It thus appears that a rational commercial policy whose aim is to cut down imports to a planned minimum has to choose between the quota system supplemented by high tariff or licence auctioning on the one hand and the system of State trading on the other. Given a firm approach, the end can be achieved by either of these methods.
In a democratic society, however, where public opinion does not view nationalization with favour and specially where established traders have some political pull, the preference obviously will be for the former. On the other hand, if the quota system leads to conspicuous abuse and corruption, the Government may, even if reluctantly, be driven to adopting the policy of State trading Whatever the method, import restriction is to operate as the chief instrument for meeting the foreign exchange gap associated with planned economic development in its initial stages. So economic growth is important.
Export promotion is by far a more difficult job for an underdeveloped country, specially in the short run. Indeed one of the characteristics of an under-developed economy is absence of variety, and hence of resilience, in exports. These countries have generally a set pattern of exports, commodity-wise as well as country-wise. They cannot easily make shifts in the pattern; introduction of new varieties of exports and cultivation of new markets take time and are themselves largely dependent on the level of economic development that a country has already attained. The difficulty is enhanced by the fact that a process of planned development is almost invariably accompanied by a rise in prices and costs in the economy. ‘Development with stability’ is a counsel of perfection which it is difficult for a developing economy to conform to if only in view of the pressure that rapid growth brings to bear on the labour market. So economic growth is important.
Export subsidies, excise duties with rebates on exports, retention quotas etc., are the usual devices for export promotion. These devices are however uncertain in their effect on exports, in so far as they are applied to the current flow of goods and the current pattern of production; the traditional exports of these countries are not elastic enough. If an attack is made on all fronts, some result may perhaps be achieved; but considering the possible yield from such measures and considering also their implications for terms of trade, one wonders if they are worthwhile. The futility of such measures is amply illustrated by the experience of our own country. With all the export promotion schemes that the country has had, its export during the first ten years of planning remained more or less stagnant, although world export trade doubled and its own income increased by 42 per cent. Those who in the face of these facts, talk glibly about export promotion in our country and expect by just short-term devices to secure an annual increase of 15-16 per cent in our exports in the course the Third Five Year Plan do not seem to know what they are talking. So economic growth is important.
All this does not suggest relegating exports into any minor role in the context of economic growth. Far from that. In some countries development of export trade may be the limiting factor of economic growth. It is, however, in the long-term perspective that exports emerge as an important factor of economic growth. What must be the investment pattern, what proportion of aggregate resources and what kinds of resources must be devoted to exportables, considering other possibilities, in order that enough foreign exchange can be earned, as plans proceed, to sustain a prescribed rate of growth these are the relevant questions to be asked in that context. The choice in this perspective will be between goods that have export potential and goods that can substitute imports; import restrictions as such must necessarily assume an increasingly minor role, as plans proceed. Indeed economic development would lose all significance if import restrictions of any sort were to remain a long-term feature of an economy. So economic growth is important.
In choosing the current investment pattern with a view to a future flow of foreign exchange for this is what a long-term perspective implies one must, however, invoke the principle of comparative costs again. It would be absurd in this context not to keep clear of any philosophy favouring either import substitutes or exports; the criterion must be the economic criterion of long-run comparative costs. Foreign trade is not an isolated phenomenon. It must be considered as an integral part of a development plan.
The aim of commercial policy must be to help this long-term process of growth as much as it is to solve the immediate problem of foreign exchange that an economy may face at a particular stage. Indeed the latter problem will be the less acute the more earnestly attention is given to the former. So economic growth is most important.