Question

1. What is the policy of import substitution? Has this policy worked for the developing countries? If not, what are the problems of this policy?

2. Mention any two benefits of export promotion policy.

Answer 1

1. Most LDCs have for various reasons ignored primary-export-led growth strategies in favor of development strategies for import substitution (IS). Such policies are aimed at promoting rapid industrialisation and, thus, growth by erecting high barriers to foreign goods to promote domestic production. A policy package, known as import substitution (IS), consists of a wide range of regulations, limitations and prohibitions such as import quotas and high import tariffs.

The trade restrictions are meant to "protect" domestic industries in such a way that they can achieve comparative advantage and replace domestic goods with goods previously imported. IS policies are primarily based on the belief that economic growth can be accelerated by aggressively moving economic activity towards manufacturing away from traditional agriculture and resource-based sectors of the economy.

Obviously, the wide range of tariffs, quotas and outright import bans which are part of IS policies are not a form of protection for the infant industry. The claim in the infant industry notes that sectors and industries which can reasonably be expected to gain comparative advantage should be covered after some time of learning.

2. In any industrialization policy, job creation is a major consideration. Export-oriented companies are consuming labor in this regard, thereby helping to reduce a country's unemployment problem. Workers will be directly employed, for example, in a specific export promotion sector, as well as indirectly in related industries such as transport and insurance.

Because the export promotion industries have a broad market, they are able to make full use of the existing plant capacity. They can take advantage of the large-scale production in this way. This will result in lower costs for the production.