Strategy # 1. Merits of Import Substitution:
Under the policy of import substitution, the stress is on the substitution of domestically produced goods for goods previously imported.
In this view, the hallmark of a developed country is modern industry. Rather than importing steel, automobiles, TV sets, computers, and other such products, a country should produce them itself in order to develop the skills necessary for modernisation.
It should produce, in other words, all the goods it had previously imported from the industrialised countries; this is the road to development that most of the larger developing countries, including India, China and Brazil undertook in the post-Second World War period. At times these countries have undertaken import substitution to extremes, insisting. For example, and insisting on domestically produced computers when they might not be able to perform the functions of imported computers.
Import substitution strategy saves scarce foreign exchange, improves the terms of trade to some extent and creates jobs and incomes in a labour-surplus country like India. But it has certain drawbacks also.
Drawbacks:
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Trade barriers set up to protect domestic firms can end up protecting inefficient producers, the absence of foreign competition means that there is an inefficient spur to innovation and efficiency. The profits to which trade barriers frequently give rise provide a source of government corruption. And the trade barriers remain years after they are introduced.
(i) Negative value addition:
In some cases the value addition made by the protected industry is actually negative. It is because costly capital goods are to be imported. For instance, it is often cheaper to import cars that to import components and assemble cars. Of course, with protection car manufacturers of developing countries are able to make profits. But consumers suffer since they have to pay higher prices.
(ii) Inefficiency:
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Trade protection to stimulate import substitution generally leads to massive inefficiencies. This is usually the case when the protected industry is one like steel, which supplies inputs to a large number of other industries. Manufacturing cars in a less developed country (LDC) might be profitable if the company could purchase steel at international prices.
But if it is forced to pay inflated prices to buy domestically produced steel, it cannot compete with foreign producers. The government might try to offset this by subsidising the car manufacturers. A subsidy or trade protection in one sector thus grows into a complex of subsidies and trade protection in other sectors.
However, supporters of import substitution argue that many of the most rapid bursts of growth of the current developed countries occurred in war times, when the economy was inwardly directed, not export oriented. Looking at the experience of Japan they argue that at least for industrial goods, import substitution — the development of domestic market — must precede exports.
Strategy # 2. Export-Led Growth:
One factor that distinguishes the countries of East Asia from less successful LDCs is their emphasis on exports. A growth strategy focusing on exports is called export-led growth. Firms are encouraged to export in a variety of ways. They are often given increased access to credit, often at subsidised rates.
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Under this strategy firms produce according to their long-term comparative advantage. This is not current (static) comparative advantage based on acquired skills and technology, and recognition of the importance of learning by doing, i.e., of improvement in skills and productivity that comes from production experience. With exports, demand for the goods produced by a developing country is not limited by the low income of its people. The whole world is virtually its market.
Merits of the Strategy:
There are certain advantages of the strategy of export-led growth. These are the following:
(i) Economic efficiency and modernisation:
Advocates of export-led growth also believe that the competitive environment created by the export market is an important stimulus to efficiency and modernisation. The only way a firm can successied in the face of keen international competition is to produce what consumers want, at the quality they w.ant, and at the lowest possible costs. This growing competition forces specialisation in areas where low-wage developing countries have a comparative advantage, such as, labour-intensive products.
(ii) Cost reduction:
Export-led strategy forces firms to look for the best ways of producing. International firms (multinational corporations) often take the lead in showing domestic firms how to increase production efficiency.
(iii) Transfer of technology:
Finally, export- led growth often facilitates the transfer of advanced technology. Producers exporting to developed countries not only come into contact with efficient producers within those countries; they also learn to adopt their standards and production techniques. They come to understand better, for instance, why timeliness and quality in production are important in an era of globalisation and information revaluation.