We have seen that commercial policy in a developing economy must be directed to the realization, through export surplus on current consumption account, of enough foreign exchange to feed the process of investment involved in the planned target of growth.
The process is no doubt eased by foreign aid and, thanks to the growing awareness in the advanced countries of the need for international economic co-operation, foreign aid is becoming a significant element in the financing of economic development of underdeveloped countries. Yet foreign aid, even as it is, covers only a part of external finance in the context of rapid economic development of these countries; the remaining part must necessarily be export surplus on current account. So economic growth is important.
Now a country can create export surplus by cutting down imports and by increasing exports. If adequate foreign exchange is to be secured to give effect to a development plan involving the use of imported capital goods, imports of consumption goods must be cut down below the normal level and exports must be pushed up beyond the normal level. A rational commercial policy must have both these methods in view.
Whereas, however, the decision to import less is a one-party decision, the decision to export more involves two parties the country sending exports and the country receiving them. This is why under-developed countries are often bound to place more reliance on import restriction than on export promotion in their endeavour to secure foreign exchange for developmental purposes. It is indeed mainly through curtailment of imports that the foreign exchange requirements of a development plan have to be met at any rate in the early stages of planning in an under-developed country.
And in most of the under-developed countries there is a fairly good scope for such curtailment. It is one of the evil paradoxes of an under-developed country that while the vast majority of the population is subnormally poor, there is a section which earns enough to enable it to indulge in imported luxuries. Controls may conveniently be applied, as they are being applied in the developing countries, to these imports.
For luxury goods are, by definition, goods shortage of which does not affect the productive efficiency of the people. They are non-essentials from the point of view of economic growth and one can extend the list of such goods according to one’s conception of the degree of non-essentiality. How far controls on such imports can be carried and what impression they would produce on balance of trade in any specific case depends, first, upon the significance of luxury items in the normal import basket of the country and, secondly, upon the political pull of its so-called U-sector. So economic growth is important.