Question

Who benefits from an import-substitution strategy? Who is harmed?

Short answer

Answer: Domestic industries, employment, government revenue, and economic stability can benefit from an import-substitution strategy. However, consumers, inefficient industries, export industries, and overall economic growth can be harmed by this approach.

Step-by-step solution

Beneficiaries of Import-Substitution Strategy

The following segments of society or economy can benefit from an import-substitution strategy: 1. Domestic industries: This strategy encourages and protects domestic industries by providing them with various incentives and protectionist measures. As a result, they can grow and become more competitive, ultimately benefiting employers and employees in those industries. 2. Employment: An increase in domestic production can lead to higher employment, as more workers are needed to produce goods and services that were previously imported. 3. Government revenue: Tariffs and other trade restrictions on imports can generate significant revenue for the government, which can be used to invest in public services or infrastructure. 4. Economic stability: By reducing dependence on imported goods, a country can minimize its vulnerability to external shocks (e.g., currency fluctuations, trade disputes) and maintain a more stable economy.

Harmed by Import-Substitution Strategy

The following segments of society or economy can be harmed by an import-substitution strategy: 1. Consumers: Import restrictions can lead to higher prices for goods and services, as competition from cheaper imports is reduced. Consumers may also have less variety in their choice of products. 2. Inefficient industries: While the strategy may protect domestic industries, it can also encourage inefficiency, as they may not need to innovate or reduce costs to compete with cheaper imports. This lack of competitiveness can harm the long-term development of industries. 3. Export industries: A protectionist strategy can result in retaliatory trade barriers from other countries, which can harm industries that rely on exports for their growth. 4. Economic growth: Although the strategy can boost domestic production, it can also negatively affect economic growth if it impedes international trade, investment, and technological innovation. Countries that fail to integrate with the global economy may stagnate or fall behind in development. By examining the pros and cons of an import-substitution strategy, the answer to the exercise is that domestic industries, employment, government revenue, and economic stability can benefit from this strategy, while consumers, inefficient industries, export industries, and overall economic growth can be harmed.