QUESTION

The economy of XYZ recently gained independence from their colonial masters. The
first president Dr. Yebeyebi embarked on a massive imported substitution drive as a
way of promoting growth and development. Industrialization became a vital off shoot of
this policy and in the process the country concentrated on inward activities and
restricted through several tools the importation of certain products.

Would you as a consultant support their initiative viz –a- viz the supposed gains and the
welfare implications of international trade.
Introduction
Import substitution and trade protectionism are tools or strategies that have been
adopted by many a country to promote economic growth and development when
independence is gained. Countries like Ghana, China, India, Malaysia and many other
countries have all used these tools or strategy in one way or the other for their
economic growth.

To appreciate the strategy being adopted by Dr. Beyeebi and to support it or not, it
would be advisable to understand what import substitution and trade protectionism are,
the benefit to be derived if the economy is closed or restricted and the benefit
international trade provides which will be absent if trade is restricted.

Import Substitution
Import substitution is the strategy of encouraging domestic industry by limiting imports
of manufactured goods. In economics, an import is any good (e.g. a commodity) or
service brought into one country from another country in a legitimate fashion, typically
for use in trade. Import goods or services are provided to domestic consumers by
foreign producers. The strategy is inward oriented in that trade and industrial incentives
favor production for the domestic market over the export market An import in the
receiving country is an export to the sending country. If a country practices import
substitution, then the country is restricting free trade of certain goods and services. Free
trade refers to the trade that is free from all artificial barriers to trade like tariffs,
quantitative restrictions, exchange controls, etc.

Industrialization
A process of socio-economic change whereby a human group is transformed from a
pre-industrial society into an industrial one. A part of a wider modernization process,
where social change and economic development are closely related with technological
innovation, particularly with the development of large scale energy and metallurgy
production

Trade protectionism
Protection refers to the government policy of according protection to the domestic
industries from foreign competition. Any form of restriction imposed on international
trade, especially the importation of goods, eg tariffs, quotas, exchange control, etc .

The action by the president

In the first place the policy can assist the president and the country to protect infant
industries. According to Alexander Hamilton and Frederick List a new industry having a
potential comparative advantage may not get started in a country unless it is given
temporary protection against foreign competition. An established industry is normally
much stronger than an infant one because of the advantageous position of the
established industry like its longstanding experience, internal and external economies,
resource position, market power, etc. Hence, if the infant is to compete with such a
powerful foreign competitor, it will be a competition between unequals and this would
result in the ruin of the infant industry. Therefore, if a new industry having a potential
comparative advantage is not protected against the competition of an unequally
powerful foreign industry, it will be denying the country the chance to develop the
industry for which it has sufficient potential. The intention is not to give protection for
ever but only for a period to enable the new industry to overcome its teething troubles.
The policy of protection has been well expressed in the following words: "Nurse the
baby, protect the child and free the adult". This practice is evident in China when China
closed it economy and protected its infant industries to mature before opening up to the
rest of the world. This has given China a very good advantage as it is now counted as
one of the giant industrialized countries.

Another good aspect of import substitution and trade protectionism is the fact that the
country would have diversified industries producing different goods and services for the
benefit of the citizenry. It is necessary to have a diversified industrial structure for an
economy to be strong and reasonably self-sufficient. An economy that depends on a
very limited number of industries is subject to many risks. A depression or recession in
these industries will seriously affect the economy. A country relying too much on foreign
countries runs a number of risks. Changes in political relations and international
economic conditions may put the country into difficulties. Hence, a diversified industrial
structure is necessary to maintain stability and acquire strength. It is, therefore, advised
to develop a range of industries by according protection to those which require it.
Therefore the president Dr. Yebeyeebi adopting this trade protectionism and import
substitution will help the country to achieve diversification. For instance when Ghana
gained independence in 1957, the president Osagyefo Dr. Kwame Nkrumah embarked
on massive industrialization establishing over a hundred factories to produce different
kinds of products. Mismanagement however, has led to the collapsed of all this
wonderful factories leading many people to be unemployed.

Again XYZ can improve its balance of payment account if the economy is protected. By
restricting imports, a country may try to improve its balance of payments position. The
developing countries, especially XYZ, may have the problem of foreign exchange
shortage. Hence, it is necessary to control imports so that the limited foreign exchange
will be available for importing the necessary items. In developing countries, generally,
there is a preference for foreign goods. Under such circumstances it is necessary to
control unnecessary imports lest the balance of payments position become critical.

Another benefit is that employment could be created if import is restricted. The domestic
economy could be stimulated and employment opportunities expanded if trade is
protected. Restriction of imports will stimulate import competing industries and its
spread effects will help the growth of other industries. These, naturally, create more
employment opportunities. For instance the massive industrialization embarked upon by
Ghana’s first president led many people to gain employment and this reduced the
unemployment situation in the country.

Protection could also help the country to develop its own key industries. If we do not
have our own source of supply of key inputs, we will be placing ourselves at the mercy
of the foreign suppliers. The key industries should therefore be given protection if that is
necessary for their growth and survival. For instance as Ghana was a leading producer
of gold and continues to be a leading producer after South Africa, the first president
thought of having a key gold refinery industrial in the country which was sited at Tarkwa
in the Western Region but was never put into use when Nkrumah’s government was
overthrown.

There are however benefits of international trade that XYZ as a country and its citizenry
may not enjoy as a result of the trade protection and import substitution.

One benefit that international trade presents is the availability of variety of goods and
services. Often it is either impossible or not economically feasible to produce certain goods
within a country even though the demand for them may be great. Importation results in
availability at a lower cost which in turn presents the possibility of more widespread
consumption. Hence the restriction to import will result in the citizenry not having this variety of
imported products. For instance Nigeria does not produce salt so if the country restricts trade
how will the citizenry enjoy the importance of salt in food production.

Another benefit may be the transfer of technology. Even when the foreign market is
serviced by producing abroad there are advantages for domestic consumers and
producers. Since both from the transfer of products and technology among countries
helps countries especially developing countries like XYZ to acquire new and improved
ways of doing things. By adopting import substitution and trade protectionism, XYZ as a
country may lack this transfer of technology. For instance after China had opened its
market to the rest of the world, many big companies have moved their production plant
to the country and this will help the country and the citizenry to learn the foreign
technology as well as how certain things are done. So with trade restriction and import
substitution, citizens of XYZ may not enjoy this amazing transfer of technology.

Another benefit of international trade is the wider market availability which leads to low
cost of production. International trade leads to the expansion of plant size. If such
expansion in trade leads to scale economics there is a good possibility that the benefits
of lower cost will be available to either or both the domestic and foreign consumers. The
presence and the degree of domestic competition will be available to either or both the
domestic and foreign consumers. The presence and the degree of domestic competition
will determine whether and how much of the savings will be passed on to consumer.
This lower cost may further broaden the domestic market and make luxury products
available to lower income segments. As a result of the wider market availability and the
cheap labour in China, cost of production has gone down and many companies want to
establish their plant there. This may not happen in a country such as XYZ as a result of
trade restriction and import substitution.

Another benefit which international trade provides but will be absent in an import
substitution and trade protectionism country like XYZ is the enhancement in the
standard of living of the citizenry. It provides new consumption experiences plus the
possibility of buying products that more closely meet the requirements of varying life
style. International track opens the world market to producers of these goods thereby
allowing more efficient and profited production with only local sales. The quality of the
lifestyle of the people of China and India has improved as a result of opening up their
economy. These countries can now afford to give grant or loan to Africa with a very
small interest rate.

From the argument above, it can be concluded that the adoption of trade restriction and
import substitution or free trade may depend on a country’s growth stage and the vision
of its leader. Countries like China have adopted trade restrictions and have succeeded.
Both trade restriction and free trade have their own challenges and both have their own
benefits too. As a recent independent state, I would cite with the president for
embarking on a massive industrialization drive and restricting certain products he
believe XYZ has the comparative cost advantage in its production. I would however,
advised that the economy should be opened for international business after the
objective of industrialization has been achieved.