Why do countries prefer to use both import substitution and export promotion?

Traditionally, the two strategies are used separately by developing countries to achieve industrialization: one is the view of inward looking to develop domestic infant industries to compete in international markets. This strategy has the disadvantage of producing lower quality goods and using substandard technology during the capital formation stage. In comparison, an outward looking strategy encourages the allocation of national resources to export oriented transnational industries while avoiding price distortions.

An inward-looking strategy is also an attempt to withdraw--in the short run-- from complete participation in the world economy. This strategy consists of import substitution where the domestic means of production substitutes goods that otherwise would be imported.

This strategy can cut back on expenditures of scarce foreign exchange and generate new manufactured exports instead of exporting primary product while at at the same time, import substituting by infant industry argument can be applied. The strategy however, must consider tariffs, import-quotas and domestic subsidies to promote and protect import-substitution industries.

By comparison, an outward-looking strategy emphasizes participation in international trade by promoting the allocation of resources to export-oriented industries avoiding price distortions in the domestic market. Nonetheless, policy measures are not use to shift production arbitrarily between serving the domestic and foreign markets.

In this case, the economic principle of comparative advantage is the incentive for domestic production having an advantage either on labor costs, transportation or capital performance but not affecting prices of domestic consumption. This strategy follows an on export-oriented policy that is assisted by price assistance measures such as export subsidies, skill training of the labor force and using the most advanced technology. Also, offer tax incentives to foreign investment that generate more exports, specially labor intensive manufacturing where labor is abundant and its comparative advantage is greater when pegged to the overall international market.

China is a good example of this principle and strategy achieving great success in raising the standard of living of otherwise poor and untrained numerous rural populations. Another country that seems to be heading in the same direction and development strategy is India. The task is monumental for a country not only that has to focus on an outward looking development strategy but it also has to pay attention to building the supporting infrastructure like roads, bridges, ports and most importantly the necessary infrastructure for educating and training the labor force while trying to keep a balance between debt and GDP ratios to check inflationary pressures and retain its comparative advantage in international markets.