Question

1. What are the basic features of import-substitution industrialization?

2. How is an outer-oriented development strategy different from import substitution?

3. According to Krueger, what are the key reasons why trade liberalization has given a boost to economic development in countries that used to pursue import-substitution policies?

4. Does the author agree with the view that import-substitution has short-run costs but long-term benefits? Why or why not?

5. According to Krueger, what does it take for trade liberalization to be successful?

6. While the author emphasizes the benefits of trade liberalization, this policy is likely to involve cost as well. What do you think are some of these costs?

Answer 1

The policy of import substitution industrialisation is mainly adopted by the developing economies . It is an economic policy with the primary objective of replacing foreign imports with domestic production. The main aim of this policy is to reduce the foreign dependancy by increasing local production. The main features of this policy are

1. There will be policies to protect the industries producing the substitutes.

2. Incentives will be given to encourage capital and technology imports which helps manufacturers in the production process.

3. Protective barriers to trade will be implemented.

4. Foreign direct investment will be discouraged.

An outer oriented development strategy is different from import substitution mainly in one aspect. It encourages the production and export of goods in which the country has a comparative advantage . Outer oriented development strategy encourages free trade and free movement of capital and labour.

The trade liberalisation policy has given a boost to the developing economies by enabling them to pursue an export led growth strategy, free capital mobility, a floating exchange rate and investment for providing infrastructure

The author didn't agree with the view that import substitution has long term benefits. With the controls over foreign trade there arouse foreign exchange shortage. There were balance of payment crisis as the export earnings failed to grow. The rate of inflation also increased .

The success of trade liberalisation depends on the nature of the economy. If there are labour market flexibilities then trade liberalisation can be successful. When there is flexibility it is easier for an economy to change the nature of production.

There are certain costs involved with trade liberalisation . One among them is structural unemployment. This scenario occurs when there is a shift in the nature of production. It also involves environmental costs . Trade liberalisation may lead to greater exploitation of environment. Last but not the least , it may hinder the development of infant industries