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The Pitfalls of Protectionism: Import Substitution vs. Export-Oriented Industrial Policy

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  • Reda Cherif
  • Fuad Hasanov

Abstract

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.

Suggested Citation

  • Reda Cherif & Fuad Hasanov, 2024. "The Pitfalls of Protectionism: Import Substitution vs. Export-Oriented Industrial Policy," IMF Working Papers 2024/086, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2024/086
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    More about this item

    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;
    All these keywords.

    JEL classification:

    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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