Difference between Import Substitution and Export-Led Growth – Essay

February 2, 2019 admin 0 Comment

However, the basic problem confronting a developing economy is that there are no clear cut and universally accepted rules of growth strategy.

The reason for such a state of affairs is self-evident. No two countries face an identical set of circumstances, nor do they choose an identical set of objectives. There are differences in their levels of economic and social development.

Important differences also characterise their institutional frameworks and social and ethical standards. Similar variations are also seen in the efficiency and integrity of their governments, official agencies, their financial systems, and so on.

Not only that, depending upon its political ideology, each country decides the extent to which it should depend upon state regulation of market mechanism. This choice is also usually connected with the choice between a path of import substitution or that of export promotion.

What is noteworthy is that in this choice, political and social ideologies play a critical role. However, given a bewildering variety of objectives and strategies chosen by developing countries, we find that each of them primarily concentrates on either import substitution (IMS) or export promotion (EP).

IMS is a path of economic isolation while that of EP is one of economic integration with rest of the world. In the former, a country tries to get rid of its dependence on imports (possibly caused by a hangover of colonialism/imperialism) by producing everything itself; in the latter, it uses exports as the primary vehicle of economic growth.

The choice between the two approaches is seldom based upon pure economic criteria. Moreover, it is next to impossible to formulate precise rules under which a country should make its choice. It is a particularly difficult task because circumstances faced by a country keep changing continuously.

In the initial stages of this debate, even economic reasoning was divided over the issue. While some analysts strongly advocated IMS, others were equally forceful in emphasising the merits of EP and using export earnings as an engine of growth.

Individual countries opted for one or the other approach in line with their social and political ideologies. Quite a few of them adopted the path of IMS, but with different degrees of commitment.

In general, the countries with a preference for planning, regulated markets and public enterprises opted for import substitution, while countries which believed in the merits of market mechanism and private enterprise, concentrated upon the strategy of export- led growth.

It is noteworthy that international organisations like the World Bank and the IMF were staunch supporters of export-led growth because of their preference for private enterprise.

Currently, weight of economic opinion has shifted in favour of market orientation, globalisation and export promotion.

However, this opinion also emphasises that trade should be promoted by removing restrictions in its way and not by subsidising it because it is claimed that subsidies, like import substitution, distort resource allocation and possibly encourage inefficiency and complacency.