Import Substitution and Export Promotion: What are they?

a presentation by Anas Rahman Chowdhury

Import Substitution
● also known as import substituting industrialisation is a trade strategy where a
country manufactures simple consumer goods for the domestic market to
promote domestic industries
● goods like shoes, textiles, beverages etc can be examples of such goods
● this measure depends on protective measures that prevent the entry of imports
that compete with domestic producers
Real-life Examples of Countries Using Import Substitution

● in the 1950s and 60s, Brazil adopted such a policy to promote economic development; they
aimed to reduce reliance on imported manufactured foods and develop their own industrial
base
● this measure saw the growth of the automotive, steel, and consumer goods industry in Brazil
● another example can be seen in the form of India; after independence, the government
pursued this strategy in order to reduce reliance on foreign imports, promote self sufficiency
and build an industrial base in the nation
● India used high tariffs on imports, licensing requirements and the development of key
domestic industries to achieve their goals
● this resulted in the establishment and growth of industries like steel, heavy machinery and
manufacturing
Pros & Cons of Import Substitution
● it allows for the domestic country to reduce its dependency on foreign nations
for the goods and services it requires
● the excess protection of domestic firms disincentivizes efficiency and results in
resource misallocation
● this policy results in the growth and development of domestic industries
● exchange rates become overvalued and this results in the worsening of the
current account balance of payments
● import substitution allows for the domestic country to diversify its economy
● this policy, if misused, results in the neglect of agriculture, and thus the
worsening of the country’s primary sector
Export Promotion
● it’s a growth and trade strategy where a country attempts to achieve economic
growth by expanding exports
● it is also based on strong government intervention
● this is justified by the notion that this is necessary to help countries develop a
strong manufacturing sector oriented towards exports
Real-life Examples of Export Promotion
● South Korea used this policy in the 1960s and 70s; they provided incentives and
support for industries to focus on producing goods for export markets
● successful industries included electronics, automobiles, and shipbuilding
● Deng Xiaoping’s reforms during the 1980s and 1990s resulted in China’s growth;
Special Economic Zones were created to attract foreign investment
● Xiaoping’s reforms resulted in China becoming the ‘world’s factory’ with huge
shares in global exports in numerous sectors
Pros & Cons of Export Substitution
● this policy allowed expansion into foreign markets, and allowed firms to exploit
economies of scale to their advantage
● exporting countries become overly dependent on exports, and in events like
recessions, exports may fall and result in harmful effects on the exporting
country
● adopting such a policy results in the improvement of the current account
balance of payments for the country, as exports of the country increases
● strong exports over a long period of time could result in trade deficits for
trading partners, which could result in trade protection by the trade partners
who feel threatened by excessive imports