Question

The consensus today is that import-substitution protectionist industrial policy has not served the developing countries' growth ambitions well. This fact proves that policies relying on export-driven growth are the "winning ticket" for these countries. Fully evaluate this statement

Answer 1

The import substitution strategy and export driven strategy are the two main strategies that countries adopt when they are into international trade relations with other countries.

The strategy of import substitution aims at reducing the amount of foreign goods. This is mainly done for giving an impetus to the new industries which has started operations. The strategy can be implemented in different ways. It can be done either by imposing a tariff or by giving a quota. Changing the exchange rate is also a method used for import substitution. As a result of import substitution thus new industries start to function in the country which also may give rise to the establishment of related industries. This will lead to economic growth.

On the contrary export driven strategy mainly aims to increase the export of goods and services to other countries. This strategy increases the competition and paves way for the improvement of production process as a result of the competition in the international market. It also creates more foreign exchange reserves.

As developing countries are concerned, import substitution policy is good at the initial stage and in the long run it is advisable to switch to export driven strategy. This is because in the short run import driven strategy can be instrumental in building a firm foundation for the budding industries. Once they are established they can switch to export driven strategy as it brings benefits in the long run. Once you adopt export driven strategy you will have to face the challenges and competition from the foreign markets. This will lead to the production of increased quality products and reasonable price. Moreover there will be continuous effort to increase the product by doing of research and development.

Thus, import substitution strategy is more effective in the short run than in the long run.