11 Arguments Put Forth in Favour of Import Substitution

1. Growth Multipliers:

It was argued that IMS permitted simultaneous growth of several industries, and this provided an opportunity of balanced economic growth.

In addition, through input-output relationships, these industries provided forward and backward linkages and thereby they acted as growth multipliers with the potential of generating a momentum of their own.

2. Employment:

Technically speaking, industries can grow faster than agriculture. Therefore, it was argued that a developing country could absorb its growing labour force through rapid industrialisation via IMS.

3. Terms of Trade:

It was claimed that IMS reduced the demand for imports and improved the terms of trade of a country.

4. Balance of Payments:

Improved terms of trade and reduced demand for imports helped a country in improving its BOP position. Moreover, it was maintained that demand for industrial goods has an inherent tendency to increase faster than the demand for (and export of) agricultural goods.

Accordingly, industrialisation through IMS helped a country in meeting that growing demand and prevented worsening of its BOP position.

5. Foreign Exchange Reserves:

During 1950s and 1960s, developing countries were facing a severe scarcity of foreign exchange and thus faced problems of financing their imports. IMS, by reducing the demand for imports, was expected to ease the pressure on their meager foreign exchange reserves.

6. Implementation:

It was claimed that each country (even a developed one) tries to protect its own economic interest to the extent it can. Therefore, in such an atmosphere, it is less difficult for a backward economy to adopt a strategy of IMS than get economic concessions from foreign countries.

7. Market Uncertainties:

Relying upon export earnings means playing with uncertainties of international markets. A poor backward country cannot afford to take this risk and, therefore, it should protect itself via IMS.

8. Savings and Capital Accumulation:

It was argued that IMS, by adding to the profit incomes, helps an economy in increasing its saving and investment rates.

9. Social Cost and Benefit:

Market prices of productive resources (including labour) do not represent their true social prices (values). IMS provides an opportunity to ignore the estimates of commercial costs and, instead, apply the estimates of social costs and benefits in deciding what should be produced domestically. In the process, IMS also helps a country in improving its resource allocation.

10. Self-sufficiency:

Advocates of IMS claimed that every country should try to be self-sufficient in essential items like the ones relating to defence, health, food, and the like. And, IMS was the best way to achieve this goal.

11. Inherent Right:

It was argued that nature did not ordain that some countries should remain perpetually poor by producing only primary sector commodities. They had as much right to achieve economic growth through industrialisation as the advanced ones.

Submitted by : Professor Yogendra, Category : Knowledge, Tag : Essay on Networking