Import substitution and export promotion: In search of a theory of economic development

This thesis analyzes the experiences and presents critical analysis of existing theories of the two major economic development strategies: import substitution and export promotion. Theoretical studies are conducted to elucidate the experiences of both strategies. The focuses are on government intervention versus free markets regime, and closed economy versus open economy with free trade.; Data and evidence suggest that many import-substitution economies had a very high level of government intervention, particularly, the heavy subsidies to industrial firms. The import-substitution economies may experience some economic growth at the initial stage, but eventually often resulted in economic stagnation. Evidence suggests that the technological progress in the import-substitution economies had been slow, while it had been faster in some export-promotion economies.; The first theoretical model studies the impact of government intervention on the entire economy. The model features continuum of heterogenous firms with explicit entry and exit. The government subsidy serves as an exit barrier to industrial firms that results in accumulation of a large number of inefficient firms. The quantitative experiments indicate substantial long-term welfare costs of the government intervention.; Another theoretical study focuses on the impact of international trade on industrialization and on manufacturing export of developing economies. The model features an intermediate capital goods sector, and a special factor of production, managing skills. A numerical example of trade between economies with different capital endowment illustrates that, for the economy with lower capital endowment, the stationary equilibria has a large manufacturing sector, and it exports the manufactured good to the relative capital abundant economy. However, in the autarky equilibria, the manufacturing sector has a much smaller output.; This dissertation suggests that the free markets and free trade approach may have been the true "engine of growth" behind many fast growing economies. In particular, government intervention and restrictions to trade had contributed to economic stagnation of import-substitution economies, and the relatively free markets, and free trade had contributed to fast growing of some export-promotion economies.