Strategies 1

Import substitution

To reduce domestic consumers’ dependence on imported goods, for which they substitute domestic goods and services, thus promoting the development of domestic industries.

AD

• Greater diversity of economic activities.
• Supply-side improvements as a result of investment in health care and education.
• Protectionism gives existing industry a breathing space to grow and opportunity for infant industry to achieve economy of scale.
• Protect jobs: higher employment (domestic firms dominate, because lack of foreign competition).
• Protects domestic firms from MNCs’ power & possible bad influence.
• Protects local culture / social habits by isolating domestic firms from foreign influence.

DIS

• Over-expansion of G (government overspending & debt crisis made Latin American governments unable to repay loans in early 1980s).
• Inability to benefit from free trade.
• Inefficiency in domestic industries & growth of inefficient domestic monopolies.
• Retaliatory protectionism from other country.
• Creates a more powerful domestic elite. (Monopolist)
• Newly established industries are often “capital intensive”: employ “inappropriate technologies”

Export promotion

Strategies to encourage economic growth through increased international trade and the promotion of export industries.

Policies:

• Protectionist measures: Tariff / quota / Subsidy / administrative / & ER devaluation
• Liberalized trade: open up domestic market to foreign firms, rising competitiveness
• Liberalized capital flows: reduce restrictions on FDI
• **A floating ER **
• Investment infrastructure
• Deregulation & minimal government interaction.

AD:

• Rising export increases AD & fuels growth.
• Focusing on simple & non-durable manufactured products changed structure of economy.
• Increase employment for rural migrants. (mostly labor intensive)
• Export earnings alleviate BoP problems
• Focusing on large export market forces firms to grow in size & acquire EoS
• International competitiveness provided stimulus for firms to learn technologies
• Acquire skills in marketing / finance / management / entrepreneurship

DIS:

• Vulnerability resulting from dependence on foreign markets
• Difficulties with access to foreign markets
• Necessary conditions: need a vital role of state but government intervention may slow down growth.
• Problems with attracting multi-national corporation. (Fear of MNCs becoming too powerful)
• Worsen income distribution: income inequality
• Usually need to maintain ER: artificially undervalued
• Policymakers may ignore costs of environmental degradation

Trade liberalization

The removal or reduction of trade barriers that block free trade between countries. It involves elimination of tariffs, quotas, subsidies and administrative legislation.

Diversification

A strategy to reduce reliance on the export of a narrow range of exports by reallocating resources to a wider range of industries.

AD

• Allow to achieve structural change, from primary sector to secondary sector
• Avoid from volatile changes in price of product
• **Increase export revenue **

DIS

• Not beneficial to global resource allocation
• Firms are not allowed to take the advantage of economic of scale
• May lead to structural unemployment

Exports diversification

A policy initiative to move away from commodity concentration of exports, when a country, instead of relying on only a few commodities to export, tries to export a bigger variety of goods & services.

• Diversify national output: in order to reduce reliance on a narrow range of commodities, many LDCs are pursuing X diversification by venturing into production of manufactured & semi-manufactured products.
• Invest in human capital: better-educated workers can attract foreign direct investment, which acquire capital and technology, so manufactured products may increase in production.

AD:

• Allow to achieve economic structural change. (Primary changed to manufactured)
• Avoid / protect from volatile changes in price of products.
• Stabilize / increase export revenue
• Stabilize / increase employment
• Avoid long term declines in commodity terms of trade (Average export price / Average import price)
• Avoid MDCs trade barriers (agricultural subsidies)
• Reduce vulnerability to export shocks (e.g. bad weather)
• Rising technology use & skill development (increases demand for highly skilled workers)

DIS

• can’t improve productive efficiency & output
• can’t improve global reallocation of resources
• can’t take advantage of economy of scale