IB Economics HLTopic 4 — The Global EconomyPaper 1, 2 & 3Core idea~12 min read
Trade Strategies, Diversification and Social Enterprise
More trade generally means more growth and more development. The argument is about how to get it — by shutting imports out and building at home, or by pushing exports out into the world. The two strategies point in opposite directions and are worth learning as a pair.
📚 What you need to know
Four strategies raise a country’s participation in trade: import substitution, export promotion, economic integration and diversification.
Import substitution uses tariffs and quotas to push consumers towards domestic producers.
Export promotion uses subsidies and support to help local firms sell abroad.
Economic integration lowers barriers between member countries.
Diversification widens the range of products a country exports, which reduces risk.
Social enterprises pursue social objectives such as worker welfare or shared ownership alongside trading.
Inward or outward
That last contrast is the heart of the debate. Import substitution grows an industry; export promotion grows an industry that can survive without help.
The honest version is that most successful economies used both, in sequence. Protect a young industry while it learns, then push it into export markets before the protection makes it lazy. The difficulty is that removing protection is politically much harder than granting it.
The four strategies compared
Strategy
How it works
Main advantage
Main disadvantage
Import substitution
Tariffs and quotas raise import prices so consumers buy locally
Less dependence on imports and more domestic employment
Higher prices, less choice, inefficient firms protected, retaliation
Export promotion
Subsidies and trade fairs help domestic firms reach international buyers
Economies of scale, specialisation, and innovation driven by competition
Some firms cannot compete and fail; the subsidies carry an opportunity cost
Economic integration
Countries agree to lower barriers between themselves
Some loss of sovereignty, and common external barriers can block other trade
Diversification
Widening the range of goods and services a country exports
Less exposure to the price of one commodity, and new jobs
New industries take time and money, and established rivals are hard to displace
Why diversification matters so much
Countries with a single dominant export see their whole GDP rise and fall with one world price. Adding pillars is slow, expensive and the most durable fix there is.
🧩 What diversification actually fixes
Price volatility. Independent products rarely all crash in the same year, so revenue smooths out.
Low income elasticity. Manufactured and processed goods respond far more strongly to world growth than raw commodities.
Recession exposure. A downturn hits some sectors and not others, so employment holds up better.
Value added. Processing at home keeps the profit that would otherwise be earned abroad.
Social enterprise
A social enterprise trades like any other business but exists to meet a social objective as well as to survive financially. Common forms include profit sharing with workers, a focus on worker welfare, or giving employees an ownership stake in the firm.
✓ WHAT THEY DO WELL
Motivation and productivity. Workers who own a share of the business produce more.
Employment. New jobs, often in places conventional firms overlook.
Income where it is needed. Profits stay in the community rather than leaving it.
Trust. Local ownership makes it far easier to operate in places with weak institutions.
✗ WHERE THEY STRUGGLE
Scale. These ventures tend to be small and highly localised.
Costs. Without volume there are few economies of scale.
International competition. Competing with multinationals on price is close to impossible.
Capital. Raising finance is harder when profit is not the sole objective.
Keep social enterprise in proportion. It is a genuine contributor at community level and it is not a national development strategy. Saying so is good evaluation, not cynicism.
Worked examples
WORKED EXAMPLE 1
Copper accounts for 71% of a country’s exports. Its world price falls 25%. Calculate the fall in total export earnings, then explain how diversification would have helped. [4]
Step 1: the calculation0.71 × 25% = 17.75%Step 2: why the loss is so large
Because a single product dominates, one world price move passes almost directly into national export earnings.
Step 3: the counterfactual
If copper were 25% of exports instead, the same price fall would cost 0.25 × 25% = 6.25%.
Step 4: the mechanism
Diversification does not stop the copper price falling. It reduces how much of the economy that fall reaches.
A 17.75% fall, against 6.25% for a diversified exporter
WORKED EXAMPLE 2
Evaluate the use of import substitution as a development strategy. [15-style plan]
Case for
Protection gives infant industries space to reach a viable scale, raises domestic employment and reduces reliance on imports, which also helps the current account.
Case against 1: consumers
Tariffs raise prices and cut choice, and the burden falls hardest on low-income households, which can worsen development even as output rises.
Case against 2: efficiency
Resources are drawn towards firms that are not internationally competitive, so allocative efficiency falls and costs rise for any manufacturer using imported components.
Case against 3: retaliation
Trading partners may respond in kind, closing the export markets the country needs.
Judgement
Defensible as a temporary measure for a specific industry with a stated end date. As a permanent policy it protects inefficiency and raises the cost of living.
Depends on whether the protection is time-limited and actually removed
💡 Exam tip
Treat import substitution and export promotion as a contrasting pair. Comparing them is worth more than describing each.
For diversification, use the share of exports arithmetic. It makes the argument concrete in one line.
Bring in YED as well as PED. Diversification into manufactures is about long-run demand growth, not only stability.
Mention the infant industry argument by name when discussing protection.
For social enterprise, be positive but say plainly that it operates at community scale.
⚠ Common mix-up
Import substitution is not the same as protectionism in general. It is protectionism used deliberately to build domestic industry.
Export promotion is not free trade. Subsidies are intervention, just aimed outward.
Diversification is not the same as producing more. It means producing a wider range.
A social enterprise is not a charity. It trades and needs to cover its costs.
Do not assume more trade is automatically good. Who gains from it is a separate question.
Up next: Market-Based and Interventionist Policies — the two philosophies behind almost every development policy you will be asked to evaluate.
Want this explained one-to-one?
Book a free session with an experienced IB Economics tutor and get your trickiest topics made simple.
