Import substitution industrialization
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Import substitution industrialization (also called ISI) is a trade and economic policy based on the premise that a country should attempt to substitute products which it imports (mostly finished goods) with locally produced substitutes. Even though ISI is a development theory with links to dependency theory, and not naturally a trade theory, its political implementation and theoretical rationale are rooted in trade theory. Baer contends that all countries which have industrialised after the United Kingdom went through a stage of ISI where the large part of investment in industry was directed to replace imports (Baer, pp.95-96).[1]
As a set of development policies, ISI policies are theoretically grounded on the Singer-Prebisch thesis and practically on the infant industry argument. From these postulates it derives a body of practices, which are commonly: an active industrial policy to subsidize and orchestrate production of strategic substitutes, protective barriers to trade (e.g. tariffs), an overvalued currency to help manufacturers import capital goods (heavy machinery), and discouragement of foreign direct investment.
Conceptually, ISI could be outward-looking in that it promotes exports (like in Asia, especially South Korea) or inward-looking without significant links to world markets (like in Latin America). In both cases, however, external competition by imports in the markets of the targeted industries are discouraged by tariffs. Hence, policies to pursue ISI have a strong protectionist component and are not favored by advocates of absolute free trade.
The major advantages claimed for ISI include: increases in domestic employment (reducing dependence on labour non-intensive industries such as raw resource extraction and export); resilience in the face of a global economic shocks (such as recessions and depressions); less long-distance transportation of goods (and concommitant fuel consumption and greenhouse gas and other emissions). The disadvantages claimed for ISI is that the industries that it creates are inefficient and obsolete, and that the focus on industrial development impoverishes local commodity producers who are primarily rural.
In most manufacturing processes a point of output is reached after which the cost of producing every additional unit of output diminishes. Different types of industries, given their different production functions (combinations of capital and labor, etc.) obtain different scale thresholds or minimum levels of output necessarily to begin accruing cost savings from large-scale output. For example, a mechanical pencil factory may need to sell 5 million units of output (pencils) each year before it can achieve economies of scale of production – efficient level of production. An automobile industry may need to sell 519, 001 units of output (cars) to achieve the same level of efficiency. Clearly, the more units of anything manufactured you can sell the better the chances that your factories (consumer goods and intermediate, and ultimately capital goods) will achieve economies of scale, efficient production. In a free market global economy, industries that produce inefficiently (without obtaining economies of scale of production) under the protections of ISI have been subject to criticism from more efficient foreign industries – a force driving the neo-liberal campaign for open markets. What determines whether a country obtains efficiency – economies of scale in production? Market size (number of consumers, population) and purchasing power (usually but unreliably indicated by GNP/capita). Hence, larger, richer economies were more likely to make ISI succeed efficiently, whereas smaller countries with lower per capita incomes were less likely to succeed with ISI.
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[edit] Latin America
Import substitution policies were adopted by most nations in Latin America in the 1930s and 1940s because of the Great Depression of the 1930s. In the 1950s the Argentine economist and UNECLAC head Raúl Prebisch was a visible proponent of the idea. Prebisch believed that developing countries needed to create forward linkages domestically, and could only succeed by creating the industries that used the primary products already being produced by these countries. The tariffs were designed to allow domestic infant industries to prosper.
ISI was most successful in countries with large populations or high living standards, having already a more solid economic basis upon which to function. Latin American countries such as Argentina, Brazil, Mexico, and, to a lesser extent, Chile, Uruguay and Venezuela had the most success with ISI (Blouet and Blouet, 2002). Smaller and poorer countries such as Ecuador, Honduras, and Dominican Republic were not very successful in implementing ISI policies. In Latin American countries where ISI was most successful, it was accompanied by structural changes to the government. Old neocolonial governments were replaced by more or less democratic governments. Banks and utilities and certain foreign-owned companies were nationalized or transferred ownership to local businesspeople.
Many economists contend that ISI failed in Latin America, being one of many factors leading to the so-called Lost Decade of Latin American economics. Other economists contend that ISI led to the "Mexican Miracle," the period that lasted from 1940 to 1975 in which economic growth of 6 percent or more.
[edit] East Asia
The inward-looking variant of ISI was rejected by most nations in East Asia in the 1960s, and some economists attribute the superior performance of East Asia in the 1970s and 1980s to this difference in policies. Indeed, Asian policies are most commonly not referred to as ISI, even though some would argue the rationale and execution of policy design largely followed those recipes.
Most East Asian countries, while rejecting the inward-looking component of classical import substitution policies, also maintained high tariff barriers. The strategy followed by those countries was to focus subsidies and investment on industries which would make goods for export, and not to attempt to undervalue the local currency. In pursuing this and to boost its competitiveness in the 1970s , South Korea made large investments into heavy and chemical industries, such as shipbuilding, steel and petrochemicals. This focus on export markets allowed them to create competitive industries.
From: http://hdr.undp.org/docs/publications/ocational_papers/oc24aa.htm
[edit] Sources
- Chasteen, John Charles. 2001. Born in Blood and Fire. pages 226-228.
- Reyna, José Luis & Weinert, Richard S. 1977. Authoritarianism in Mexico. Philadelphia, Pennsylvania: Institute for the Study of Human Issues, Inc. pages 067-107.
[edit] References
- ^ Baer, Werner (1972), "Import Substitution and Industrialization in Latin America: Experiences and Interpretations", Latin American Research Review vol. 7 (Spring): 95-122.(1972)
[edit] See also
- International trade
- Commanding Heights for an exposition of the effects of ISI on Latin American economies
- Singer-Prebisch thesis
- Export-oriented industrialization
- Export substitution industrialization
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