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    Industrial Development Strategy

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    Goodluck Maleko
    The document discusses import substitution strategy (IS), an industrial development strategy used by developing countries in the 1950s-1960s. IS aims to replace imported manufactured goods with domestic production through tariffs and incentives. While initially promising, IS often led to inefficient industries, wealth flowing abroad, capital-intensive industries that created few jobs, worsening balance of payments issues, harm to agricultural exports, income inequality, and industries that never matured without protection.

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    Industrial Development Strategy

    Uploaded by

    Goodluck Maleko
    6 views35 pages
    The document discusses import substitution strategy (IS), an industrial development strategy used by developing countries in the 1950s-1960s. IS aims to replace imported manufactured goods with domestic production through tariffs and incentives. While initially promising, IS often led to inefficient industries, wealth flowing abroad, capital-intensive industries that created few jobs, worsening balance of payments issues, harm to agricultural exports, income inequality, and industries that never matured without protection.

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    The document discusses import substitution strategy (IS), an industrial development strategy used by developing countries in the 1950s-1960s. IS aims to replace imported manufactured goods with domestic production through tariffs and incentives. While initially promising, IS often led to inefficient industries, wealth flowing abroad, capital-intensive industries that created few jobs, worsening balance of payments issues, harm to agricultural exports, income inequality, and industries that never matured without protection.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    6 views35 pages

    Industrial Development Strategy

    Uploaded by

    Goodluck Maleko
    The document discusses import substitution strategy (IS), an industrial development strategy used by developing countries in the 1950s-1960s. IS aims to replace imported manufactured goods with domestic production through tariffs and incentives. While initially promising, IS often led to inefficient industries, wealth flowing abroad, capital-intensive industries that created few jobs, worsening balance of payments issues, harm to agricultural exports, income inequality, and industries that never matured without protection.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 35

    Industrial Development Strategy

    Import Substitution Strategy


    During the 1950s and 1960s,
    developing countries experienced a
    decline in world markets for their
    primary products and growing BOP
    deficit on their current accounts
    Given a general belief in the magic
    of industrialization, they turned to an
    IS strategy of urban industrial
    development
    Definition
    IS entails an attempt to replace
    commodities that are being imported,
    usually manufactured consumer
    goods, with domestic sources of
    production and supply
    The typical strategy is first to erect
    tariff barriers or quotas on certain
    imported commodities and then try to
    set up the local industry to produce
    these goods.
    Typically, this involves joint ventures
    with foreign companies, which are
    encouraged to set up their plants behind
    the wall of tariff protection and given all
    kinds of tax and investment incentives
    Tariffs, Infant industries and the theory of
    protection
    A principal mechanism of IS strategy
    is the erection of protective
    tariffs( tariffs on imported goods) or
    quotas
    The basic economic rationale for
    such protection is the infant industry
    argument
    Ways in which the infant industry is
    protected
    There are three most common methods
    are
    1) Tariffs
    2) Trade Quota
    3) Provision of subsidies
    Tariffis a tax that is levied on imported
    products.

    Forms of tariff:
    a) Ad valorem
    b) Specific
    c) Compound tariff
    Ad valorem duty – is a fixed
    percentage of the value of the
    commodity, as when imported cars
    are taxed at 25%
    Specificduty – is a fixed amount of
    money per physical unit of a
    commodity, say 50,000/- per
    imported commodity
    Compound duty – is the combination of
    the two as when a car is taxed at 50,000/
    plus 5% of value
    An immediate effect of a tariff is to
    raise prices, thus inducing consumers
    to reduce their purchases of their
    tariffed good
    Quota
    Is the establishment by a government of a
    physical limit on the quantity of a good
    that that can be imported over a given
    period
    A quota may be expressed in
    physical, value or market share terms,
    but all imply that when a given
    quantity has been imported no more
    of that good will be allowed into the
    country
    Subsidization of domestic industries
    Subsidy is a negative tax.
    This is an attempt of the government
    to promote certain lines of production
    Subsidies have the effect of
    protecting domestic industries
    (producers) against foreign
    competition
    This is because subsidies enable
    domestic producers to produce at a
    relatively low cost compared to
    foreign competitors
    Advantage of ISI
    The market for industrial product
    already exists, as evidenced by
    imports of the commodity.
    So risks are reduced in setting up an
    industry to replace imports.
    Employment Creation – through
    establishment of industry within the
    country the rate of unemployment will be
    reduced because an industry needs skilled
    and unskilled labour in its operations
    Sources of Government revenue
    The IS industrialization Strategy and
    Results
    Most observers agree that the IS
    strategy of industrialization has been
    largely unsuccessful
    Specifically, there have been five
    undesirable outcomes:
    First, secure behind protective tariff
    walls and immune from competitive
    pressures, many IS industries(both
    publicly and privately owned remain
    inefficient and costly to operate)
    Second, the main beneficiaries of the
    IS process have been the foreign
    firms that were able to locate behind
    tariff walls and take advantage of
    liberal and investment incentives
    After deducting interest, profits and
    royalty and management fee, most of
    which are remitted abroad, the little
    that may be left over usually accrues
    to the wealth local industrialists with
    whom most foreign manufacturers
    cooperate and who provide their
    political and economic cover
    Third, most IS has been made
    possible by the heavy and often
    government- subsidized importation
    of capital goods and intermediate
    products by foreign and domestic
    companies
    In the case of foreign companies,
    much of this is purchased from parent
    and sister companies
    There are two immediate results:
    ◦ Capital- intensive industries are set up, usually
    catering to the consumption of the rich while
    having a minimal employment effect
    ◦ Far from improving the LDCs BOP
    situation and alleviating the debt
    problem, indiscriminate IS often
    worsens the situation by increasing a
    need for imported capital goods and
    intermediate products while a good part
    of the profits is remitted abroad in the
    form of private transfer payments
    Fourth, a fourth detrimental effect of
    many IS strategies has been their
    impact on traditional primary –
    product exports
    To encourage local manufacturing
    through the importation of cheap
    capital and intermediate goods,
    exchange rates have often been
    artificially overvalued
    This has had the effect of raising the
    price of exports and lowering the
    price of imports in terms of the local
    currency
    The net effect of overvaluing
    exchange rates in the context of IS
    policies is to encourage capital
    intensive production methods still
    further and to penalize the traditional
    primary – product export sector by
    artificially raising the price of exports
    in terms of foreign currencies
    This overvaluation, then causes local
    farmers to be less competitive in
    world markets
    In terms of its income distribution
    effects, the outcome of such
    government policies may be to
    penalize farmers and the self –
    employed while improving the profits
    of the owners of capital both foreign
    and domestic
    Fifth,IS, which may have been conceived
    with the idea of stimulating infant
    industry growth and self – sustained
    industrialization by creating “forward”
    and “backward” linkages with the rest of
    the economy have often inhibited that
    industrialization
    Many infants never grow up, contend to
    hide behind protective tariffs and
    governments are reluctant to force them to
    be more competitive by lowering tariffs

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