Advantages of Inward Looking Policies
Advantages of Inward Looking Policies
trade in and out of the country. They have been the crucial deciding factor for any
countries success as they can make or break the economy. Moreover they significantly
impact the major economic indicators of the economy such as GDP, inflation,
employment etc.
There are two ways in which countries can strengthen their industries and progress to
industrialization.
Both these policies are used to gain economic growth and industrialization however
they are very different in their essence. The policy maker and the economist have to
view various factors and decide which policy would best fit their own economy.
government is interested in protecting and helping the infant industries grow and become
competitive in the world market by gaining comparative advantage. This can be achieved
when the opportunity cost of producing that good is lower than other countries. This is
achieved through high trade barriers and high tariffs on imported goods. There is low level of
They provide subsidies to domestic firms and try to build on economies of scale in order to
lower their cost of production. This makes the country more competitive when the
It acts as a buffer and shields the economy from external forces. Hence the country is less
volatile towards outside recessions and booms, resulting in stable and sustainable growth.
expensive for people to buy. Hence they rely more on locally produced goods rather than
foreign goods.
Barriers will stay as they are until local firms are able to compete in terms of size & have
The inward policies lead to inefficient resource allocation which results in welfare loss within
the economy. This is because the goods and services available in the world market are
cheaper still the people are forced to buy them at a higher price from the domestic market or
The resource utilized in providing subsidies to the domestic firm has high opportunity costs.
These resources could’ve been used elsewhere such as in infrastructure, education, health
Low level of FDI means slower transfer of technology and knowledge which restricts growth
within the country. Moreover there isles accumulation of capital stock which leads to slower
economic growth.
CAPITAL COST:
The cost of importing capital machinery is higher due to increased tariffs and quotas in form
of protectionism. This may also result in worsening the BOP deficit rather than improving it.
OUTWARDLOOKING TRADE POLICY
These are the opposite of inward trade policies. Countries that implement it focus on
international trade, reducing protection, lifting subsidies and increasing FDI. Singapore,
Taiwan and Hong Kong are successful examples of implementations of outward policies. They
adopted it because of the limited scope from the small domestic market. They focus on
exporting more goods and services in which they have a comparative advantage and hence
more profits can be made. It focuses on export promotion and developing its competitiveness
Many of these factories are located in urban areas & they are labor-intensive. It provides
great employment opportunity to not only people in town but also to rural migrants. They can
develop their small scale industry and export their products in the foreign markets.
Aggregate Demand:
An export-oriented economy will expect an increase in its exports over imports, thus creating
net exports. As now the country will be catering to domestic as well as international market
An increase in exports over imports can improve its terms of trade. Terms of trade means
ratio of export prices to import prices. The country need to export lesser to finance the same
Since local manufacturers are producing on a large scale to world market, it is able to
significantly exploit EOS. This will give the developing countries an advantage
on top of its cheap labor. It will be able to compete easily at international scale with its cost
competitiveness. Ex:China
Developing countries are often accused by Western economies as the major contributors to
global warming, especially China. Rich Western economies have already reached
the desired level of income. As such living in a cleaner environment is now their priority.
Meanwhile, for poor but booming countries they have to sacrifice environment at the expense
of economic growth & development. Besides, industrialists in developing economies are not
that well educated. As such their level of environmental awareness is very low
This is assuming if all developing countries are trying to export their way out simultaneously.
Due to flooding of manufactured goods into the world market, its prices will be forced to
Export-led growth is not without its problems too. Its level of success depends a lot on the
pace of economic growth in rich Western countries. If U S is hit by a recession, then third
world countries could be the worst affected. Level of exports will slump. Unemployment will
escalate & the demultiplier effect will feed into the whole system.
It’s unlikely that Western manufacturers are able to compete with low cost Asian economies.
Manufacturing sector is labor intensive and labor form a large portion of total costs. It’s one
of the major arguments as to why major Western economies are shifting their comparative
advantage to services sector. Others which still have manufacturing industry as their core