By: Fakhar Bokhari & Mansoor Ahmed
The
article is based on the critical study of two industrialization strategies that
is Import
Substitution and Export Promotion.
Basically,
import substitution is substituting the imported goods with locally produced
goods in order to meet the internal demand. It is done through government
intervention through tariffs, quotas, exchange rate, prices of the factors of
production and interest rate. In short, Import Substitution is a strategy that appreciates
the local production with the help of Government intervention to the whole
economy.
Since
1950’s and 1960’s, Pakistan adopted import substitution strategy as its trade regime.
This strategy was adopted because after the independence, Pakistan’s economic
conditions were very vulnerable. In early developing countries, development
comes into the picture through substituting the imported goods by locally
produced goods.
Most
of the less-developed countries have begun developing by an Import Substitution
strategy in order to reach a level at which it can compete with foreign industries
in all over the world.
Later
on they have followed an outward oriented strategy. Especially the countries, which
have a huge internal market, had advantage of the Import Substitution strategy
during 1960s. Practically the countries that pursue Import Substitution strategy
had to shift their strategies to Export Promotion strategy due to heft economic
crisis. After these shifts these countries had developed faster than the others.
Due to this reason, Pakistan switched to export promotion strategy in 1970’s.
This
strategy is adopted in order to prepare the “potential” industries for
competition with the foreign rivals. Exporters, facing the increasing
competition have to improve their technologies and their quality continuously
in order to compete in the International market.
The
Export Promotion strategy may be a remedy to the unemployment problem if the
country has advantage in human capital. Furthermore, foreign direct investment
(FDI) as a growth-enhancing component has received great attention of developed
countries in general and less developed countries in particular in recent
decade. It has been a matter of great concern for many economists that how FDI
affects economic growth of the host country.
The
investments are financed solely from domestic savings in a closed economy having
no access to foreign saving. In contrary, open economy investments are financed
both through domestic savings and foreign capital flows, including FDI. Foreign
direct investments facilitate investment-receiving countries to achieve
investment levels beyond their capability to save.
Now
the questions arise:
Why
do various countries develop more than others?
Is
there any International trade strategy playing a role on this?
IMPORT
SUBSTITUTION MAIN STRATEGY TOOLS:
TARIFFS
A
tariff is a percentage that is applied to the value of an imported item with
the resulting sum of money going to the government. A tariff raises the
effective price of a commodity above international levels.
Assumptions:
(Implicit)
·
Competitive markets
·
P* (World price) is independent of
domestic strategy.
Suppose
that a tariff of t% is imposed. It will have an effect of increasing international
price (as perceived by buyers) to the level
P*(1+t/100)
EFFECTS:
1. Demand falls to point D.
2. Domestic supply is larger, at the level C.
3. Import falls to CD from AB.
4. Buyer’s loss: they pay higher Prices.
5. Sellers gain: they obtain higher prices.
6. The government obtains tariff revenue.
_____________________________________
QUOTAS
(Often
combined with tariff) A quota is the stipulation of a maximum quantity on a
particular good, above which no more of that good can be imported into the
country.
For
the purpose of comparison with tariffs we are going to impose a particular
quota. Recall that the amount imported after the tariff t, was CD. Let us
choose precisely this quota.
EFFECTS:
1.
The equilibrium domestic price is the same as with the tariff.
2.
The domestic production levels are the same as well,
and so is the amount of imports.
____________________________________
COMPARING TARIFF
AND QUOTA
EFFECTS:
1. Tariffs and quotas are equivalent in this
example.
2. Except that they allocate purchasing
power
differently to the buyers and the Government.
______________________________________
After conducting a detail study over import
substitution and export promotion, we are able to conclude that the development
of any economy depends on the utilization of both foreign and local resources.
Import substitution has proved as a successful strategy in past because in
early developing countries, development comes into the picture through
substituting the imported goods by locally produced goods. This strategy was
also followed by the vetos as this is the only way through which the local
industry could grow and prosper. Most of the less-developed countries have
begun developing by an Import Substitution strategy in order to reach a level
at which it can compete with foreign industries in all over the world.
Later on they have followed an outward
oriented strategy, especially countries having a huge internal market. Due to
this reason, Pakistan switched to export promotion strategy in 1970’s. This
Strategy is adopted in order to prepare the “potential” industries for
competition with the foreign rivals.
After working on this area we recommend that
the government should create a mix strategy in order to increase growth and
development of our country.
To increase the production and the quality of
the products they should give incentives in the form of reductions over the
imports of plants, equipments, machinery and other raw materials. In this way,
local market would flourish as the domestic consumers would opt for the
products that are locally produced.
They should focus over export promotion
strategy because this strategy expands trade beyond market-determined limits.
This strategy lumps together under the classification of outward
orientation, in contrast to inward orientation that is
used to describe import substitution strategy.
We should also focus over such trade regime
that encourages foreign direct investments as unfortunately in the recent years
due to economic instability we had lost a number of investors which were ready
to invest in some big projects planned by the Govt. of Pakistan.
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Article dated: August 2009.
