Trade and Debt Problems of the Third World
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It reduces the profitability of exporting as an activity. The domestic currency value of foreign exchange earnings are reduced below the rate that would be set by a more appropriate exchange rate. Imported inputs or domestically produced import-competing inputs have to be purchased by the export industries at above world prices. In many countries this contributes to an ‘inefficiency illusion’, i.e. because domestic production costs exceed world prices, the impression is created that local industry cannot compete or export without protection.
It provides an environment for a protected industry to tolerate relatively more inefficiency than an unprotected one. Slack management, underutilised capacity, unexploited economies of scale often prevent firms from exporting their output.
Existing export opportunities may not be grasped because production for the protected domestic market is typically more profitable and assured.
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