Trade policies in developing countries

Abstract

The effects of developing countries' trade policies on their export performance and economic growth are investigated. A review of the research on the growth strategies of developing countries suggests that, while the protection of the manufacturing sector may permit rapid growth at an early stage of import substitution, it will eventually have adverse consequences for economic growth. The high protection of domestic industry induces the establishment of high cost import substituting activities, and a bias against exports retards the development of manufactured exports. Finally, in the absence of foreign competition, there will be little incentive for technical progress in small protected domestic markets. Furthermore, once an industrial structure geared to import substitution has been established, change becomes increasingly difficult. One strategy for change could be implemented by using a basic exchange rate for nontraditional primary products, export taxes on traditional primary exports, and a combination of tariffs and subsidies on manufactured goods.

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