The basic advantage of the import substitution

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The basic advantage of the import substitution strategy is that it is less risky than export led strategy. Since the production capacity is being created to carter to the needs of the domestic economy, the risks elements are less compared to a position where the outputs are to be market abroad. However the main drawback of substitution strategy is that industries which would operate in highly protective environment would become inefficient and create a high cost economy. The strategy can work only for a finite period. Once the domestic economy is saturated, the strategy would cease to work. The export led-growth strategy is on the contrary outward oriented as it links domestic economies with the world. Instead of trailing growth by protecting domestic lacking comparative advantage, the strategy involves promoting growth through the export of manufacture goods . Export-led growth implies opening domestic markets to foreign competition . By implementing this strategy, countries hope to gain enough hard currency to import commodities manufactured more cheaply somewhere else. Countries such as Taiwan and South Korea, thanks to this strategy, have managed to achieve rapid economic growth by stimulating the development of industries that export their output. There are however, several undesirable effects . If the country has to import in very large
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quantities inputs for export production , the net benefit to the country may not be substantial . Fluctuations in the international markets and international policies can destabilize the domestic economy . In both situation, it has been argued that learning would contribute to industrial development however, import substitution advocates argue that import substitution contribute to industrial development through learning by doing while export-led growth advocates argue that trade contributes to the transfer of knowledge and technology . The major difference among the two is mainly that import substitution favors government intervention while export led strategy argues in favor of free trade and market-oriented development . Export-led strategies introduce international competition to domestic market which can encourage efficient companies and discourage inefficient ones, by creating a more competitive environment. They promote higher productivity and hence faster economic growth . On the other hand, since import substitution strategies rely on trade protection it tends to switch demand to products produced domestically. Exporting is then discourage due to the increased cost of imported inputs and the increased cost of domestic input relative the price received by exporters. Nevertheless, there are no reasons to say that the two strategies are mutually exclusive.
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  • Fall '01
  • Mussot
  • International Trade, import substitution, John D. Daniels, Lee H. Radebough

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