Trade Strategies to Promote Economic Growth and Development Part 1

Import Substitution Industrialization (ISI)

Import Substitution Industrialization (ISI)

aims to produce goods domestically instead of importing

allows domestic industries to grow

eventually, the developing country should be able to compete on the international market

What does ISI need to work?

government needs to organize the goods they intend to grow domestic production of

subsidies need to be provided to those industries

government would need protectionist policies (ex. Tariffs) to reduce foreign imports

Advantages of ISI

protects domestic jobs

protects local culture and social habits

protects the economy from multinational countries taking over

Disadvantages of ISI

could lead to fewer jobs in the LR if economic growth does not occur

Lack of specialization from comparative advantage decreases output and loses efficiency

inefficient production due to lack of competition

could lead to increased inflation levels

could lead to retaliatory trade measures from other countries

Export Promotion

export led growth

open trade barriers and increased international trade

increasing exports and export revenue

Increased exports will increase GDP, jobs, and income

Policies for Successful Export Promotion

liberalized trade - open domestic markets, reduce trade barriers

liberalized capital flows - reduce restrictions of foreign direct investment

Floating exchange rate

Investment in infrastructure that enables trade

Deregulation/limited government interference

Problems with Export Promotion

increases protectionism in developed countries on manufactured products from developing countries

the suggested policies may not all be necessary and could hinder export led growth

Advantages of Export Promotion

could lead to increased income equality

economic growth could occur with out increased economic development

Economic Integration

preferential and free trade agreements

Advantages of economic Integration

larger export markets

encourages regional cooperation, improving accès to infrastructure, transport methods, etc

Provides job opportunities in member countries

leads to increased efficiency levels

Disadvantages of Economic Integration

trade can become more complicated, especially if there are multiple trading bloc agreements

some companies may go out of business due to the increased competition, increasing unemployment

Diversification of economic Activity (Export diversification)

move from proaction of primary commodities to manufactured products

Diversification of economic activity should lead to:

protection from primary products increasing

stabilized/increased export revenue

stabilized/increased employment

Barriers to Diversification of Economic Activity

tarif escalation

more highly skilled workers are necessary (poverty traps)

Supply Side Policies (Trade liberalization)

removal or reduction of trade barriers

Advantages of Trade Liberalization

increases world trade

allows developing countries to focus on production of goods they have the comparative advantage in

Disadvantages of Trade Liberalization

many developing countries lack the infrastructure to successfully benefit from this

Privatization

the sale of public government owned businesses to the private sector

Goal of Privatization

profit maximizing private companies should be more efficient than the government which will increase output

Problems with Privatization

impact of poverty and income inequality

Deregulation

regulation increase the cost of production for businesses, so deregulation should increase aggregate supply and real GDP

Problems with Deregulation

depends whether laws are reduced or eliminated

could include the removal of labor law, environmental laws, safety, and health regulations all of which could negatively impact society

Foreign Direct Investment

long term investment by private multinational enterprises/corporations (MNCs)

MNCs will build new plants or expand existing plants in foreign countries

MNCs will emerge or buy existing businesses in foreign countries

Social Enterprise

organization s that have specific social objectives as their primary goal

Goal of Social Enterprises

aim for the creation of wealth, a viable business model, and environmentally responsible operation

goal is to reduce/eliminate a social issue (poverty, lack of education, lack of healthcare, etc)