Question

5. International trade and development

Identify whether each scenario in the following table is an example or foreign aid, import substitution, or export promotion.

Scenario	Development Strategy
	Foreign Aid	Import Substitution	Export Promotion
After World War II, the Argentine government actively supported domestic production of textiles, leather, and home appliances in an effort to become more self-sufficient and less reliant on foreign goods.
In 1991 and 1992, the World Bank gave over 45% of its concessional assistance—grants or loans at a low interest rate—to the least developed countries.
In January 2007, the Pakistani government provided research and development support and loans to local textile companies that sold their products abroad.

Which of the following are common criticisms of import substitution? Check all that apply.

It reduces a country’s gains from specialization and trade.

Other countries could retaliate by instituting trade restrictions.

It reduces domestic saving

Answer 1

Answer

Scenario	Development Strategy
	Foreign Aid	Import Substitution	Export Promotion
After World War II, the Argentine government actively supported domestic production of textiles, leather, and home appliances in an effort to become more self-sufficient and less reliant on foreign goods.		Import Substitution
In 1991 and 1992, the World Bank gave over 45% of its concessional assistance—grants or loans at a low interest rate—to the least developed countries.	Foreign Aid
In January 2007, the Pakistani government provided research and development support and loans to local textile companies that sold their products abroad.			Export Promotion

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The common criticisms of import substitution are as follows;

It reduces a country’s gains from specialization and trade.

- The import substitution policy is taken to promote the domestic industries and to protect the domestic producers from foreign competition. The absence of foreign competition affects the efficiency in production of domestic producers, and thus specialization from trade gets hampered for import substitution. The inefficiency of production, diseconomies of scale, decreases the GDP of a country and thus reduces economic growth.

Other countries could retaliate by instituting trade restrictions.

The import substitution policy and trade restriction with high tariff rate, import quota etc. in a country restricts imports from foreign countries. The foreign countries may retaliate if their exports are restricted in the country that takes import substitution policy, and thus these countries may institute trade restrictions with the country that takes import substitution policy.

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