UNIVERSITY OF CAPE COAST

Cape Coast, Ghana

Eco 404: Economic Growth & Development II

Dr. Benedict Afful Jr.

0244984060
[email protected]

Department of Economic Studies

School of Economics
College of Humanities and Legal Studies
University of Cape Coast
 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA

LECTURE 3
20/09/2022
IMPORT-SUBSTITUTION
INDUSTRIALISATION
Dr. Benedict Afful Jr, Lecturer in Economics
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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA LECTURE 4

•Strategies and Policies of

Economic Development
➢Balanced and Unbalanced Growth
➢Import-Substitution Industrialisation
➢Export-Oriented Industrialisation

Dr. Benedict Afful Jr, Lecturer in Economics

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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA

IMPORT-
SUBSTITUTION
INDUSTRIALISATION
Dr. Benedict Afful Jr, Lecturer in Economics
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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Import Substitution Industrialization
• Import substitution is a trade policy aimed to promote
economic growth by restricting imports that
competed with domestic products in developing
countries.
• ISI is a trade and economic policy which advocates
replacing foreign imports with domestic production
• Thus, import substitution approach substitutes
externally produced goods and services with locally
produced ones
Dr. Benedict Afful Jr, Lecturer in Economics
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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Import Substitution Industrialization
• Import substitution can also be discussed as a policy
strategy that attempts to utilize underused capacities,
reduce regional unemployment or protect infant
industries

• ISI is an inward-oriented strategy in which the

government attempts to redirect domestic demand
from imports to domestic production.

Dr. Benedict Afful Jr, Lecturer in Economics

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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Import Substitution Industrialization
• Key idea:
➢ ‘produce it rather than import it’
• Strategy:
➢ “ that a developing country should, whenever possible,
produce goods domestically, rather than import them”
• The notion of import substitution was popularized in the
1950s and 1960s as a strategy to promote economics
independence and development in developing countries

Dr. Benedict Afful Jr, Lecturer in Economics

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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Origins of Import Substitution Industrialization
1. Wars and Depressions (Cataclysmic Origins) : 2
world wars and the great depression.
2. Growth of Domestic Market: cement and beer.
3. Official Development Policy: deliberate policy
thus state own or domestic manufacturing firms.
4. Balance of payment difficulties: domestic
production to solve BOP deficit problems.
Dr. Benedict Afful Jr, Lecturer in Economics
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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Objectives of ISI
1. Promoting of domestic industry
2. Employment generation
3. Promotion of industrialization
4. Improvement of balance of payment
5. Boost spending on national output
6. Conservation of foreign exchange

Dr. Benedict Afful Jr, Lecturer in Economics

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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Necessary conditions for ISI
1. The government needs to adopt a policy of organizing
the selection of goods to produce domestically

2. Subsidies are made available to encourage domestic

industries

3. Government need to implement a protectionist

system with tariff barriers to keep out foreign goods

Dr. Benedict Afful Jr, Lecturer in Economics

[email protected]
 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Steps for implementing ISI
1. Identify large domestic markets, as indicated by substantial
imports over the years.
2. Ensure that the technologies of production can be
mastered by local manufacturers or that foreign investors
are welling to supply technology, management and capital.
3. Erect protective barriers, either tariffs or quotas on
imports, to overcome the probably high initial cost of local
production and make it profitable for potential investors in
the target industries.
Dr. Benedict Afful Jr, Lecturer in Economics
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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA ISI as Official Development Policy
• Frist stage: replacement of imported goods with
domestic production of non-durable consumer goods
which were formerly e.g. Footwear, matches, soap etc.
• Second Stage: This stage involves intermediate goals
production. Such production is subject to substantial
economies of scale both internal and external. The
unit costs are therefore very high if output is low. For
the protected domestic economy with limited market,
a relatively high rate of protection is required.
Dr. Benedict Afful Jr, Lecturer in Economics
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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA ISI vs comparative cost doctrine
• As a development strategy ISI conflicts with the comparative
cost doctrine.

• As a developing country, if we are going to allow

comparative cost doctrine to dictate to us then we will never
be in a position to accumulate the type of capital that will
enable us to develop.

• The comparative cost is condemning us to area of

production which will not help us to develop.
Dr. Benedict Afful Jr, Lecturer in Economics
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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA ISI vs. Comparative cost doctrine
• Why?
• This is because:
1. a lot of things we produce are being replaced by synthetic
substitutes.
2. the relative factor endowment that dictates the exports of
primary product changes with population growth, degradation
of natural resources, capital accumulation, education of the
labour force and acquisition and adoption of new technology.
3. it should also be noted that countries comparative advantage
tend to move with development (factor intensity).
Dr. Benedict Afful Jr, Lecturer in Economics
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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Economic Argument for Protection
1. The infant industry argument: Such industries cannot
stand the competition from abroad.
2. The existence of external economies in production: In
developing countries social cost may diverge substantially
from private cost and social benefits may exceed the
private benefits because of externalities.
3. Primary activities in exports tend to have little secondary
impact on other activities.
Dr. Benedict Afful Jr, Lecturer in Economics
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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Evaluation of ISI
1. The small size of the domestic market limits the scope of
application of large scale production methods.
2. Technical change is hindered by lack of sufficient domestic
competition and the existence of sellers’ market.
3. Producers have dominant position and consumers have
practically no choice between domestic and foreign
products.
4. The results is that far from catching up with the industrial
nations, developing countries fall further behind in terms of
productivity levels.
Dr. Benedict Afful Jr, Lecturer in Economics
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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Evaluation of ISI
Price

a SS

b
𝑃𝑑∗

𝑃𝑑𝑡
A B C
D
𝑃𝑤 𝑃𝑤

c DD

0 𝑄2 𝑄4 𝑄0 𝑄3 𝑄1 Quantity

Dr. Benedict Afful Jr, Lecturer in Economics

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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Effects of protection on growth
1. Protection permits rapid expansion of manufacturing in the
first stage of imports substitution when imports of non-
durable consumer goods are replaced by domestic
production. Such industries are targeted because they
employ chiefly unskilled and semi-skilled labour and they do
not require the application of sophisticated technology and
need few inputs from ancillary industries. In addition, the
efficient scale of operation of these industries is relatively
small.

Dr. Benedict Afful Jr, Lecturer in Economics

[email protected]
 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Effects of protection on growth
2. In the second stage, the expansion of output in industries
producing non-durable consumer goods necessarily slows down
after imports have been fully replaced since domestic
production cannot continue to grow faster than home demand.
At the same time increasing difficulties are encountered in
import substitution with regard to other intermediate products,
capital goods and durable consumer goods. These require
higher technology and skills and need large scale production for
efficient operation. They also require materials, part and other
components from other industries which may not exists.
Dr. Benedict Afful Jr, Lecturer in Economics
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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Effects of protection on growth
3. Behind the protection of tariff walls, firms are suitable to be
subject to government interventions that can affect
employment, costs and pricing.

4. The infant industry argument for temporary protection

against imports is more difficult to assess. If a country truly
possesses a potential comparative advantage in the production
of a particular good, then tariff protection for a short period of
time, has theoretical merits.

Dr. Benedict Afful Jr, Lecturer in Economics

[email protected]
 Advantages of ISI
UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA

1. Protects jobs in domestic market

2. Protects local culture and habits
3. Protects the economy from power and bad
influence of MNC’s
4. Reduced dependence on labour non intensive
industries
5. Resilience in the face of global economic shock
6. Less long distance transportation of goods
Dr. Benedict Afful Jr, Lecturer in Economics
[email protected]
 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA Disadvantages of ISI
1. The IS industries are inefficient as they are not exposed
to internationally competitive industries
2. Increase in unemployment internationally as world GDP
decreases through promotion of inefficiency
3. May only protect jobs in short-run
4. Lack of specialization and comparative advantage
5. High rate of inflation due to domestic aggregate supply
constraints
6. May cause retaliatory measures
Dr. Benedict Afful Jr, Lecturer in Economics
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 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA
TO DO
1. State 7 countries (at least one from each continent) that
have ever participated in ISI.
2. Mention any 3 countries that have not participated in
ISI.
3. READ EXPORT-ORIENTED INDUSTRIALISATION ON
YOUR OWN.

Dr. Benedict Afful Jr, Lecturer in Economics

[email protected]
 UNIVERSITY OF CAPE COAST
CAPE COAST - GHANA

MOBILIZING RESOURCES FOR

ECONOMIC DEVELOPMENT
IN OUR NEXT LECTURE

[LECTURE 5]
Dr. Benedict Afful Jr, Lecturer in Economics
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