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Trade Policy in Developing Countries
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developing countries:

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The term “developing countries” does not have a precise definition, but it is a name given to
many low and middle income countries
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Import Substituting Industrialization
 Import substituting industrialization was a trade policy adopted by many low and middle
income countries before the 1980s
...

 It was often accompanied with the belief that poor countries would be exploited by rich
countries through international financial markets and trade
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o To allow these industries to establish themselves, governments should temporarily
support them
until they have grown strong enough to compete internationally
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It may be wasteful to support industries now that will have a comparative advantage in the
future
...
With protection, infant industries may never “grow up” or become competitive
...
There is no justification for government intervention unless there is a market failure that
prevents the private sector from investing in the infant industry
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Imperfect financial asset markets
– Because of poorly working financial laws and markets (and more generally, a lack of
property rights), firms can not or do not save and borrow to invest sufficiently in
their production processes
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2
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– The knowledge created when starting an industry may be not appropriable (may be
a public good) because of a lack of property rights
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2
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o But this claim is a matter of debate
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 As with import substituting industrialization,
economic development was the ultimate goal of
trade liberalization
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o Growth rates in Brazil and other Latin American countries have been slower since
trade liberalization than they were during import substituting industrialization,
o But unstable macroeconomic policies and financial crises contributed to slower
growth since the 1980s
...

o Some economists also argue that trade liberalization has contributed to income
inequality, as the Hechscher-Ohlin model predicts
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Export Oriented Industrialization
 Instead of import substituting industrialization, several countries in East Asia adopted
trade policies that promoted exports in targeted industries
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o These economies or a subset of them are sometimes called “high performance Asian
economies
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o By this standard, these economies are “open economies
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”
o Although evidence suggests that these economies did have less restricted trade than
other low and middle income countries, some trade restrictions were sometimes
still in effect

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