Benefits
1. Export expansion:
A better answer instead of putting so much emphasis on import substitution, it makes more sense for governments to balance it with a policy of export expansion.
The idea is to join in what has been called the international division of labour, where each country makes the best use of its resources by concentrating on producing and exporting products in which it has a competitive advantage, while buying from other countries the products they produce more efficiently.
By increasing their export earning, countries are better able to pay for their imports. But there are other reasons why developing countries should try to expand their exports, develop new, export-oriented industries and seek new markets.
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Governments take a keen interest in exports because they speed economic development and improve the standard of living of the people. Success means increasing the total amount of exports.
It also means diversifying those exports not only in terms of products but also in terms of exports markets. This spreads both the risk and the benefits.
2. Increased scale:
By exporting, industries can increase the scale of their production, thus increasing efficiency and lowering costs.
3. Better usage of national resources:
Many developing countries concentrate on their traditional export products – even when the demand for at least some of these products in world markets is declining. It is clearly in their interest to allocate some of these resources to products for which the demand is increasing.
4. Diversification of products and markets:
It is all the more important that diversification of products and markets should be there because some developing countries see only limited growth prospects for their traditional exports. The reasons for this include:
i. Declining growth of demand in world markets for many primary products
ii. Technological changes that economies on raw materials
iii. Competition for artificial substitute
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Widening beyond the home market, an important objective of exports is to seek a wider market than the limited home market.
Many developing countries with a small population and very low per capita income find that they have the natural resources to produce a particular product. But the home market is often too small to justify a factory of even the minimum efficient size.
This type of problem was faced by the Government of Somalia earlier when trying to establish a Gypsum factory. In spite of the fact that the country has big deposits of Gypsum, the amount of the finished product that could be sold on the home market did not justify setting up a factory.
This situation, which is fairly common, can often be dealt with successfully if production is aimed towards foreign markets.
5. Reducing unemployment:
The effects on employment of export expansion can be very significant. This is particularly true if the exporting is by labour- intensive industries, and if the industries are located in rural areas where there is a serious shortage of jobs.
6. Technological advance:
Expansion and diversification into exports also lead to improvement in the level of technological ‘know-how’. Competition in international markets stimulates the exporters to adapt their products to the needs of the market, often leading to the use of more modern technological processes and production methods. This has a dynamic effect on industry in the developing country.
These beneficial effects are not confined to production aspects. Greater knowledge is gained about marketing research, export costing and pricing, management of marketing channels, personal selling and publicity. This can have a very beneficial effect on business efficiency in general.
7. Better products:
Another argument for export expansion is that competition in world markets stimulates your own industries to produce better quality goods, a development which is also of benefit to people buying the same goods at home.
In producing better quality goods, your factories also demand a higher level of skills, so that the impact of export expansion is to increase the level of jobs as well as the number of them.
Everyone knows that exports are good for the country as a whole. But, businessmen will only enter the export field, if they know that exporting is going to increase their business and produce profits.
8. Foreign exchange benefits:
A country must achieve a surplus from the export of products that it is good at producing – so that it may import goods for which it has no comparative advantage.
The hunter exchanged his surplus with the farmer and some international trade is still done on a better basis. Most trade is now carried out using money, both within a country and internationally.
If we need US Dollars to buy the goods we need, what is the use of earning German Marks? Because there is a market for currencies in the same way as there is for products-we can buy Dollars with German Marks.