products that more closely meet the requirements of varying life style. International track opens the world market to producers of these goods thereby allowing more efficient and profited production with only local sales. The quality of the lifestyle of the people of China and India has improved as a result of opening up their economy. These countries can now afford to give grant or loan to Africa with a very small interest rate. From the argument above, it can be concluded that the adoption of trade restriction and import substitution or free trade may depend on a country¶s growth stage and the vision of its leader. Countries like China have adopted trade restrictions and have succeeded. Both trade restriction and free trade have their own challenges and both have their own benefits too. As a recent independent state, I would cite with the president for embarking on a massive industrialization drive and restricting certain products he believe XYZ has the comparative cost advantage in its production. I would however, advised that the economy should be opened for international business after the objective of industrialization has been achieved.