Industrialization Strategy
Export Promotion vs Import Substitution
From
Prof. M. Sajidin
Industrialization Strategy:
Export Promotion vs Import Substitution
In order to promote industrialization as well as remove trade
deficits two types of policy measure are advanced by the
economics and planners, like
1. The export sector be promoted or
2. The substitute of import be produced
Industrialization Strategy:
Export Promotion vs Import Substitution
Arguments in favour of
Import-Substitution (IS) Strategy
1. Self-sufficiency
2. Historical Proof
3. Primary Goods Export, their limited Demand
and Shrinking Markets
4. Protection to Infant Industries
5. Inflow of Foreign Capital
Industrialization Strategy:
Export Promotion vs Import Substitution
Arguments against
Import-Substitution (IS) Strategy
The economists like Little, Tibor Scitovsky, Maurice, Scott, Kirkpatrick and Dornbushe
etc. are of view that the IS strategy for industrialization has been largely
unsuccessful. In this respect, they advance following reasons:
1. The inefficient production is permitted in the name of IS on the basis of tariff
walls and reduced competition.
2. The foreign firms (MNCs) are the biggest beneficiaries of IS policy who work and
earn heavy profit under tariff walls and take the advantage of liberal tax and
investment activities. After having deducted interest, profits, royalty and
management fees, most of which are remitted abroad. Whereas a little amount
which is retained by foreign firms in the host countries is use to benefit their
domestic counterparts, the domestic wealthy industrialists, the political and
bureaucrats etc.
Industrialization Strategy:
Export Promotion vs Import Substitution
Arguments against
Import-Substitution (IS) Strategy
3. The IS has been made possible by the heavy and often government subsidized importation
of capital goods and intermediate products by foreign and domestic companies.
4. The policy of IS is followed on the encouragement of local manufacturing through
importation of cheap capital and intermediate goods. For this purpose the exchange
rates are artificially over valued. This has the effect of raising the price of exports and
lowering the price of imports in terms of local currency. As in Pakistan during the fixed
exchange rate regime the free market exchange rate, between Rs. And $ was 20 to 1,
whereas the official exchange rate was 10 to 1. an item that cost $ 10 in US could be
imported in Pakistan for Rs. 100/- (excluding transport costs and other service
charges). While in the presence of free market exchange rate same good would cost Rs.
200/ in Pakistan. Thus by means of an ‘over-valued exchange rate, LDCs governments
are able to lower the domestic currency price of their imports. At the same time, their
export prices are increased. For example, at an exchange rate of 10 to 1, US importers
would have to pay 10 cents for every 1 rupee item, rather that the 5 cents in the
presence of exchange rate 20 to 1.
The net effect of overvaluing exchange rate in the context with IS policies is to
encourage capital intensive techniques of production to modernize the industrial
Industrialization Strategy:
Export Promotion vs Import Substitution
Arguments against
Import-Substitution (IS) Strategy
5. Although the IS policy is highly justified on the ground of stimulating
infant industry growth and self sustain industrialization by creating
‘forward and backward’ linkage effects. But the fact is there that so many
infants go on growing up under the shield of tariff walls and go on
availing the benefits of ‘infants’. This will lead to inefficient resources
allocation and production. Again, the IS policy of industrialization will be
least beneficial in respect of ‘Self-Reliance and Self-Sufficiency’ if the
import substituting industries go on purchasing their inputs from
overseas sources of supply than through domestic suppliers.
