Reforms, market dynamics and productivity in developing countries

Between the end of World War II and the mid-eighties, development strategy in a number of developing countries was based on the protectionist "Import substitution" (IS) concept. Many of these countries' governments were of the opinion that maintaining free trade would prevent their economies from industrializing and would therefore render them vulnerable to long-term adverse movements in terms of trade, and impact their growth and welfare. However, during the 1980s, both economists and policy-makers became skeptical about the beneficial impact of the IS strategy. The difference in performance between the outward-oriented Asian and the inward-oriented Latin American economies clearly called for a reconsideration of the strategy. Empirical evidence (Sachs and Warner 1995) also suggests that open economies tend to adjust more rapidly from primary-intensive to manufacture-intensive exports, and to achieve sustained growth. Since the mid-eighties, many LDCs have engaged in a process of economic reform, involving a more outward orientation of their economies, the lowering of trade barriers, privatization of many industries and reform of the foreign-exchange market. © 2010 Springer-Verlag New York.