International Trade: A Case of Developing Countries and the Policies Involved

INTERNATIONAL TRADE: A CASE OF DEVELOPING COUNTRIES
by [Name]
Course
Professor’s Name
Institution
Location of Institution
Date
International Trade: A Case of Developing Countries
Introduction
Industrial growth and development are important in developing countries and as such, it has received considerable attention over the years. According to Carrasco and Tovar-Garcia (2020), high rates of growth in developing countries have been linked to reduced poverty and improved standards of living. Over the years, developing countries have adopted different policies and strategies to promote economic and industrial growth. The results, even from developing countries using similar policies, indicate that the rates of economic growth vary considerably (Carrasco and Tovar-Garcia, 2020). Countries using similar policies find themselves in the extreme ends of growth rates, with some enjoying high growth rates while others experiencing very low growth rates if any. Understanding these policies, especially in the era of globalization and international trade, is important for policymakers, to allow them to introduce more appropriate policies for the growth of their specific countries. This paper aims at discussing import substitution policies and export-led growth policies and how they influence/ can influence economic growth and development in developing countries. Further, the paper will discuss the challenges of each of these policies and provide a recommendation on which policies can best promote growth and development in developing countries.
Import Substitution Policies
Import substitution policies are inward-looking in the sense that they focus on reducing foreign dependency by replacing imports with local production of goods (Slatvistskaya et al., 2017). The idea of such policies is to reduce the surplus of imports in the domestic market while giving the country a chance to develop its market and become more competitive in international trade. Import substitution policies gained prominence in the 1950s and 1960s (Slatvistskaya et al., 2017). Several factors contributed to the popularity of these policies. The first factor was the end of the Second World War, which resulted in a high cost of living, especially in developing countries (Adewale, 2017). A lot of production resources had been focused on producing weaponry for the war and local households suffered as a result. Developing countries realized a need to strengthen their local industries by producing goods that would otherwise be imported from other countries. The second factor was the global economic crisis (Adewale, 2017). During the meltdown, the prices of the primary products that are exported by developing countries went down. This affected the local economy by slowing industrial growth.
According to Adewale (2017), countries that adopted import substitution policies applied several strategies to facilitate sufficient internal markets. They include government subsidies, targeted import control, and high tariffs on imported goods. These trade limitations protect local industries whose products replace imports. Additionally, different countries use different approaches to import substitution policies. For instance, countries such as Japan used licenses as a way of implementing import substitution (Zobov et al., 2017). This approach involves buying licenses from other countries, especially to promote local science and technological advancement. Another approach involves developing products that are similar to those of imports in the country (Zobov et al., 2017). However, the products have to exceed the imports in terms of performance and quality.
Challenges of Import Substitution Policies
In the initial stages of implementation of import substitution policies, some countries in Latin American registered significant growth. As indicated by Zobov et al. (2017), between 1950 and 1980, the gross domestic product (GDP) annual growth was 5.5%. Also, these countries enjoyed GDP growth per capita of 2.7%. The living standards during this period improved significantly and the countries gained more skilled workers. However, these positive outcomes were short-term. For instance, Brazil enjoyed tremendous success between 1968 and 1973 as its GDP rose (Adewale, 2017). This growth made Brazil an attractive market for global investors but in the long run, it opened up the country to a financial crisis that slowed its economic growth. The short-term economic growth associated with import substitution policies led to growing criticism of the practices. The main criticism was that the practice had placed too much attention on import substitution at the expense of exports (Irwin, 2021; Zobov et al., 2017). In Latin America, developing countries failed to promote their goods in the foreign market. These countries produced goods but there was a lack of competitiveness for the goods in the international markets. As a result, the countries lost an opportunity to utilize export opportunities that would have otherwise boosted economic growth. Even in today’s world, import substitution has been criticized for its inefficiency by blocking the exportation of domestically-produced goods. Zobov et al. (2017) opine that import substitution practices sometimes require high capital because to replace imports with similar domestic products, developing countries need to possess the technology and capital-intensive techniques in production. Yet, in the absence of export promotion, the cost of import substitution becomes higher and cannot be compensated. Also, as indicated by Cheng (2020), import substitution cannot facilitate long-term growth because the size of domestic markets cannot accommodate sustainable growth. As such, many countries have not been utilizing this practice.
Export-Led Growth Policies
The fall of the import substitute regime was accompanied by the rise of export-led growth policies. Export-led growth policies promote economic growth and development by supporting exportation (Agarwal, 2017). Countries that implement this practice engage significantly in international trade. As revealed by Adedoyin et al. (2020), international trade is one of the main factors used to determine the economic growth of a country. This has been the basis for the adoption and support of export-led growth policies in promoting economic growth and development in developing countries. Unlike, import substitution practices, export-led growth practices encourage local production of goods intending to export them to international markets. The success of export-led growth policies dates back to the 1960s when East- Asian countries such as Singapore, Hong Kong, South Korea, and Taiwan experienced significant economic growth and development due to robust exportation of their local goods (Malovic & Zdravkovic, 2017). However, they only became popular in the late 1970s.
Countries utilizing the export-led growth strategies employed several strategies. The main one, according to Makhlouf (20...