The emphasis that Countries have placed in their development strategies in favor of either export led growth strategy or import substitution has influenced the evolution of current account balances and growth of output. In the case of import substitution, the costs of these strategies have often turned out to be far greater than expected. In particular, the methods used to shield domestic sectors from foreign competition such as those used in many western hemisphere Countries have in the event been more prone to produce distortions and resource misallocation than those used to favor exports as in certain Countries in Asia.

This essay will focus on discussing exports led growth strategy, import substitution policy, and the main differences between the two strategies and the most superior one. Those in support of the export led growth strategy usually do so on the basis that it is the normal and effective substitute to other strategies of development. Outward orientation and export led growth are argued to generate the necessary flexibility in shifting the economy’s resources to take account of the changing pattern of comparative advantage (World bank, 1987).

IMPORT SUBSTITUTION STRATEGY

Import substitution of one form or another prevailed in many developing Countries during the 1950’s and early 1960’s, and it was very popular in several developing Countries such as Argentina, Brazil and Mexico and some Countries still prefer it till today. The strategy believes in the protection of domestic producers from foreign competition by substituting domestic production of goods previously imported with domestic sources of production and supply and then substitute through domestic production for a wider range of more sophisticated manufactured items by the extensive use of trade barriers to protect domestic industries from import competition. The idea behind this is to raise the price for domestic substitutes for the imported goods. The increased price however provides greater incentives for production for the home market by domestic firms relative to production for foreign markets (exports). From a development perspective, the goal of such a strategy has been to promote the growth of the manufacturing sector and therefore transform the economy from an agricultural one to an industrial base. In the extreme, import substitution strategy could lead to complete self sufficiency.

The rationale behind import substitution arises as a result of the perspective of trade held by developing Countries. Most developing Countries assume they cannot export manufactured goods as they cannot compete with established firms of the developed Countries due to the fact that developing Countries maintain high trade barriers and since developing Countries have a need for economic growth, they are now faced with no option but to produce for themselves some of the goods they import (Carbaugh, 2008).

Import substitution appears logical, in one aspect, in the sense that if a good is highly demanded and imported, why not produce it domestically? But from an economist point of view, it may be more expensive to produce it domestically and cheaper to import it; and comparative advantage should decide which goods should be imported or exported.

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