Import substitution indicates one country adopt many approaches that create high barriers to some foreign final goods in order to protect domestic industry. There are some countries in favor of import substitution development strategies especially before the 1970s. This is a government intervention to the market, could protect local infant industry and production. Gradually, domestic goods will substitute foreign goods in markets and more industrial companies will be built. In practice, politicians of developing countries often provide domestic corporations additional protection through many development strategies. By adopting import substitution strategy, country still can increase domestic employment, reduce stress in the face of global economic shocks such as economic recessions and depressions, cut in transportation fee of goods, and decrease in the trade deficit.
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Historically, countries which followed the import substitution strategy built up several manufacturing corporations to produce goods that imported former. But some of them are inefficiency small companies. Initially, they produced light consumer goods such as textiles, and then focused on iron and steel. But followed the historical cases, regulations can be found that some countries with large populations or high living level in Latin America were most successful by adopting import substitution policy. For instance, Brazil, Argentina, Mexico, Chile, Uruguay. But any other poorer and smaller countries such as Honduras, Ecuador were not successful by adopting import substitution strategy, import substitution in most East Asian country in the 1960s were not successful either. Now, Let us take a look at previously successful case about import substitution strategy in Mexico. As a developing country, Mexico started to adopt import substitution strategy during the Great Depression of the 1930s which as a result of domestic industry protection. After the Second World War, this strategy was strengthened, industrialization had become explicit. In the 1950s and 1960s, Mexico raised trade barriers to another high level. During that period, Mexican industry became increasingly self-sufficient. In the next decade, its industry export were very little, it earned from foreign countries most on tourism and oil. It did build many industrial companies to produce goods for consume, but some of them are inefficient small companies. Some domestic companies became stronger then. I found some statistics in growth rates of Mexico. From 1913 to 1950, GDP growth rate in Mexico was about 3.0%, 1950-1960 was sloping upward to 6.1%, and 6.2% in 1950-1968. Dollar value of exports growth rate was about 1.6% by 1913-1937, upward to 4.7% in 1950-1967. These statistics were evidence of success in Mexican economy during this period.
Export promotion is an export-oriented development strategy which government reduces tariffs and encourages domestic companies to export manufactured goods. Its main point is to produce goods for international trade and increase exports. When a country experienced a protection phase, domestic companies were uncompetitive to foreign companies and they have become more inefficient. After the 1970s, few developing countries have adopted export-oriented strategy instead of import substitution strategy. There were four small Asian economies known as the four tigers. Japan, South Korea, Singapore, Hong Kong and Taiwan have followed export-oriented strategy for extensive periods of time, they have been very successful. Followed them, in the 1990s, more and more developing countries began to adopt export promotion policies. The table below describes five of those countries did reform.
Country Reforms in trade
Mexico Reduction in quotas began in 1985. Tariffs reduced to average 11%, a maximum rate of 20%.
Brazil Average tariff was reduced to 21% in 1992. Stringent computer protection was ended in October 1992; most NTBs were removed in March 1990.
Argentina Average tariff was reduced to 11% in 1991. The highest tariff rate was 15% points in 1992. Import restrictions were substantially eased in 1991.
China An agreement was concluded in 1992 to begin significant liberalization of imports, including a phase out of almost 90% of all NTBs in 1998.
India Restrictive import licensing requirements covering 70% of all imports were eliminated in 1992. By 1993, the average peak tariff rate was reduced to 85%.
Source: Based on Table 10.1 in Steven Husted and Michael Melvin, ��International Economics��, page277.
As we can see in this table, these five countries reduced average tariff to reform their trade through export-oriented development strategy. They earned more from foreign countries and they can pay their foreign debt. Most of them were in Latin America and Asia. Moreover, World Bank called some Asian countries which developed fast as the high performance Asian economies (HPAEs). The four tigers achieved very high growth rates of economy. After them, late in the 1970s and 1980s, Malaysia, Thailand, Indonesia, and China which country followed the export promotion policy have a rapid growth in economy. GDP is a great measurement of a country��s economy. The table from World Band below that shows five countries�� GDP during those periods. (billion dollars)
year
country 1960 1970 1980 1985 1990 1995 2000
Mexico 13.056 35.542 194.357 184.473 262.71 286.698 581.426
Brazil 15.166 42.328 235.025 222.943 461.952 768.951 644.702
Argentina n.a. 31.584 76.962 88.417 141.352 258.032 284.204
China 61.378 91.506 189.4 306.667 356.937 728.007 1198
India 36.605 61.194 183.799 229.941 317.467 356.299 460.182
Data source: World Bank. World Development Indicators
As it shows, we can figure out, before the 1970s, the GDP grew slowly in these five countries. They were most under the policy of import substitution. Then, in the 1980s, these countries did have a GDP booming in their economy. Mexico GDP rose from 35.542 billion dollars to 194.357 during the 1970s. Brazil GDP had risen 192.697 billion dollars in ten years. China had risen 97.894 billion dollars, and India had risen 122.605 billion dollars. The exception was Argentina, because of the war, its GDP grew not very fast. There is no denying that their GDP except Argentina grew extremely higher than other countries which were still adopting import substitution strategy through that period. The statistics on GDP growth rates, however, been somewhat disappointing me. Although GDP and per capita income had risen during these years, the GDP growth rates in these countries particularly Mexico and Argentina have not been higher that before. Let us go on analyzing Mexican development strategy after the 1970s. By the late 1970s, Mexico encountered economic difficulties, inflation and more foreign debt could not be able to make full payments. This led Mexico faced an economic crisis and felt obliged to make changes in development strategy. In the mid-1980s, Mexico reduced tariffs and abandoned most of the import restrictions. The government started to encourage import and export manufactured goods, closely associated with the U.S. economy. In 1994, Mexico followed the America and Canada, signed the North American Free Trade Agreement (NAFTA). After that, Mexico has a better economy, it benefits not only for Mexico but also for North American manufacturing system. Export promotion will increase the exports and more domestic manufactured goods and services will be traded. But why its GDP growth rate has been lower than before? Most economists in favored of blaming Mexican poor education.
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In most less developed countries, government can manipulates economy through policies easily. Import substitution strategy will protect domestic industries, and will provide an uncompetitive market for domestic corporations. But there probably will have a high level of production prices and low quality of productions. Today, North Korea is a dictatorship country, it restricts not only in politics but also in economy just like China’s condition in the 1900s, as Chinese elders called ‘seclude the country’. In other words, it implements import substitution strategy in terms of a high level of restriction in import and export. And now, North Korea is very poor and laggard. In many developing countries, poverty issue still can not be solved. They are unable to produce many manufactured goods for consumer. Countries with small populations are unable to produce many aspects of manufactured goods, because they lack of labor, capital, knowledge and good manager in the market. If they adopted export promotion strategy, they would import a lot of goods and services. By reducing tariffs and releasing the restrictions in import, more investors and corporations will step in the market. They will bring advanced technology, advanced management, fresh goods, and exotic culture.
In conclusion, this essay compared two common development strategies in international trade often adopted by countries, i.e. import substitution and export promotion. Import substitution indicates one country adopt many approaches that create high barriers to some foreign final goods in order to protect domestic industry. The are some merits of this strategy, protect the domestic industries, increase in domestic employment, reduce stress in the face of global economic shocks such as economic recessions and depressions, cut in transportation fee of goods, and decrease in the trade deficit, etc. Most developing countries prefer to apply import substitution strategy initially, and there were many cases in the nineteenth century that illustrated this strategy suits countries with large populations or high living level. Export promotion is an export-oriented development strategy which government reduces tariffs and encourages domestic companies to export manufactured goods. Its main point is to produce goods for international trade and increase exports. In the 1990s, more and more less developed countries began to adopt export promotion policies. Except for political reasons, most of them did have success. By analyzing the case of these two strategies in Mexico, import substitution is benefits for the first phase in industrialization. However, experienced a protection phase, Mexico had encountered many difficulties, which led Mexico faced an economic crisis and felt obliged to make changes in development strategy. After adopting export promotion strategy and signed NAFTA, Mexico has a better economy, it benefits not only for Mexico but also for globalization. Consequently, import substitution is good for first few decades in developing countries, but then, export promotion is better for them and the whole world.
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