Industrial Development
Senior 6 · Economics
Industrial Development
Lesson 4 of 4
25 min
NST2 sets two industrial aims side by side. It plans to double Rwanda's export revenues from US$3.5 billion in 2023 to US$7.3 billion by 2029 (MINECOFIN, NST2, p. 12), and it says the Made in Rwanda policy will be strengthened "to ensure production of a high proportion of essential and high-value items locally, grow exports and reduce imports" (NST2, full version, p. 9). Unit 1 introduced the two trade strategies behind these aims; this lesson asks which of them can drive industrialisation.
Think: can a country protect its home market and push into export markets at the same time? What could go wrong?
Definition
Import-substituting industrialisation (ISI): an inward-looking strategy of building industries to supply the home market with goods that were imported, usually behind tariffs, quotas and other protection.
Export-promoting industrialisation (export-led growth): an outward-looking strategy of building industries that compete in world markets, using incentives such as tax relief, special economic zones and a competitive exchange rate rather than import barriers.
Definition
Infant industry: a new industry whose costs are high at first because it lacks scale and experience, but which could become competitive if given time to grow and learn.
Effective rate of protection (ERP): the percentage by which protection raises an industry's value added above what it would be at world prices:
where is value added per unit at world prices and is value added per unit at protected prices.
From the 1950s to the 1980s many developing countries, especially in Latin America and later in Africa and South Asia, followed ISI, partly because economists such as Raúl Prebisch and Hans Singer argued that the terms of trade of primary exporters tend to worsen (Unit 1). ISI usually passes through two stages:
| Arguments for ISI | Arguments against |
|---|---|
| Saves foreign exchange and eases the balance of payments | Needs imported machines and inputs, so the import bill often rises |
| Creates industrial jobs and skills at home | Protected firms become inefficient and never "grow up" |
| Allows infant industries to learn | Consumers pay higher prices for lower-quality goods |
| Builds linkages with local agriculture and services | Small home markets limit scale; plants run below capacity |
| Reduces dependence on volatile primary exports | Encourages lobbying for protection (rent-seeking) and smuggling |
| Raises tariff revenue | Often capital-intensive, so creates few jobs; ignores export markets |
A tariff of 30% lets the infant sell at home even though its average cost is above the world price. If the firm learns, its cost soon falls below the protected price and then below the world price at time T; after that it needs no protection, and the tariff should go. The danger is the second firm: protected, it has little reason to cut costs, and protection becomes permanent. The infant industry case therefore needs protection that is temporary, conditional on performance and announced with an end date.
Worked example
Worked example 1: the effective rate of protection (illustrative figures)
A shirt sells on the world market for US$10 and uses imported cloth costing US$6. Rwanda puts a 25% tariff on shirts but none on cloth. Find value added at world prices, value added with the tariff, and the effective rate of protection.
A 25% tariff on the product gives the shirt-maker 62.5% protection on its own activity, because the whole price increase falls on value added. If cloth were also taxed at 25%, then and the ERP would be only 25%. This is why tariffs that escalate with processing (low on inputs, high on finished goods) strongly favour final assembly.
From the 1960s South Korea and Taiwan, and later other East Asian economies, built industries that had to compete abroad. Governments still helped them, with credit, tax incentives and some protection at home, but tied the help to export performance: firms that failed to export lost their support. Exports gave them markets far bigger than home, foreign exchange to buy machines, and constant pressure to raise quality.
| Arguments for export promotion | Arguments against |
|---|---|
| World markets allow economies of scale, even for a small country | Exposes firms and jobs to world recessions and competition |
| Competition forces efficiency, quality and learning | Rich countries' protection can block access |
| Earns foreign exchange to pay for imported capital goods | Incentives and special zones cost government revenue |
| Labour-intensive exports create many jobs | Low wages may be the main "advantage"; working conditions can suffer |
| Attracts foreign investment and technology | Export enclaves may have few links with local firms |
| Follows comparative advantage, so uses resources efficiently | Hard for a landlocked country with high transport costs |
Worked example 2: how fast must exports grow?
NST2 aims to raise export revenues from US$3.5 billion (2023) to US$7.3 billion (2029). What average annual growth does that need?
By the rule of 70, revenue growing at 13% doubles in about years. Such growth is hard to reach from coffee, tea and minerals alone, whose prices swing; it points to new manufactured and service exports.
The Made in Rwanda Policy is explicit that it pursues both channels: it aims to improve the trade balance "both by recapturing parts of the Rwandan market from imports and by improving the ability of Rwandan producers to compete in exports markets" (MINICOM, 2017, p. 2). Its five pillars are sector-specific strategies, reducing the cost of production, improving quality, promoting backward linkages, and mind-set change (p. 1). Most of these are supply-side measures that raise competitiveness rather than barriers against imports, while the EAC common external tariff gives some protection to goods the region can make.
| Element | Import substitution | Export promotion |
|---|---|---|
| Local preference in public procurement (Made in Rwanda, p. 2) | Yes | |
| EAC common external tariff on finished goods | Yes | |
| Quality infrastructure and certification | Yes | Yes |
| Special economic zones (lesson 3) | Yes | Yes |
| Export revenue target of US$7.3 billion (NST2) | Yes | |
| Regional and African trade agreements (Unit 4) | Yes |
Warning
Don't present the two strategies as opposites only. The countries that industrialised fastest used protection and export discipline, in sequence or together. The exam question is usually "which mix, for which industries, for how long?" Answer it for named industries: cement and dairy (home market, heavy transport costs) differ from garments and processed coffee (export markets).
Tip
Three tests for any protected industry: Is protection temporary? Is it conditional on performance, such as exports or falling costs? Is the industry one where Rwanda could eventually have a comparative advantage? If all three answers are yes, the infant industry case is strong.
Important
Discuss. Which strategy, import substitution or export promotion, would best drive structural transformation in Rwanda over the next ten years? Justify your answer for two named industries.
Kigali Today, "President Kagame Tours Special Economic Zone" (about 2016). The President urges manufacturers to serve the local market well before aiming at regional and international markets. Is this advice closer to import substitution or to export promotion? Discuss after watching.
Practice
Further reading
Sources and credits
Written by Ganzaa: the text, the infant industry diagram, the tables, the worked examples and the practice items. The prices and costs in the diagram, worked example 1 and the practice items are illustrative.
