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The Pitfalls of Protectionism: Import Substitution vs. Export-Oriented Industrial Policy
Author:
Reda Cherif
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Fuad Hasanov
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Series:
IMF Working Papers
Volume/Issue:
Volume 2024: Issue 086
Language:
English
Publication Date:
26 Apr 2024
DOI:
https://doi.org/10.5089/9798400270802.001
ISBN:
9798400270802
ISSN:
1018-5941
Pages:
41
Keywords:
Industrial policy; export orientation; import substitution; growth; diversification; innovation; technology; import substitution policy; D. export orientation; risk tradeoff; policies in India; Policy strategy; Exports; Manufacturing; Imports; Tariffs; Competition; Global; Caribbean; North America
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Industrial policies pursued in many developing countries in the 1950s-1970s largely failed while the industrial policies of the Asian Miracles succeeded. We argue that a key factor of success is industrial policy with export orientation in contrast to import substitution. Exporting encouraged competition, economies of scale, innovation, and local integration and provided market signals to policymakers. Even in a large market such as India, import substitution policies in the automotive industry failed because of micromanagement and misaligned incentives. We also analyze the risk tradeoffs involved in various industrial policy strategies and their implications on the 21st century industrial policies. While state interventions may be needed to develop some new capabilities and industries, trade protectionism is neither a necessary nor a sufficient tool and will most likely be counterproductive.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund