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

Reda Cherif () and Fuad Hasanov
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Reda Cherif: International Monetary Fund

Journal of Industry, Competition and Trade, 2024, vol. 24, issue 1, No 12, 34 pages

Abstract: 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 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 (search for similar items in EconPapers)
JEL-codes: O25 O47 O57 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10842-024-00414-9

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