May anbyody help me with this two part question, thanks! First Part a) What has
ID: 1217632 • Letter: M
Question
May anbyody help me with this two part question, thanks!
First Part
a) What has been the long-run experience of countries that have pursued import-substitution industrialization?
b) What's a possible justification for the view that export-oriented industrialization is a better development strategy than import-substitution industrialization?
2nd Part
. a) Explain why primary goods can be expected to exhibit more price instability than manufactured goods.
b) How could buffer stocks be used to reduce this instability?
Explanation / Answer
Import substitution is a trade and economic policy in which a country pursues aggressive domestic production so that foreign imports are replaced by domestic production. This is done by countries to reduce their dependence on foreign countries for consumption goods.
Over the past 20 years, many countries have tried their hands at import substitution industrialization. Here, we discuss about India, which pursued this strategy post-independence during 1950s. During that time, all manufacturing activities were protected along with other import controls. This resulted in the appearance of many high-cost manufacturing units along with squeezing of agriculture. There was reduced threat of foreign competition to domestic industries. As per a study by Ahluwalia (1980) on India’s manufacturing activities post the adoption of ISI, it was found that initially the ISI worked quite well, however it started declining post 1965. Around mid-1960s, the rate of import substitution declined in many sectors with the contribution of ISI to growth declining sharply after 1965.
Then, a new policy of promoting exports was adopted but that too faded off in the long run.
Similarly in Korea, a study by Frank, Kim and Westphal (1975) found that import substitution fell from 24% to 1% to getting negative in 1970s in Korea.
Thus, it can be seen that though the policy works well in the initial years, it effects start to fade away gradually, thereby calling upon the need for a new policy action.