Most developing countries have announced that they will convert their economic development strategies from import substitution to export promotion. But the majority of them have not lived up to that commitment. This raises the question as to why there is a gap between rhetoric and reality. Several explanations stand out. First and foremost is the intellectual power of the infant-industry argument, which says that positive externalities may justify temporary protection of some industries until they mature later. Secondly, the shift to more open economies is often resisted by powerful interest groups such as bureaucrats and protected firms. Bureaucrats resist reform because they benefit from discretion over the allocation of import licenses, and protected firms resist reform because they lose their rent and face more severe competition.
In this publication, Anne O. Krueger addresses the reasons why policymakers do not live up to their commitments, as well as other questions. She explains the reasons why import-substitution policies failed in the past, assesses the effect of outer-oriented trade policies on economic development, explores how to overcome the problems encountered in the reform process, and draws some preliminary conclusions for Egypt. She makes a persuasive case for reducing the bias against exports by providing incentives across the board. Her analysis draws substantially on the experiences of Chile and Korea.
Author(s): Anne O. Krueger