Towards a Theory of Import Substitution Exchange Rates and Economic Development
Description:... Three factors are believed to have led to technological advancement in the industrially mature countries. First, a shortage of labour which encouraged labour-saving inventions; secondly, the existence of discretionary purchasing power needed to sustain the markets for these inventions; and thirdly, a relatively abundant supply of capital which provided the basis of production. These three factors have been conspicuously absent in the newly developing countries and technology has thus had to be supported by a different set of economic considerations. The author analyses the conditions for technological development in third world countries by drawing upon the Indian experience. Based on the idea that foreign exchange shortages provide the key impetus to import substitution, the study brings out the fundamental relationship between technological progress and the scarcity of foreign exchange. He relates technological advancement to the progressive substitution of imported elements in the production process by domestically manufactured ones, a process that requires skills as well as capital. Capital formation is thus seen not just as an engine of output but also as the basis for import substitution. The problem is examined at the macro level and, interestingly, also at the micro level where firms are shown to incorporate the shadow prices of foreign exchange in their production function. The micro and macro dimensions are neatly tied in with reference to the dynamics of development and the role of multinationals. The third edition contains a new Prologue as well as a case study which shows that the micro model of the firm can be extended to cover both the domestic and the export markets.
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