Trade and Developing Economies

Trade has often been viewed as an integral part of economic development for poorer

Trade and Economic Development – Import Substitution and Export Promotion

One of the main aims of developing countries is to pursue industrialisation by expanding
the secondary (industrial) sector.

International trade provides a means by which this can be pursued.

There are two main strategies that countries can follow with regards this problem:-

1. Import substitution:

The idea is to produce what was previously imported from elsewhere.

this saves valuable foreign exchange and
ease balance of payments deficit (most poor countries have these).
there is a ready-made market for the product, because people are already buying it from

In theory, firms would start by importing:-

‘capital goods’ [plant and machinery and the latest technology],
‘intermediate goods’ [raw materials and other components], and
technical expertise.

When established, industry would be able to import capital goods to make all the
necessary machinery themselves.

Governments might use tariffs to protect infant industries at first then them once the
industry was ready to compete.

In reality, firms have rarely got beyond the first stage. Import tariffs have remained in
place, since producers were unprepared to face global competition and so they had no
incentive to become efficient and competitive.

2. Export Promotion

This was by the ‘Asian Tiger’ economies in their expansion of hi-tech manufacturing
Countries try find markets in which they can successfully exploit their comparative
advantages and sell their products to.

Production centred on labour-intensive technologies (for the comparative advantage!) –
i.e. production has been based on much lower unit labour costs

Industry made up of private-sector firms driven by the profit motive

Module 6: Govt Policy, National & International Economy © tutor2u 2004 AQA A2
Economics Course Companion 2005 (143)

o Government provides incentives for firms to export

Many of the Asian Tiger economies have been incredibly successful in implementing
export promotion strategies and for them the process of globalisation has been a huge
stimulus to their economic growth and development over the last ten – twenty years.