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Import-substitution strategy

What are the advantages and disadvantages of using import-substitution to accomplish industrialization rather than using government aid and private investment to develop new manufacturing industries?

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Import-substitution strategy implies a country is trying to develop industries producing goods especially for domestic consumption. These goods are traditionally imported from other countries. There are many developing countries are implementing this strategy as part of their industrialization strategy. Normally they are focusing on domestically produced commodity processing industries, particularly on agriculture or mineral products.

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Solution Summary

Import substitution strategy is often used by developing countries as part of their industrialization drive. The strategy is good especially for developing domestic capability in terms of know-how and technology. This strategy is also able to boost country's foreign exchange as well as value added in the economy. However, on the negative side of this strategy is normally associated with an inefficient allocation of resources in the economy. This is due to the inability of local capabilities in terms of labor and technology. Domestic resources could have been used for other more efficient uses to maximize benefits for the society. Import-substitution strategy is also normally associated with protectionism policy by tariff or non-tariff barriers. This normally will not go well with WTO if a country is within WTO.