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Analyse the Problems That Developing Countries Experience - Essay Example

Developing countries have adopted a number of approaches In their attempts to eve their economies and societies from So-called “backward” orientation towards a more “modern” one. Crucial to this process was a desire to change from a rural- traditional dominance to a more modern-industrial mode of the simple reason that development was equated with industrialization. As a result developed countries pursued a policy of rapid Industrialization primarily through a process of import substitution.

In this essay the writer is going to analyses the problems that developing countries experience in adopting Import Substituting Industries (SIS) strategy as an approach to Industrial growth and development. According to Michael Toward (1994:681), SIS is “A deliberate effort to replace major consumer Imports by promoting the emergence and expansion of domestic industries such as textiles, shoes, household appliances,” usually requiring the imposition of protective tariffs and quotas to protect new or infant industries.

Specifically, import substitution has been based on the following arguments: infant industry protection, instability of foreign market earnings and the need for self-sufficiency. Premises (1962) savings for investment, since industries are assumed o save more, a need to conserve foreign exchange and d Improve balance of payments and additional exports of primary products would turn the terms of trade against the exporting country.

Cipher and Dietz (1997). The policy instruments supporting Import substitution regimes are an assorted mix of tariffs ,quotas exchange control and overvalued currencies -Restrictions on imports protect domestic firms from competition with produces from other countries (1971) and Lewis and Slinger (1968) indicated an excessively high rate of effective protection and by implication, a heavy movement of resources into manufacturing sectors.

It gives an empirical estimate of the domestic marginal rate of transformation by adjusting domestic prices for monopolistic rents and factor market distortions in order to reflect the opportunity cost of producing various commodities. There is a very large body of research on the effect of import substitution regimes in developing countries. A major effect cited is the discrimination against agriculture. This happens because protection raises the price paid for manufactures while depressing those for farm produce.

A related effect has been the favoring of profits ever wage within manufacturing sector with a resulting increase in inequality of income distribution . Since import substitution initially focuses on the production of final consumer goods in created a demand for a variety of new import to be used in production process. This led to an increase in dependence on import with even more serious consequences in the event of foreign exchange shortages. Now there would be effect on employment and capacity utilization instead of there being only shortages of the formerly imported product.

This kind of situation resulted in the faculty of further import substitutions. Briton (1998). The net result was that import substitution did not lead to economic self-sufficiency. While several of the large developing countries (e. G. Brazil, Mexico, India) were reasonably successful in fomenting industrialization through SIS strategies, this approach did have several negative impacts as well. There are sectarian disparities. Not all sectors of industry benefited equally.

By protecting infant industries from competition, many sectors could produce inefficiently and survive, charging customers higher prices than foreign counterpart suppliers. Many times those industries already established founded domestically production intermediate production inputs more expensive than the foreign inputs that they were buying before IS’. Either such customers successfully pressured governments for exemptions to the import restrictions or absorbed higher costs of their own production.

Thus, one sector in a final manufacturing process sometimes benefits by discouraging the development of a domestic intermediate input sector. Instead of improving the situation of the old economic order based on the trade of cheap raw materials (e. G. Ron ore) for expensive finished products (e. G. Automobiles), IS’, in some cases, aggravated the balance of payments dilemma. Mainly because new infant industries specializing in final consumer durable and non-durable goods created a demand for intermediate and capital goods which could only be purchased from abroad.

As long as final goods themselves were imported the demand for these expensive industrial suppliers did not exist. So, while the structure of imports shifted, from consumer goods to intermediate and capital goods, the total import bill often stayed about the same or even worsened. Another criticism of import substitution is that it eliminates the gains from trade by favoring product on for domestic use over exports. This happens because of over-valued exchange rates that mean a producer will earn a lower amount of there is a bias against exports.

In addition the protective-regimes further penalize export by tariffs on their inputs and thereby raising the cost of production as well as prices, leading to international-non-competitiveness. Anderson et al (2002). Export expansion is important for it is almost nearly a necessary condition for sustained growth and development over any lengthy period. Exports are viewed as an ;engine of growth” and increasing the internal demand while at the same time expanding productive capacity and productivity. If money wages are assumed to increase at the same time expanding productive capacity and productivity.

Money wages are assumed to increase at the same rate in other trading countries the rise in productivity will result in relative price stability and an improvement in international competitive. So long as exports keep increasing there will be a self-reinforcing tendency for a country to maintain its competitive position and to continue its economic growth. Exports then make possible the benefits from trade, pay for the imports required in development both directly and indirectly by adding to borrowing and debts servicing capacity.

Policies to promote export expansion have included subsidies, realistic exchange rates and trade agreements. Export expansion may generally take two forms namely primary commodity export expansion is however not necessarily easier Tackier (1977). Identified factors militating against rapid expansion in export of primary products especially agricultural foodstuffs and raw materials, developed country population growth rates at or near replacement levels, low price elasticity of demand for most non-fuel primary commodities.

While traditional approaches to import substitution create a bias against exports, it is believed this bias can be removed by other policies, as has been the case in Taiwan and Pakistan. Included in these policies are export substantiation and the case of multiple exchange rates. Such an approach would decrease some of the distortions arising from import substitution to change the structure of the economy. However, the country cannot export manufacturing without building the capacity to reduce them and capacity cannot be built without import substituting.

This is because the ration of imports to domestic production of manufactures in many Olds is so high that attempts to create domestic capacity is bound to take the form of imports substitution. There is thus an implication of a sequence from primary specialization to import substitution, to export of manufactures. Finally (1973) showed that this sequence is attended either by sufficiently large increase in productivity in manufacturing sector, or through an increase to save out of profits. Thus sectors that showed a high growth of import substitution were also the ones that had a relatively high rate of export growth.

Although countries that have built their development efforts around import substitution were also the ones that had a relatively high rate of export growth. In conclusion, although countries that have that have built their development efforts around import substitution have experienced grave problems. It is still possible to pursue the policy in a more satisfactory manner. The problems arise as a consequence of the kinds of activities selected and the methods adopted to bring bout import subs.