Developing economies are usually in a serious policy dilemma on whether to promote exportation or to discourage importation as a strategy to growth. The two strategies attempt to empower the national economies but with major differences in terms of objectives, procedures and the long-term effects. The right balance between the two policies has been one of the most controversial in development economics.
The process of Import Substitution.
Import substitution refers to an economic strategy whereby efforts are made to turn off the reliance on foreign products through local productions. A government doing this policy usually applies tariffs, quotas or bans on imported goods and offers subsidies and protection to the local industries. The primary objective is to develop infant industries till they become competitive.
In the short-run, import substitution can be used to facilitate local industrial capability as well as creating jobs. But with time, too much protection can lead to inefficiencies, inability to be innovative, high costs of production and consumer choice. Domestic industries might not be able to increase productivity and quality without being exposed to the global competition.
Concept of Export Promotion
Export promotion is also the opposite because it aims at promoting local companies to compete within the global markets. This approach focuses on enhancing productivity, quality and efficiency in such a way that local goods can be sold in the world market. Governments that implement the export promotion policies are heavy investors in infrastructure, education, technology as well as trade facilitation.
Export promotion has the ability to bring foreign exchange earnings, creation of employment and incorporation of the economy into the value chains of the world. Nevertheless, it also opens domestic industry to competition at the international level, and therefore makes economies susceptible to the vagaries of the world market, trade barriers and economic shocks.
The Export Promotion and Import Substitution: A Comparative View.
It is not whether to adopt export promotion or an import substitution, but it is the trade-offs between them that is debatable.
The importation of products replaces the local industries and could lead to inefficiency.
Export promotion is more competitive and needs high institutional capacity.
Import substitution is concerned with local markets whereas export promotion is concerned with the international market.
Export-led growth is usually much quicker to achieve economic growth and is more exposed to external risks.
It has been historically proven that both of the policies are not always successful. The results are subject to the quality of governance, market size, availability of resources, and the economy of the world.
Paths to Industrialization
The import substitution became the method of industrialization of many developing countries in the midst of the 20th century. Although there were countries where people have early industrial growth, there were other countries which experienced stagnation as a result of inefficiencies. Conversely, the nations that embraced the export-based models of growth specialized in producing goods to the outside world and grew fast in terms of industrialization and earnings.
These opposing experiences point out that ideology alone is not enough to be export promotion and import substitution the determining factor in the success of export promotion and import substitution.
The Dual Approach: Integrating Export Promotion and Import Substitution.
Over the past several years, a number of economists have proposed a policy that incorporates both export promotion and import substitution, or a balanced/dual approach. This strategy helps in upholding the domestic industries to substitute some imports at the same time stimulating the firms to venture into foreign markets.
A good dual strategy will be able to:
Less overdependence on imports.
Enhance internal supply chains.
Increase export earnings
Enhance economic stability.
Nevertheless, to undertake such strategy, policy coordination, flexibility, and evaluation have to be carried out to prevent policy contradictions.
Conclusion
Decision on whether to promote export or to substitute imports is a dilemma that is still unsettled in developing economies. Governments need to consider them as complements to each other rather than opposing strategies. An eclectic blend of the two policies, adjusted to the national interest and the world facts, is capable of fostering a sustainable growth, industrial advancement, and the stability of the economy in the long term.