The role of trade in economic growth and development is an issue that has received
considerable examination. In the context of developing countries, policies regarding trade
orientation have been an important part of the debate. Recognizing the growth in the industrial
sector as an important component of economic development, policy makers in developing
countries have leaned towards inward- or outward-oriented trade policies at different times. As
will be discussed in the course of this study, an inward orientation has been thought to hinder
export in various ways. Nonetheless, many countries, especially in Latin America, have shown
considerable progress in industrialization, if only for a certain period of time, under such a policy
(Dornbusch, 1992). In contrast, policies promoting outward orientation seek to eliminate the
biases against export. In some cases, this has been done by explicitly promoting export in
particular sectors or components of those sectors. Many countries, most notably the East Asian
economies, that adopted such policies have undergone substantial and sustained industrialization
themselves.
Inward-oriented trade policies are part of an Import-Substitution development strategy.
The theory of import substitution holds that the production structure of developing countries is
dominated by the primary commodities – agricultural and mineral goods – sector. Further, it
assumes that these countries do not benefit from international trade because the terms of trade
has permanently favored non-primary goods. Thus, to achieve development, the production
structure of these countries has to change – these countries need to industrialize. As developed
countries are already industrialized, developing countries need to protect their economies from
imports and efforts should be made to establish and protect import-substituting industries. These
industries would enable domestic production of goods that would otherwise have to be imported.
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In the long run, these industries will be able to gain international competitiveness and will
emerge as a healthy export sector.