The decision on whether to employ import substitution or export promotion to enhance economic growth has been tough especially in developing countries. The two alternatives are both competitive in their own sense. Therefore, the decision on which strategy is to be used is usually dependent on a country’s objectives. Import substitution involves replacing of a country’s imports with goods and services that are produced domestically (Sawyer and Sprinkle, 2009). This strategy leads decrease in a country’s dependence on imports. Economists have associated import substitution with development of nascent domestic industries. Export promotion on the on the other hand entails the use of incentive programs to promote a country’s export while encouraging firms and industries to participate in export related activities (Sawyer and Sprinkle, 2009).
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Comparing and contrasting economic development based on import substitution and export promotion
Both import promotion and export substitution have been used to encourage economic development in various countries. Import substitution has been used to reduce foreign dependency and to encourage development of infant industries (Sawyer and Sprinkle, 2009). Industrialization in a country leads to creation of employment thus curbing the problem of unemployment. Import substitution reduces the vulnerability of a country towards drastic changes in the international trade scene. Moreover, import substitution increases the variety goods and services available for consumers choose. By use of this strategy, a country is able to reduce the expenditure of foreign reserves on imports. The foreign currency saved can therefore be used for other development projects. Various policies are used to encourage import substitution such policies include:
- Government subsidies in certain economic sectors
- Trade protectionism
- Increased taxation to fund the process of developing internal industries.
The use of import substitution strategy was once adopted by the Latin American countries to reduce external dependence and to increase employment opportunities in these countries (Mehdi, 2005).
However, the use of import substitution as a means of encouraging development has been widely criticized. This because most of the substitution is usually capital intensive and therefore contributes very little towards reducing some of the economic challenges facing a country. For protection purposes, capital is usually drawn from areas of competitive advantage to areas of high profits. This in turn leads to reduced growth in areas of competitive advantage. Eventually these economic areas collapse. Protectionism also leads to lower competition among industries this leads to lower standards and poor consumer goods and services. The use of import substitution strategy was abandoned by the Latin nations when they realized that it slowed down the rate of economic development in the countries (Mehdi, 2005).
Export promotion has also been used to encourage economic development. Like import substitution strategy, this strategy also emphasizes on industrial development. Development of industries in this strategy is encouraged for the purpose of increasing export trade in a country (Sawyer and Sprinkle, 2009). By using export promotion strategy, production capacity of countries increases, this in turn leads to development of larger and more efficient industries to carter for the needs of consumers within both the country and those outside the country. Unlike in the import promotion, development of industries in this strategy is through exposure to international trade and not due to the government protectionism. In developing countries, the export of labor-intensive commodities is considered as a good strategy in economic development (Mehdi, 2005).
Most industries in these countries can therefore be developed by substituting capital with labor and thus reducing the general cost of production. A reduction in cost of production will lead to cheaper goods that will encourage exports. Export promotion like import substitution has great influence in a country‘s foreign exchange reserves. But unlike in the import substitution where the existing reserve is saved, in export promotion the foreign exchange reserve increase due to increase in the amount of international trade being undertaken. A successful export promotion strategy creates employment just as import substitution does. Moreover, it increases the availability of consumer goods and services within and outside a country’s borders. Therefore, a good export promotion program encourages economic development. Various methods are employed to ensure export promotion is successful. These strategies include the use of incentives, establishing of export protection zones (EPZs) and the use of subsidies.
Like import substitution, export promotion is not without criticism. Economists argue that by encouraging export activities a country is exposed to the international market competition. The competition provided by the international industries may affect the nascent industries that are exposed and without protection. This leads to a loss in the future comparative advantage of the infant industries. Such a loss may lead to poor economic development in the future (Mehdi, 2005). Therefore, the use of export promotion leads to exposure of a country’s economy to exogenous forces that may lead to crises and economic instability. A good example of such a crisis is the global recession that occurred between 2007 and 2010. This global economic recession was caused by over-dependence on export trade and it affected many economies in the world.
The use of either import substitution or export promotion to facilitate the economic development of a country has its merits and demerits. While import substitution provides protection to nascent industries, export promotion exposes these infant industries to competition. Both methods can be used to encourage industrial development thus encouraging economic development.
Mehdi, S. (2005). Trade Policy at the Crossroads: The Recent Experience of DevelopingCountries. London: Macmillan.
Sawyer, W. and Sprikle, R. (2009). International Economics. Upper Saddle River, NJ: Pearson Prentince Hall.