What policies can a developing country use to build up its manufacturing industries?

• →Infant industry protection refers to the use of trade barriers, such as tariffs and import quotas, to shield newly established domestic industries from established foreign competition until they are sufficiently productive to compete on their own terms.
• →A government pursuing this strategy may impose a 25% tariff on imported manufactured goods, raising their price relative to domestically produced alternatives.
• →This means that domestic consumers are more likely to purchase home-produced goods, generating revenue and scale for the infant industry. As a result, firms can move along (down) their long-run average cost curve through economies of scale, and productivity improvements as workers accumulate human capital specific to that sector.
• →Therefore, over time, the domestic industry may become internationally competitive without permanent protection. South Korea's government used precisely this approach during the 1960s and 1970s, directing subsidies and protection towards the chaebol conglomerates in steel, shipbuilding, and electronics, these sectors then became globally competitive exporters.
• →A complementary strategy is export-led growth, in which a government keeps its exchange rate undervalued to maintain a price advantage for manufactured exports, as China did through managed exchange rate policy during the 2000s.
• →The effectiveness of these strategies is, however, contested: infant industry protection risks creating permanently inefficient industries that lobby against the removal of tariffs, and the success of South Korea and China may reflect specific institutional conditions that are difficult to replicate elsewhere.

• →Infant industry argument: The rationale that short-run protection allows a developing industry to achieve economies of scale and learning-by-doing effects, so that long-run average costs fall to the point where the industry can compete internationally without assistance.
• →Import substitution industrialisation (ISI) versus export-led growth: ISI uses tariffs and quotas to replace imports with domestic production; export-led growth uses competitive exchange rates and subsidies to build industries that sell abroad. Both are examined strategies, and the distinction matters for evaluation.
• →Foreign direct investment (FDI) as a development tool: Governments may offer tax incentives or special economic zones to attract multinational corporations, which bring capital, technology, and managerial expertise — though profit repatriation and transfer pricing can limit the net benefit to the host economy.
• →The role of the state versus markets: Some development strategies rely heavily on industrial policy and government direction of resources (as in South Korea); others emphasise liberalisation, deregulation, and openness to trade (the Washington Consensus approach). Evaluative answers must weigh the conditions under which each is more effective.
• →Aid and its limitations: Overseas development assistance can finance infrastructure and education that underpin industrialisation, but tied aid, dependency effects, and governance problems mean that aid alone is rarely sufficient to drive sustained development.

Questions on this topic assess students' understanding of the range of strategies available to developing-country governments seeking to accelerate industrialisation and broader economic development, as set out in Edexcel spec point 4.3.3.b. The core mechanism being tested is whether students can explain how specific policy interventions e.g. protectionist, supply-side, or externally financed interventions alter the incentives facing domestic firms and the trajectory of an economy's productive capacity. At the higher mark tariffs, questions require students to evaluate trade-offs: for instance, whether the dynamic gains from protecting an infant industry outweigh the static welfare losses from higher consumer prices, or whether export-led growth is sustainable in a world of slowing global demand. Strong answers integrate macroeconomic theory, real-world examples, and a reasoned conclusion about the conditions under which a given strategy is most likely to succeed.

Examined 3 times across Edexcel since 2017.

The two highest-tariff appearances were both on Paper 3 as optional questions carrying 25 marks, indicating that when this topic is examined at length, it demands sustained evaluation rather than description alone.