Import Substitution Policy vs. Export Led Growth Strategy

Developing countries promote industrialization through import substitution and export-led growth

Developing countries use two key ways to promote industrialization in their countries. The primary strategies utilized by emerging countries are import substitution and export-led growth. Import substitution industrialization, according to Rodrigues, is an economic theory used by rising nations to reduce their reliance on established countries. By completely developing the industrial sector, the strategy aims to protect local industries in developing countries. As a result, indigenous manufacturers compete favorably with imported goods from developed countries. Growing industries, according to the ISI hypothesis, become self-sufficient over time. In contrast to ISI, growth is driven by exports. Export-led growth is an economic strategy by developing countries to seek niche for an individual product in the global market (Kumar, 197). Industries producing the said product receive subsidies from the government making them be at a better position of accessing the market. The goal of the strategy is to import cheaply manufactured goods.

Trade in Latin America

Second World War II led to economic depression in most parts of the world. Both developing and underdeveloped countries were starting to experience financial distress. Many foreign markets were closed, and countries had to look for alternatives that would lead to economic development (Roberto, 1). ISI policies were initially implemented in Latin America where the intention was to create an internal market that would lead to the development of self-sufficiency. Power generation and agriculture sectors facilitated the success of ISI during its first stages. The governments promoted industrialization by subsidizing electricity generation and agriculture through reduced taxation and protection of trade policies. However, in the 1980s and 1990s, developing countries turned away from ISI. Change in attitude towards implementing of ISI policies was due to an insistence placed on the global market and program adjustments by the World Bank and IMF.

Success of ISI in achieving the goal of industrialization and economic growth

Countries which conduct import substitution report overall positive development regarding gross domestic product growth rate and investment rate. However, over the years countries report negative consequences of ISI. It is now globally accepted that most import substitution strategies become unsuccessful in most countries. Import-oriented industries become costly to operate as they rely on imports that do not require research and development. This is a major drawback for growing industries as it reduces the efficiency of the industries with time. It is further noticed that some companies that conducted import substitution policy are acquired by foreign companies reducing the private profits gained from the sectors. Finally, manufacturers specializing in consumer goods create demand for intermediate goods increasing the importation cost.

The role of macroeconomic policy in the success of export-led growth in East Asia

The macroeconomic policy focuses on inflation, unemployment, and budget deficits. Macroeconomists have further turned their focus on growth and development (Dash, 312). Macroeconomics played a fundamental role in the success of the export-led approach in East Asian countries. The macroeconomic policy and economic growth correlate depending on the external shocks. The ultimate goal of any economic policy is to ensure the global competitiveness of the country’s exports. The macroeconomic policy, therefore, supports the goal by providing the strategy that avails the instruments of achieving the particular goal. The macroeconomic policy provides grounds for offering incentives by the government while running high-level budget deficits. The investment-GDP ratio does not necessarily affect economic growth according to research done by Fischer in 1991. For example, the South Korean government adopted an industrial target policy with the objective of decreasing the investment-GDP. The results showed that the reduction in GDP investment did not affect the economic growth of the country. Because of an increasing number of investment projects in Taiwan and South Korea, there was an unclear association of Taiwan and South Korea. To get back on track, Taiwan had to rush to undertake investment projects. Macroeconomic goals were stepping stones in ensuring reduced inflation and decreased budget deficits in Taiwan and Korea.

Industrial policy in HPAE

According to Werner and Olson (54), East Asia has achieved high growth and equity. The results come from a combination of fundamentally sound development policies that do not necessarily arise from accumulated human capital. Making the East Asia miracle was not an easy task. The success is attributed to aspects of growth by the eight high-performing East Asian economies (HPAEs). Wonhyuk (74) considers HPAE as “the economies with strong growth and declining inequality.” Life expectancy has improved in these economies while the rate of people living in absolute poverty decreased to a lower level. Industrial policy is attributed to the success of East Asia. First, government intervention by supporting certain industries made it possible for industrial growth in these areas. Government intervention policies took many forms such as policies to promote investment with equity, restricting borrowing charges, and sharing information between private and public sectors (Won, 60). Government intervention attributed to higher and evenly distributed economic growth. Industrial policy also helped in maintaining a sustained rapid growth in HPAE. The HPAE governments were supportive to industries by increasing a broad range of financial institutions that offered financial support to the growing industry. To conclude, trade policy played a vital role in the success of HPAE. Many developing countries that have adopted industrial policy have tremendously succeeded in economic growth.

Works Cited

Alvarez, Roberto. “Productivity, Trade, And Development In Latin America”. Emerging Markets Finance And Trade, vol 51, no. 1, 2015, pp. 1-2. Informa UK Limited,

Dash, R. K. “Revisited Export-Led Growth Hypothesis: An Empirical Study On India”. South Asia Economic Journal, vol 10, no. 2, 2009, pp. 305-324. SAGE Publications, .

Kumar, Ganesh. “Export-Led-Growth Hypothesis: Further Econometrics Evidence From India”. Economic Affairs, vol 60, no. 2, 2015, p. 197. Diva Enterprises Private Limited,

Lim, Wonhyuk. “Chaebol And Industrial Policy In Korea”. Asian Economic Policy Review, vol 7, no. 1, 2012, pp. 69-86. Wiley-Blackwell,

R, Werner Kristjanpoller, and Josephine E. Olson. “Economic Growth In Latin American Countries: Is It Based On Export-Led Or Import-Led Growth?”. Emerging Markets Finance And Trade, vol 50, no. s1, 2014, pp. 6-20. Informa UK Limited,

Rodrigues, Mauro. “Import Substitution And Economic Growth”. Journal Of Monetary Economics, vol 57, no. 2, 2010, pp. 175-188. Elsevier BV,

Won,Yongkul,. “Export-Led, Or Import-Led Economic Growth?: Evidence From Major ASEAN Countries”. The Southeast Asian Review, vol 20, no. 1, 2010, pp. 41-70. Korean Association Of Southeast Asian Studies,