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Table of Contents

  1. Topic pack - Development economics - introduction
  2. 4.1 Economic development (notes)
  3. 4.1 Economic development (questions)
  4. 4.2 Measuring Economic Development (notes)
  5. 4.2 Measuring development (questions)
  6. 4.3 The role of domestic factors in economic development (notes)
  7. 4.3 The role of domestic factors in economic development (questions)
  8. 4.4 The role of international trade (notes)
    1. Role of international trade - introduction
    2. Trade problems (LDCs)
    3. Problems - over-dependence on primary products
    4. Price volatility of primary products
    5. Consequences of price volatility
    6. Price increases can also be problematic!
    7. Price volatility case study - tomatoes
    8. Price volatility case study - copper
    9. Trade strategies for growth and development
    10. Import substitution
    11. Import substitution case study - sorghum
    12. Export promotion
    13. Export promotion case study - Thai toy industry
    14. Trade liberalization
    15. The role of the World Trade Organization
    16. Background information
    17. The Doha round
    18. Case study - trade sanctions
    19. Bilateral and regional preferential trade agreements
    20. Case study of a bilateral preferential trade agreement
    21. Case study of a multilateral preferential trade agreement
    22. Some background reading
    23. Diversification
    24. Case study - diversification
    25. Diversification in Malawi - video
    26. Some background reading
  9. 4.4 The role of international trade (questions)
  10. 4.5 The role of Foreign Direct Investment (FDI) (notes)
  11. 4.5 The role of foreign direct investment (questions)
  12. 4.6 The role of foreign aid and multilaterial development assistance (notes)
  13. 4.6 The role of foreign aid and multilateral development assistance (questions)
  14. 4.7 The role of international debt (notes)
  15. 4.7 The role of international debt (questions)
  16. 4.8 The balance between markets and intervention (notes)
  17. 4.8 The balance between markets and intervention (questions)
  18. Print View

(a) Import substitution

S:\triplea_resources\DP_topic_packs\economics\student_topic_packs\media_development\images\ship.jpgThe protection of jobs and the promotion of growth in developing countries could be achieved by concentrating on producing import substitutes.

Countries need foreign exchange to buy imports and if they can develop and produce substitutes for imports, this will increase foreign exchange reserves.

To encourage import substitution, many countries adopt protectionist policies to reduce competition from imports. (See section 3.1 on the arguments for protectionism).

Critics of this suggest that there may be some short-term gains in job protection but, in the longer term, output (and therefore employment) will be lower than under a free system of exchange and trade.

Comparative advantage allows gains from trade via specialisation. However, with protectionism domestic producers may have little incentive from competition with foreign competitors to invest in R and D or to reduce prices. Countries, which have adopted import substitution policies have tended to record lower growth rates than those who have selected the export-led strategy. (See section 3.1 on the arguments against protectionism).

Many developed economies have strict protection policies in place to stop cheaper imports coming in from less developed economies. In general, less developed economies have a comparative advantage in many agricultural markets.

Increasingly, (through diversification policies) they are also gaining similar advantages in a number of low and middle group manufacturing.

The developed world has agricultural policies, such as the Common Agricultural Policy (CAP), which protects EU-based farmers and subsidises EU food exports to developing countries. The US has similar protection for its farming community and demands that the World Trade Organisation (WTO) adopt policies that safeguard the US agricultural sector (see Cotton Subisidies in USA).

Textiles from developing countries face a similar battle to access markets in major developed economies to overcome a range of protectionist measures, including health and safety regulations. However, as some Far East economies have proven, the right product at the right price can break into the lucrative markets of North America and Europe, e.g. electronics (eg Samsung).