International Economics Strategies and Balance of Payments
Import Substitution
Import substitution aims to stimulate local industry by protecting it from international competition. By placing tariffs on more expensive imported goods, local production is stimulated, and domestic demand is reserved for domestic products.
The economic rationale for this strategy is the infant industry argument. In sectors with significant economies of scale and dynamic economies, established industries in industrialized countries have a competitive advantage over nascent industries. To overcome this, temporary support for new industries through tariffs is necessary until they achieve sufficient size and experience to compete internationally.
While tariffs negatively impact economic welfare, in contexts with significant economies of scale, the positive effects associated with exploiting increasing returns may offset the negative effects, benefiting the economy.
The challenge of import substitution intensifies as it transitions from simple to more complex stages. Easy import substitution is exhausted once the imports of nondurable consumer goods are replaced by domestic production.
In the difficult stage, the economy faces internal and external constraints.
Export-Oriented Strategy
Export-oriented strategies focus on two goals: directing industrial production to dynamic foreign markets and achieving international competitiveness in terms of technology and cost as quickly as possible. This requires implementing policies focused on strategic sectors with high export capacity.
This strategy involves an initial phase of easy import substitution. However, once this stage is exhausted, outward-oriented countries shift to export promotion rather than continuing with import substitution. Easy export substitution occurs when supported industries producing simple goods can compete on price and quality with previously imported goods and contribute to export growth. High exports stimulate the development of more technically complex industries. In this complex stage, government action can create competitive advantages, attract foreign capital, and facilitate technological learning.
Balance of Payments
The Balance of Payments is an accounting document that systematically records real and financial transactions between an economy and the rest of the world. Developed by the IMF, it reports foreign exchange transactions. Revenues represent inflows, while payments represent outflows. It comprises several sub-balances: the current account and the capital account.
Current Account
The current account encompasses operations related to income generation within a specific period, including exports and imports of goods and services, and compensation to residents for factors of production employed abroad. It consists of four sub-balances:
- Trade: Records exports as revenue and imports of goods as payments.
- Services: Records income from service exports and payments for service imports.
- Income: Records payments for work and capital employed in countries other than their owners. Income received is recorded as revenue.
- Transfers: Records unrequited transactions between residents and non-residents affecting current income, including public and private transfers or donations.
Capital Account
The capital account consists of the capital account, the financial account, and changes in reserves.
- Capital Account: Divided into capital transfers (transfer of asset ownership, transfers related to fixed asset purchases, and debt forgiveness) and acquisition/disposal of non-produced, non-financial assets (land, intangible assets).
- Financial Account: Records financial transactions or changes in assets representing wealth: money, credit, industrial property titles. These may or may not be related to the current account. Changes in liabilities are recorded in the first column, and changes in assets in the second. It includes trade credits, financial credits, direct investments, portfolio investments, property investments, and other investments.
- Changes in Reserves: Measures the increase or decrease in foreign means of payment resulting from international transactions during the period.
Two-Gap Theory (Chenery and Strout)
- Investment-Savings Gap: The gap between investment needed to promote self-sustaining growth and the financial possibilities arising from limited savings capacity.
- Foreign Exchange Gap: The gap between the need for import currency, which increases with development, and the limited export capacity, often reliant on primary goods.