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hy do some countries develop more than others? Do their strategies on international trade have a role on this? In this paper two different industrialization strategy, import
substitution (IS) and export promotion (EP), will be introduced. These strategies will be compared. The advantages and the disadvantages of these strategies on their development will be stated. Then the relation between these strategies and growth will be analyzed. Which strategy is better for higher growth rates, especially in a globalized world structure?
A specific strategy can be applied via appropriate policies assisting it. according to the structure of their international trade. or what? Is the export promotion strategy best one. In early developing countries. Import Substıtutıon Why did some countries apply import substitution strategy until the mid-1960s? According to which reasons such countries switched to the export promotion strategy? Was it because of the changing structure of the world. mainly apply two different industrialization strategies: import substitution (IS) and export promotion (EP). The evidence of this is that most of the lessdeveloped countries has shifted their policies to serve for an export 2 . most of the countries have begun developing via import substitution. its scope is greater than a policy. development comes into the picture via substituting the imported goods by locally produced goods.Export Promotıon vs. In other words. Strategy means a general model or approach. This may be due to letting the less-developed industries to reach a level at which it can compete with foreign industries in all over the world. technology. or does it have any alternative except the import substitution? These questions are also the concern of this paper. STRATEGIES FOR INDUSTRIALIZATION Countries.
The main point of an EP strategy is to make production for international trade and hence to increase exports. As we will discuss below. import substitution strategies start with producing consumption goods that do not need a progressed technology. in this model the main goal is to increase not only the national income but also the rate of exports. the external demand is the source of activity. “There are two channels through which openness positively affected growth. First. However. but the third is related to expenditures inside the country. there are indirect effects that work 3 . the main point of import substitution is that the locally produced goods are replaced with the imported goods. The second goal is to increase the rate of industrial goods in exports. in an export promotion strategy. There are three sources that put growth of a country into motion: import substitution. First two of these are related to international trade effects. Import Substıtutıon promotion strategy after an import substitution strategy (Edwards 1993). there are direct effects that operate via dynamic advantages – including higher capacity utilization and more efficient investment projects – and second. because less-developed countries actually have industries for such a production.Export Promotıon vs. export and the increase in internal demand. In other words. Generally. The indicator of EP is the increase of the rate of exports in GNP.
countries with a more volatile real exchange rate experienced poorer 1 2 This sections mostly draws on (Bruton 1989). But after a while.Export Promotıon vs. IMPORT SUBSTITUTION1. In such a regime the government determines the exchange rate. In short. 4 . For this. prices of the factors of production and interest rate. In general. In the early applications of IS strategy the governments used a fixed exchange rate policy. (Bruton 1998). The institution that will make this protection is the government. In general words. quotas but also via exchange rate. All of these cause a profound bureaucracy that will be harmful for the market. result in more rapidly growing GNP. Also known as inward oriented strategy or inward orientation. Import Substıtutıon through exports: more liberalized economies have faster growth of exports and these in turn. the local currency appreciates which in turn affects the balance of trade negatively. IS is a strategy that appreciates the local production via government intervention to the whole economy.2 (IS) Basically.” (Edwards 1993). a protection is needed. The government can do this not only via tariffs. this is a government intervention to the market. import substitution is substituting the imported goods with the locally produced goods in order to meet the internal demand.
internal and external price levels differ so much in value. The absence of competition with the foreign industries is tried to be remedied by the government. The interest rate is also determined by the government. the policies used in an IS strategy closes the country’s economy to the rest of the world. But in inward oriented countries the government. which in turn destroys the resource allocation of the economy. In outward oriented countries interest rate. But in practice the results are opposite to this view. a need 5 . In short.Export Promotıon vs. and it is determined under the market equilibrium level. However the interest rate puts savings into motion and diversifies investment between different economic activities. When starting an IS strategy it is supposed that the protection is temporary. but this in turn destroys the economy further and further (Bruton 1998). interest and exchange rate are repressive. Since the industries to protect are not chosen via appropriate competition criteria. because it is assumed that the protected industry will in turn progress and will able to compete with the foreign industries. determines these values (Bruton 1998). inflation and exchange rate are determined in the market. Because of the high protection levels. The policies on price. By this way the investment is promoted in order to support the firms. Import Substıtutıon overall performance than those nations that had managed to maintain a more stable real exchange rate (Edwards 1993).
In practice IS strategy is applied to consumption goods. the local industries may develop in order to compete with the foreign industries during an IS strategy. Furthermore the firms that will produce such consumption goods are the ones that do not need a progressed technology. because there is an interval demand for these goods. However there is no need for an appropriate price level in a closed economy. And this results in an undesired ways. It is thought that the most attractive part of the IS strategy is the decrease in the foreign currency expenditures and hence the decrease in the trade deficit. 6 . In able to compete with the foreign industries. But the competition with foreign industries is not such an easy process because it requires high levels of knowledge. ability and tentative. Moreover. Nevertheless IS strategy is attractive for developing countries. This is the easy part of the IS strategy. firstly the price level must be appropriate. The goal of the production in an IS strategy is to serve the internal demand. This is not by accident. That is to say. such as high production costs. there may be problems in returns to scale. Moreover it is believed that IS strategy involves alternative policies such EP policies.Export Promotıon vs. Import Substıtutıon for a permanent protection appears.
As noted above. This is a foreign investment and some may think that it must be appreciated. but it must be kept in mind that these investments do not have a high level of contribution to the country. The aim of including intermediate goods is to form a basis in producing high level of technology. There are two alternatives for the second stage: one is the export promotion and the other is to upgrade the production structure in able to produce intermediate goods. Since the internal industry is protected by the tariffs and quotas. First stage of an IS strategy is to produce consumption goods inside the country. and then it enlarges by including intermediate goods. which in turn raises the level of trade deficit. Before introducing EP strategy some criticisms about the IS strategy may be covered. Import Substıtutıon IS strategy is evaluated as the process of modernizing the local economy and reaching the level of developed countries. IS strategy comes to the picture with consumption goods. 7 . Because the countries that use IS strategy import intermediate goods in order to produce high technology goods.Export Promotıon vs. Some of these were mentioned above. IS strategy is the foreign (importer) industries’ disadvantage. So these foreign firms may want to reverse this disadvantage by producing their final goods inside the countries that applies IS strategy. So these foreign firms may produce their products without any quota. It is an easy way because there are approximately no barriers for intermediate goods.
Since the exchange rate appreciates in order to protect the internal industries locally produced goods become relatively expensive for foreign countries. The local produces. We had mentioned that the IS strategy starts with the production of consumption goods. which is in turn harmful for the allocation of resources. This in turn damages the exports and worsens the trade balance. This in turn leads the country (that applies IS strategy) to borrow money in order to finance the trade deficit. IS strategy has a negative effect on exporters. there is high level of prices and low quality of goods at the countries that apply IS strategy. This in turn makes the country dependent to foreign countries. This strategy reduces the import of final goods. Moreover if the level of the import of intermediate goods becomes large this in turn damages the trade balance. which is an undesired result. Both the decreasing exports and increasing dependence on foreign intermediate goods worsens the trade balance further and further. Import Substıtutıon Beyond the barriers. which know the absence of competition. This is a profound problem. Moreover there may be monopolizations in the absence of competition. 8 . but the danger is that there appears the need for import of intermediate goods in order to produce final goods inside the country. may not make any research and development.Export Promotıon vs.
which in turn brings industrialization into the picture. EXPORT PROMOTION3 (EP) Opposite to the IS strategy. which in turn remedies the returns to scale. facing the increasing competition. Import Substıtutıon By the time inward oriented countries begins to produce high technology goods. 3 Also known as export oriented strategy or outward orientation.Export Promotıon vs. A brief example of it is the changing structure of a country’s production from agriculture to industrialization. have to improve their technologies. So the industries at their childhood must be protected for a while (Balassa 1989). 9 . This means that the structure of the production function changes through a capital-using model. EP strategy promotes only the industries that has potential for developing and competing with foreign rivals. The main goal of the EP strategy is to prepare the “potential” industries for competition with the foreign rivals. Since the goal is to trade abroad. their quality continuously in order to compete with their rivals. Human capital is used less which in turn leads to unemployment problem. Exporters. there becomes competition. They have to make research and development studies (Bruton 1998).
FROM IMPORT SUBSTITUTION TO EXPORT PROMOTION As stated above most of the less-developed countries have begun developing by an IS strategy. had advantage of the IS strategy during 1960s.Export Promotıon vs. By this way the structure of the overall industry is in harmony with the country structure. the process of this shifting is not simple (Srinivasan 1999). The increase in exports raises the foreign exchange inflow. there may be an increase in import expenditures due to the increasing income of the country. 10 . Import Substıtutıon Comparative advantage theory implies that a country must specialize in the production that uses the mostly possessed factors of production. which in turn worsens the country’s trade balance (Srinivasan 1999). In practice the countries that apply IS strategy had to shift their strategies to EP strategy due to heft economic crisis. After these shifts these countries had developed faster than the others. and then they have followed an outward oriented strategy. If the country has advantage in human capital then the EP strategy may be a remedy to the unemployment problem (Bruton 1989). The indirect effect of the EP strategy appears in the export values of the countries. However. Especially the countries. However. which have a huge internal market.
Import Substıtutıon Countries. the human capital. are also needed. which apply traditional IS strategies. this kind of a subsidy may cause some further budget deficit. by the side of government. However. According to the IS strategy internal industries must be protected via some subsidies. Some structural changes in the real sector. Some other policies are used in order to terminate the discrepancy between the IS and EP strategies. In order to have trade openness these problems must be solved. make appropriate structural changes in order to trade. is prevented (Bruton 1998). such as improving productivity. Some of these problems are introduced below. because exporters do not have enough power in the foreign competition area especially at the beginning (Bruton 1998). Some other structural changes may be about the choice of appropriate technology. some problems appear during shifting to an EP strategy.Export Promotıon vs. Nevertheless. Some of these structural changes had to be about the exchange rate. By the same analogy exporters must be promoted too. The most important necessity for openness in trade is to have a flexible exchange regime. By this way the appreciation of the local currency. 11 . the appropriate allocation of resources and institutional rearrangements (Srinivasan 1999). which worsens the trade balance. These include protecting the exporters as much as the firms that produce substitutes for imports. Structural changes in exchange rate regime in not enough to promote exports.
the level of tariffs must also be decreased in order to have an appropriate environment for trade (Bruton 1998). norms and standards of the international goods. Furthermore. as a medium of protection. Outward orientation is not only increasing the exports but also opening all the goods and services to trade. Import Substıtutıon Tariffs. factors of production and exchange rates. But an EP strategy can be successful only via government support. Beside this. And getting rid of bureaucracy may be the pushing force of the exports (Adelman and Yeldan 2000). With a flexible (and probably high levels of) exchange rate is the new way of protection for the local producers.Export Promotıon vs. This is the only way of globalization. 12 . Moreover. is always less harmful than quotas. Outward oriented strategies necessitate the absence of government intervention to the price level. So the countries start trade openness by getting rid of quotas. This government support may be the training of the exporters. exporters must be enlightened about the qualities. structural changes in capital movements must also be made. the promotion of the export goods in foreign countries or a direct subsidy. Getting rid of (or a fall in) tariffs does not necessarily lead to unprotected local producers.
Import Substıtutıon There is still a debate that the EP strategy is the best one. Multi-country studies and cross-country regression analysis support this idea. 13 . Consequently. countries that have shifted their strategies from IS to EP have developed faster than others. Most of the economists of the current time agree that IS is not an alternative for EP strategy. as it was stated at the beginning of this section. but what is the alternative for EP? There is still a discussion on this subject.Export Promotıon vs.
Outward-Orientation and Development: Are Revisionist Right? Yale University. Handbook of Development Economics II: 1601-1644 • Bruton Henry J. Outward Orientations. Handbook of Development Economics II: 1645-1689 • Bruton H.Export Promotıon vs. 1993. Journal of Economic Literature XXXI: 13581393 • Srinivasan T. Import Substıtutıon References: • Adelman Irma and Erinc Yeldan 2000. Openness. 1989. and Bhagwati J. A Reconsideration of Import Substitution.N. Is this the end of economic development? Structural Change and Economic Dynamics 11: 95109 • Balassa B. and Growth in Developing Countries. 1989. 1999. Import Substitution. 1998. Trade Liberalization. Journal of Economic Literature XXXVI: 903-936 • Edwards S. Center Discussion Paper 806 14 .
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