Monday, September 7, 2009

Import Substitution in Modern China

I have been fascinated the last few days with a timely IMF working paper that argues rebalancing economic development in China will mean rapidly stimulating domestic demand and entering new non-tradable industries, even requiring some degree import- substitution. The paper is an ironic testament of these desperate economic times, considering the pervasive but wrong assertion among liberal economists that import-substitution failed in the 20th century. Besides ignoring the near complete decimation of important sectors within several developing national economies, the apologists for unfettered external export continue to pretend countries pursuing variations of import-substitution performed horribly. They didn't.

A blog post by Harvard economist, Dani Rodrik could not make this point much clearer. ISI "had a more-than-respectable productivity record" in the middle of the 20th century. So what are the prospects of the industrialization strategy making a comeback in the 21st? They could be greater than many care to admit.

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