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.


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:;

Blog: Doing industrial policy right: the pitfalls of protectionism


Fuad Hasanov

Affiliated Researcher

Fuad Hasanov is a Senior Economist at the International Monetary Fund (IMF) and an Adjunct Professor of Economics at Georgetown University. Before joining the IMF in 2007, Fuad was an...

Reda Cherif

Affiliated Researcher

Reda Cherif is a Senior Economist at the International Monetary Fund (IMF). He joined the IMF in 2008. His research covers development economics, natural resources, industrial policy, and growth and...

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