Let it be noted at once that the policy affects the pattern of foreign trade; it does not reduce its volume. On the other hand, the capital requirements of under-developed economies are such that world trade increases in volume in the process of their planned development. Here also there is a vital difference between protection as such and a policy of trade control aimed at economic growth. Protection does tend to reduce the volume of international trade at any rate in the short run whereas a growth-oriented trade control policy tends to increase it. So economic growth is important.
One may perhaps ask at this stage why there should be at all any need for foreign trade control when what is needed is the creation of an over-all investible surplus. When one imports less and exports more, one may be said to ‘save’. It is this saving that is converted into capital goods for purposes of economic development. Could not the same purpose be served by domestic savings alone, with exports and imports left free? For realizing the desired rate of savings, could we not operate exclusively on the domestic market and with the surplus thus created secure through trade whatever foreign exchange was needed to give effect to planned growth? This surely would be possible provided the surplus generated through domestic savings could be converted into necessary capital goods at constant costs. And this would either require that the import content of planned investment is infinitely flexible or that exports of the planning country are perfectly elastic. So economic growth is important.
Domestic saving, in financial terms, means withdrawal of a part of income from current expenditure on consumption goods. The effect of such withdrawal is that, at current prices, some of the goods produced are left unsold in the domestic market. The goods thus released must either be transformed internally into capital goods, or else exported in exchange for capital goods produced in foreign countries. Now either of the processes^ subject to increasing costs at any rate, in the short run.1 Even if the goods released are wage-goods and raw materials which are capable, technologically, of being transformed internally into necessary capital goods, the process of transformation must be time-consuming and the rate of transformation must be higher than the international rate.
Internal resources are not perfect substitutes of external resources. Nor is it so easy to get the good exported, specially under the present conditions of international trade and payments. For exports to have the necessary degree of elasticity, there are at least three conditions that must be satisfied: (i) the goods must be in general demand in the international market; (ii) the volume of exports from the country in question must form a very small part of the aggregate international demand for the goods; (iii) the current domestic price of the goods, together with cost of transport and other charges, must not be higher than their international price. One has only to look at the nature of the conditions to realize that they are not even approximately fulfilled in the context of rapid economic development such as under-developed countries intend to achieve. So economic growth is important.
Under-developed countries need to import machinery and other kinds of capital resources from more advanced countries. If they have to produce all these internally, development is bound to become slow and more expensive. On the other hand, if internal savings are to be transformed via exports into external capital, there is bound to be some reaction on the terms of trade. There is indeed a certain degree of rigidity in the import content of investment in developing economies, and the elasticity of exports, particularly to countries which are to supply the necessary capital goods, is certainly less than infinity.
All this makes it essential for the under-developed countries to operate on foreign markets for the supply of foreign exchange wherewith to buy capital goods needed for development. The raison d’etre of foreign trade control lies in this. So economic growth is most important.