Import Substitution in Developing Countries

In the previous chapter we dealt with Swedish agricultural policy as an example of how the theory of distortions can be applied. We showed how the tariff-based policy has led to welfare losses in comparison to the free trade situation, and we discussed how the optimal intervention policy is conditioned by the different formulations of the emergency restriction in agriculture. In the present chapter we will go into a similar application of the theory of distortions, which is a case that deals with increasing domestic production at the expense of imports, namely the trade policy of developing countries. This policy has often been based on import substitution behind tariff walls.