ISI Strategy for Development-Prebisch Argument.

Economists trying to devise a development strategy at the end of second world war took an account of dependence of almost all developing countries on exports of primary products. Prebisch among others argued that exports of primary goods would not lead to development. Due to low-income and price elasticities of demand expansion in exports of primary goods would not lead corresponding increase in export revenue as prices will decline. Import payments, on the other hand, would continue to rise as the demand for capital goods would be high in order to raise growth, because developing countries don’t produce capital goods would lead to deterioration in terms of trade and worsening BOP deficit when they try to increase the growth. The increase in BOP deficit would force the developing countries to cut back the investment and hamper the growth. Since developing countries could not be based their growth on exports of primary goods it was necessary to base development on industrialization. A further argument as given by Rosenstein-Rodan in favor of industrialization in over-populated countries. He said since these countries suffer from low labor productivity due to land pressure and future prospects in agriculture are very limited and risky, industrialization is the only way to absorb the surplus labor force.

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