Research and changes in trade policy in the mid-sixties:

It is pertinent to ask was there any research that took place on trade policy as sich?  If yes, then in what context was this  research undertaken  by economists? Was it in terms of export performance and growth or in terms of trade policy and efficiency or productivity growth?  These are the questions that this section is  going to  answer.

Early Experience with ISI and Adjustments  in Policy

Most developing countries adopted IS1 policies initially. But adoption of ISI policies did not free developing countries  from  repeated BOP  deficits and crises. Exports grew slowly.  Both domestic firms and the TNCs producing consumer goods had no incentive  to export these consumer goods, as they had a protected domestic market that was  far more profitable. Countries, which had addpted a policy of  import substitution  in capital goods industries were not able to export these goods as often these goods did not incorporate  the latest technologies or because costs of production were high as scale of production was small or because exports of capital goods are often tied to provision of supplier's credits and these countries were not in a position to provide such credit. While exports stagnated, imports continued to grow rapidly, as when a good was produced domestically, imports of intermediate goods used  in  its production went up even though imports of that good went down.

Many policy  analysts  recommended South-South  regional trading arrangements (that  is,  trade  between  developing  countries  themselves)  to  resolve  the problem created by the small size of the domestic market. You will learn about regional trading blocs.  It  was argued  that  such regional arrangements would lead to rationalisation of  industries among developing countries and so to plants of an economic size, which could then compete in the world  market. The old belief that world  trade would grow slowly was rejected as world trade grew very rapidly in this period.