Answer to Question #48945 in Economics for sara ib

Question

1) Pretend you are a trade economist providing advice to the government of a newly emerging African country. Present (neutrally) both the case for and against a trade policy based on import substitution. You may use specific international (real-world) experiences to support your case for and against such a policy.

2) Is it possible for a country to have, simultaneously, a current account deficit along with a balance of payments surplus? Explain your answer with reference to the significance and meaning of each of the BOP accounts. Be sure to discuss the possible implications for official international reserve flows (i.e. the reserve portion of the financial account).

Answer 1

1) Import substitution industrialization (ISI) is a trade and economic policy that advocates replacing foreign imports with domestic production. ISI is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. The term primarily refers to 20th-century development economics policies, although it has been advocated since the 18th century by economists such as Friedrich List and Alexander Hamilton.
ISI policies were enacted by countries in the Global South with the intention of producing development and self-sufficiency through the creation of an internal market. ISI works by having the state lead economic development through nationalization, subsidization of vital industries (including agriculture, power generation, etc.), increased taxation, and highly protectionist trade policies. Import substitution industrialization was gradually abandoned by developing countries in the 1980s and 1990s due to structural indebtedness from ISI-related policies on the insistence of the IMF and World Bank through their structural adjustment programs of market-driven liberalization aimed at the Global South.
2) A country's current account is one of the two components of its balance of payments, the other being the capital account. The current account consists of the balance of trade, net factor income (earnings on foreign investments minus payments made to foreign investors) and net cash transfers.
The balance of payments (BoP or BOP) of a country is the record of all economic transactions between the residents of a country and the rest of the world in a particular period (over a quarter of a year or more commonly over a year).
So, a country may have a current account deficit along with a balance of payments surplus, if the capital account has surplus, which is higher, than current account deficit.