Question

Discuss the relative merits of import substitution versus export promotion.

Answer 1

Import substitution is an inward looking strategy i.e the production of goods at home that would otherwise be imported.it economises scarce foreign exchange and ultimately generate new manufactured exports without difficulties associated with the exports of primary products .The strategy uses tariffs, import-quotas and subsidies to promote and protect import-substitute industries.

export promotion an outward looking strategy emphasises participation in international trade by encouraging the allocation of resources in export-oriented industries without price distortions. policy measure such as export subsidies, encouragement of skill formation in the labour force and the use of more advanced technology, and tax concessions generate more exports,

merits of import substitution

1 The market for industrial product already exists, as evidenced by imports of the commodity. So risks are reduced in setting up an industry to replace imports.

2. It is easier for countries to protect their domestic market against foreign competition than to force developed nations to lower trade barriers against their manufactured exports.

3. Foreign firms are induced to establish so-called tariff factories to overcome the tariff walls of countries.

benefits of export promotion

1) long term comparative advantage- dynamic comparative advantage, based on acquired skills and technology, and recognition of the importance of learning-by-doing of the improvement in skills and productivity that comes from repetitive performance and production experience

2) demand from huge market : increase in market base for a firm as compared to domestic market only

3)in export-led growth the competitive pressure generated by the export market is an important stimulus to efficiency and modernisation.

4)economies of scale.: The expansion of manufactured exports is not limited by the growth of domestic market. This is particularly important for many developing countries that are both very poor and small.

5)Production of manufactured goods for export requires and stimulates efficiency throughout the economy.

6) technological enhancement : Producers exporting to developed countries not only come into contact with the efficient producers within these countries but also learn to adopt their standards and production techniques.

Finally it seems that the two trade strategies—import substitution and export promotion—are not mutually exclusive. They may go hand in hand and may reinforce each other. So, what is called for is a strategy which seeks to combine the virtues of the two strategies. a blend of two can really work in certain situtations.