Published on 8 May 2024
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The pitfalls of protectionism: import substitution vs. export-oriented industrial policy

With industrial policy comeback and rising protectionism, Reda Cherif and Fuad Hasanov explore whether protectionism is still an important policy tool, and if not, which policy tools are available at policymakers’ disposal.

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 analyse the risk tradeoffs involved in various industrial policy strategies and their implications on the twenty-first 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.        


Keywords: Industrial policy, export orientation, import substitution, growth, diversification, innovation, technology

JEL codes: O25, O47, O57

Authors’ contacts: arc28@cam.ac.uk; fh416@cam.ac.uk

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