IB Economics SLUnit 4 — The Global EconomyPaper 1 & 2Core skill~10 min read
Trade and Market-Based Strategies
The fastest way for a poor country to earn foreign currency is to sell something to the rest of the world. The argument is about how you get there — by protecting your own firms until they are ready, or by throwing them straight into the deep end. Both answers are on the syllabus, and both have a catch.
📘 What you need to know
Four trade strategies: import substitution, export promotion, economic integration and diversification.
Import substitution uses tariffs and quotas to push consumers towards home-made goods. Export promotion uses subsidies and trade support to push firms outwards.
Diversification means selling more different products, which cuts the risk of relying on one volatile price.
Social enterprise puts a social goal ahead of profit — worker ownership, profit sharing, community income.
Market-based strategies mean less government: trade liberalisation, privatisation and deregulation.
Every one of these creates winners and losers. Naming the losers is how you turn description into evaluation.
Two ways to trade your way up
Import substitution says: our firms are too small to survive against foreign giants, so we will put a tariff on imports, make foreign goods expensive, and give our own producers a protected home market to grow in. Export promotion says the opposite: our firms will never get good by hiding, so we will subsidise them, help them meet foreign buyers, and let them learn by competing.
Notice who pays in each case. Under import substitution it is consumers, through higher prices. Under export promotion it is taxpayers, through subsidies.
The honest answer, and a great evaluation line, is that protection only works if it is temporary. Firms that are shielded forever never have a reason to become efficient, and the country ends up paying high prices for poor products.
Economic integration
Integration means joining up with neighbours: cutting tariffs and quotas between members, and sometimes sharing tax or currency rules as well. A firm that could only sell to eight million people at home suddenly has a market of eighty million.
Bigger market → longer production runs → lower average cost through economies of scale.
Lower prices and more choice for consumers, because members compete with each other.
Technology and ideas move faster across borders when the barriers come down.
But: members give up some sovereignty — they can no longer set their own trade policy freely.
And: some blocs put a common external tariff around the group, which can shut out cheaper producers from outside and cost the members more than they gained.
Diversification: stop betting on one price
If almost all of your export earnings come from one crop or one mineral, your whole economy is riding on a price you do not control. Diversification means adding more products so a bad year in one market does not take the country down with it.
Building new industries is slow and expensive, so diversification is a long-run strategy. That is the standard limitation to write down.
Social enterprise
A social enterprise is a business, but profit is not the point. It might share profits with workers, hand them part-ownership, or exist mainly to employ people a normal firm would not hire. Because the gains stay inside the community, income and motivation both rise where they are needed most.
Strengths: workers who own part of the business work harder and stay longer, so productivity and output rise; income stays local; new jobs appear in places big firms ignore.
Limits: these ventures are usually small and local, so they rarely reach the scale needed to lift a whole economy or to compete in world markets.
Market-based strategies
Market-based means getting the government out of the way so private firms can chase profit and, in doing so, raise output. Three appear again and again.
Strategy
What the government does
The upside
The catch
Trade liberalisation
Removes tariffs, quotas and other barriers to imports and exports.
More trade raises output, employment and incomes; firms buy cheaper inputs; consumers get lower prices; resources are allocated more efficiently worldwide.
Domestic firms exposed to global competition may fail, causing structural unemployment while workers retrain.
Privatisation
Sells state-owned firms to private owners.
New entrants compete, which can raise output and lower prices; private owners often cut waste; sale proceeds can fund merit goods.
Assets are often sold below fair value; private owners cut costs and jobs; a state monopoly can simply become a private monopoly with higher prices.
Deregulation
Removes rules and controls on how firms operate.
Lower compliance costs raise supply; fewer rules encourage new firms and innovation.
Rules exist for reasons — removing them can raise negative externalities, invite corruption, or let foreign firms monopolise an industry.
Notice the pattern. Every market-based strategy raises efficiency and lowers costs, and every one of them creates a group who lose out. If your answer only has the first half, you have written half an answer.
Worked examples
WORKED EXAMPLE 1
Explain one advantage and one disadvantage of import substitution as a development strategy. [4 marks]
Advantage: space for domestic industry
Tariffs raise import prices → consumers switch to home-produced goods → domestic output and employment rise.
This also cuts dependence on imports, which helps the current account.Disadvantage: consumers pay for itHigher import prices = lower real incomes and less choice, and protected firms have little pressure to become efficient.
One more if you have room
Manufacturers who rely on imported components now face higher costs, so protection can hurt the industries it was meant to help.
One clear gain, one clear cost, both explained
WORKED EXAMPLE 2
Evaluate the view that trade liberalisation is the best way for a developing country to grow. [15 marks — plan]
Define and set up
Trade liberalisation = removing tariffs and quotas. Link to growth through exports, cheaper inputs and efficiency.
For
Larger market → economies of scale → lower costs → more employment and income → poverty cycle broken at the wage box.
Against
Infant industries may be wiped out; structural unemployment while workers retrain; gains depend on what the country actually exports.
Evaluate — it depends on
Whether the country exports primary or manufactured goods; whether infrastructure can support exporters; whether rich countries have opened their markets in return.
Judgement: helpful, but not sufficient on its own“It depends on” is not a hedge. It is the phrase that earns the top band.
💡 Exam tip
Say who pays. Tariffs are paid by consumers, subsidies by taxpayers. One sentence, easy marks.
Use the infant industry argument for import substitution, and immediately add the condition: protection must be temporary.
Diversification answers commodity volatility. If the extract mentions one dominant export, this is the strategy to reach for.
Link every strategy back to the poverty cycle and name the box it unblocks. Examiners love that link.
Privatisation is not automatically good. Competition is what creates the gain, not private ownership by itself.
Keep a short line on the time lag. Trade strategies work over years, not months.
⚠ Common mix-up
Import substitution is not the same as protectionism in general. It is protection used deliberately to build a domestic industry.
Export promotion is not free trade. It uses government money, so it is closer to interventionist than students expect.
Privatisation and deregulation are different. Privatisation changes who owns a firm; deregulation changes the rules it follows.
Economic integration does not always increase trade with everyone. A common external tariff can reduce trade with non-members.
Diversification does not automatically raise income. It reduces risk, and the new industries take years and money to build.
Social enterprise is not charity. It is a trading business with a social objective built into its ownership.
Up next: Interventionist Strategies and Foreign Aid — the other half of the argument, where the government spends money directly on people rather than getting out of the way.
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