Import Substitution Industrialization - Policy Regimes, Indian Economy Video Lecture | Indian Economy - B Com

how everyone this is a tutorial about
trade policies in developing countries
and mainly dealing with import
substitution industrialization and
economic dualism and link between these
two there has been a belief that key to
economic development is really having a
strong manufacturing sector and one way
to have a strong manufacturing sector is
to really protect your industry at the
expense of imports you expect your
industry to have a potential comparative
advantage that the industry would reach
sometime in the future but right now it
is in the infancy stage and needs to be
protected and nurtured there has been a
successful infant industry argument
mainly with the US and Germany that
adopted this in 19th century also Japan
had extensive import controls or for a
long time as well and seeing the success
of these two countries a lot of
developing countries started protecting
their manufacturing sectors so there
have been arguments in favor of infant
industry protection one such argument is
that you know there are certain market
failures that prevents an industry from
reaching its comparative advantage a
sector has the potential to reach a high
level of productivity such that it might
have a comparative the country might
have a comparative advantage in the
future but at this point in time it is
being constrained and restricted by
other sectors and one might be in
perfect capital markets it's not easy
for this exporting sector to avail of
capital or borrow money at at the market
interest rate and it might just be that
there are no banks in those rural areas
where these export sectors might be now
so the growth of the industry is might
be restricted because of imperfect
capital markets or a probability
argument where you have certain goods
that have a large proportion of benefits
occurring to the society not to the
private sector that might invest in it
so you might have low levels of
investment in those sectors and then
other i joining sectors as well like
transportation sector you might not have
a decent roads for to transport the
goods from the
place where sleep reduced to where it
needs to be shipped to and this might
just be leading to a higher cost you
need to protect these industries till
the other sectors also develop and
you'll have a competitive advantage in
the future if you allow for imports to
come in at this point in time what's
gonna happen is that your own industry
will not be able to compete with these
inputs not because it is not product but
because it has other sectors that are
pulling it down and up but but what
we've observed is that this impulsive
students Allah zation has not really
worked the way it was supposed to the
way that it worked for the US and for
Germany they also pawns with the infant
industry argument that had been ignored
earlier one is industry might have a
competitive advantage in the future but
how much further in the future do you
think you might have that advantage and
would it make sense to protect the
industry right now if after 20 years you
might have comparative advantage one
example that is offered is of South
Korea which protected its industry for
20 years and it is only now that we see
Kia trying to compete with other
automobiles and number two some of these
industries that these countries are
trying to protect might not really have
a competitive advantage even in the
future so they might be wrong assumption
about which industries might have a
competitive advantage and here we talk
about Pakistan and India that have had
protection for this industry for a long
time and it's once India had to lower
its tariff rates the protection it was
offering its import competing sectors in
the 90s we observed that the industries
could not really compete with the
outside world and it's still like
manufacturing sectors that are able to
really compete and we have the promise
legal sector as well now and then the
third is well what if you do protect
your industry and the industry is
producing for the domestic market but
the domestic demand is too small it's so
small that you are actually producing an
inefficient scale of production that
means your protein such a small amount
that you can't really avail of economies
of scale that might exist in the
industry right and in that sense
really drive down the average cost
she'll never bring down the cost of
producing the good because of the the
restrictive demand that exists in your
countries in that case you'll never have
the competitive advantage because you'll
never ever produce at a scale to bring
down your cost no so what has been the
result of adopting import substitution
initialization in these countries there
has been higher rates of effective
protection and in efficient scale of
production in these industries and the
main one that we'll discuss in this
lecture is high in income inequality and
unemployment in these countries and this
is a table which shows the effective
rate of protection for various countries
at various points in time and would be
peace you see for Pakistan I 271 percent
after is being imposed on imports
whereas for Mexico you see only 26
percent
so really different countries of
adopting different kinds of our trade
policies some by protective measures
some lots of protective measures and
India hovers around 300 percent as well
right so where are we going with this
well we want to look at economic dualism
what is the atomic dualism it's exactly
what this picture shows you there is a
modern sector that exits exists with a
whole slum area around it right so you
have high levels of unemployment in the
city and this unemployment is arising
because you have a traditional sector
which is offering them a very lower wage
compared to the modern sector and people
are migrating from rural areas to urban
areas right so you see a slump right
next to a big city here and really all
countries well while the developed go
through this period of duality because
development really proceeds unevenly ad
you have dual economy where Mourne
sector starts performing much better
than our traditional sectors
lags behind and you have in dualism and
then countries develop further and this
duality disappears now the what is one
of the symptoms of dualism how do you
define or how do you characterize
economic duality well you have two
sectors coexisting with very different
characteristics you have a modern
industrial sector which has a higher
high value of output per worker so
productive de labor productivity is
really high in these sectors compared
with agriculture sector there's a huge
wage differential wages are much higher
in the modern sector compared to the
agriculture or the traditional sector
higher capital intensity in the
manufacturing sector in the modern
sector further increasing the labor
productivity end and then you have
persistent unemployment around the urban
areas that those were the slums that we
saw in that picture and this is the high
level of unemployment that exists in the
urban areas now how how our import
substitution in this legislation
economic dualism linked well if you have
this high levels of unemployment around
your urban areas that means the modern
sector is not able to absorb these
people that are migrating from rural to
urban areas so the believers in is I
really think that the is I can is
dualism and if there is economic duality
then maybe what policies developing
countries should be following is one of
protection in perceptions utilization
the protector manufacturing sector or
the modern sector from imports the
prices in these sectors rise and
production would increase enhance
employment increases and you deal with a
decreasing unemployment right so that's
really what the argument is in favor of
ISI now the other argument the
counter-argument is that actually you
know what the dualism has been worsened
by import substitution utilization this
is actually a cause of these severe
levels of dualism found in developing
countries these days not a solution so
these are the arguments in the counter
humans for whether you should use ISI
when you have economic dualism so let's
look at the first argument as I
mentioned earlier in perception and
industrialization GAD is realism by
reducing unemployment you protect the
import substitution a substitute import
competing sectors your manufacturing
sectors your modern sectors from imports
you block out imports the production
takes place at home this increase in
production this increase in
manufacturing Goods employment increases
and you can deal with these slum areas
these high levels of unemployment in
urban areas the second the
counter-argument is well not really but
has been observed in some developing
countries is that there has been an
increase in economic diversity as a
result of import substitution
initialization so it's actually causing
it not helping and the ones to come up
with for Harrison to taro they came up
with this model which links they explain
this counter-argument by linking the
rural to urban migration and
unemployment in urban cities and the it
undermines the migration undermines the
case of favouring manufacturing
employment right so really what we are
what they were suggesting is that right
you do if you protect the manufacturing
sectors and the prices are increasing
the sectors of pages are also increasing
these sectors so increasing this beta
disparity between traditional sector and
the urban sector and their argument is
really based on this evidence that we
see that highly elastic economies also
have a high level of urban unemployment
and so the main a link that they are
making is between the rural to urban
migration which is so large that the
increase in urban employment cannot keep
up with this migration and urban
environment actually arises now that
that would happen because
you're protecting the manufacturing
sector the modern sector right the
prices are going up the wages are going
up it has higher returns and so you see
capital moving more towards the modern
sector is becoming more productive the
bridges are increasing at the same time
the traditional sector is lagging behind
the productivity isn't increasing at the
same pace
the wages aren't going up there is a
huge disparity now that wage disparity
between modern sector and traditional
sector so more people are going to be
dissatisfied in the rural areas and move
towards urban areas
so really the problem is your
traditional sector that is not really
able to increase productivity okay so
these are pictures of some traditional
sectors in India and what we see here is
really the there hasn't been any
improvement in technology being used in
their de culture sector the labor
productivity is very low as a result you
see the wages lower in these durations
actors and modern sectors trade policy
has really been accused of avoiding this
wage differential as well as fostering
excess capital intensity in the capital
in the modern sector by imposing high
tariffs you're keeping the prices in the
manufacturing sectors artificially high
which then increases the capital
intensity in these sectors because it's
more profitable to invest in these
sectors because of higher prices is
resources moving away from agriculture
towards a modern sector to deal with it
moving to ilysm you really have to
attack the problem the problem of rural
to urban migration you have to deal with
this of wage inequality by increasing
the labor productivity in the
traditional sector