Level: SL and HL
Countries have tried many routes to development: closing or opening their economies, relying on markets or the state, attracting foreign firms or aid, and reforming institutions. This topic examines each strategy, its strengths and limitations, and the balance between government and markets.
| Strategy | How it works | Strengths | Limitations | Examples |
|---|---|---|---|---|
| Import substitution (inward- oriented) | Protects domestic industries with tariffs and quotas so that domestic goods replace imports | Builds an industrial base; protects infant industries; saves foreign exchange | Inefficient protected firms; high prices; small domestic markets limit economies of scale; corruption in licensing | India 1950s– 1991; much of Latin America 1950s–1980s |
| Export promotion (outward- oriented) | Encourages production for export through incentives, export processing zones and competitive exchange rates | Access to large world markets; economies of scale; competition drives efficiency; foreign exchange earnings | Dependence on foreign demand; vulnerable to protectionism abroad; risk of low-wage, low- skill specialisation | South Korea, Taiwan, China, Vietnam |
| Trade liberalisation | Reduces tariffs, quotas and other barriers to trade | Lower prices; competition; access to imported inputs and technology | Job losses in uncompetitive industries; loss of tariff revenue | India's reforms of 1991 |
| Bilateral and regional trade agreements; WTO membership | Gives access to partner markets on better terms | Market access; credibility of reforms | Trade diversion; limited bargaining power for small countries | India–UAE agreement; Vietnam's WTO entry in 2007 |
Export promotion is a development strategy in which a country encourages firms to produce goods and services for export.