Trade Policy in Developing Countries

Import-Substituting Industrialization
1. Was a trade policy adopted by many low- and middle-income countries before the 1980s and is the policy aimed to encourage domestic industries by limiting competing imports.
2. Countries may have a potential comparative advantage in some industries, but these industries cannot initially compete with well-established industries in other countries.
Problems with the Infant Industry Argument
1. 1. It may be wasteful to support industries now that will have a comparative advantage in the future.
2. 2. With protection, infant industries may never “grow up” or become competitive.
3. 3. There is no justification for government intervention unless there is a market failure that prevents the private sector from investing in the infant industry.
Infant Industries and Market Failures
1. 1. Imperfect financial asset markets
2. 2. The problem of appropriability
Import-Substituting Industrialization
1. It involved complex, time-consuming regulations. It set high tariff rates for consumers, including firms that needed to buy imported inputs for their products. It promoted inefficiently small industries.
Trade Liberalization
1. Some low- and middle-income countries that had relatively free trade had higher average economic growth than those that followed import substitution.
2. Trade liberalization in developing countries occurred along with a dramatic increase in the volume of trade.
3. A number of developing countries have achieved extraordinary growth while becoming more, not less, open to trade.

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Trade Policy in Developing Countries

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	Created by Sofia Elizabeth 8004 about 9 years ago