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Encyclopedia > Import substitution
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Import substitution industrialization (also called ISI) is a trade and economic policy based on the premise that a developing country should attempt to substitute products which it imports, mostly finished goods, with locally produced substitutes. The theory is similar to that of mercantilism in that it promotes high exports and minimal imports to increase national wealth. Image File history File links Unbalanced_scales. ... A fruit stand at a market. ... Face-to-face trading interactions among on the New York Stock Exchange trading floor Economics or oeconomics is the study of human choice behaviour. ... Look up policy in Wiktionary, the free dictionary. ...  High human development Medium human development Low human development Unavailable A developing country is a country with a relatively low standard of living, undeveloped industrial base, and moderate to low Human Development Index (HDI). ... A painting of a French seaport from 1638, at the height of mercantilism. ...


The policy has three major tenets: an active industrial policy to subsidize and orchestrate production of strategic substitutes, protective barriers to trade (namely, tariffs), and a monetary policy that keeps the domestic currency overvalued. Hence import substitution policies are not favored by advocates of absolute free trade. A tariff is a tax on foreign goods. ... Monetary policy is the government or central bank process of managing money supply to achieve specific goals—such as constraining inflation, maintaining an exchange rate, achieving full employment or economic growth. ... Free trade is an economic concept referring to the selling of products between countries without tariffs or other trade barriers. ...


A major (theoretical) advantage touted by proponents, which grew out of the Great Depression was this. If most of an ISI-practicing country's industries were native - food, consumer goods like clothing, automobiles, electronics, and even industrial goods - that nation would only be affected slightly, if at all, in the case of another massive worldwide economic shock like that of 1929, being insulated by its self-contained ISI policies. This proves in practice to be economically - and practically - untenable. The Great Depression was an economic downturn which started in 1929 and lasted through most of the 1930s. ... 1929 (MCMXXIX) was a common year starting on Tuesday (link will take you to calendar). ...

Contents

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. Latin America consists of the countries of South America and some of North America (including Central America and some the islands of the Caribbean) whose inhabitants mostly speak Romance languages, although Native American languages are also spoken. ... This article or section does not cite its references or sources. ... The 1940s decade ran from 1940 to 1949. ... The Great Depression was an economic downturn which started in 1929 and lasted through most of the 1930s. ... This article or section does not cite its references or sources. ... The 1950s was the decade spanning from the 1st of January, 1950 to the 31st December, 1959. ... Paul Samuelson, Nobel Prize in Economics winner. ... The United Nations Economic Commission for Latin America and the Caribbean (UNECLAC or ECLAC) was established in 1948 (then as the UN Economic Commission for Latin America) to encourage economic cooperation among its member states. ... Raúl Prebisch (1901–1986) was an Argentine economist known for his contribution to structuralist economics, in particular the Prebisch-Singer hypothesis that formed the basis of economic dependency theory. ... A developing country is a country with low average income compared to the world average. ... A tariff is a tax on foreign goods. ... The Infant Industry Argument is an economic reason for protectionism. ...


ISI succeeded only in creating, in some countries, moderate growth, at best, often resulting in inferior, or mediocre substitutes for higher quality products that were cheaper in the world market. For example, Brasilian small arms production is a result of ISI, though these goods could very easily, and at much lower cost, have be attained from any number of other manufacturing nations. As a result, Brasil now has a native weapons industry, even exporting such to countries as Venezuela, yet these weapons are of inferior quality to, as an example, German manufactured small arms. 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 and Uruguay 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 came crashing down to be replaced by more or less democratic governments. Banks and utilities and certain foreign-owned companies were nationalized. Definition from Oxford English Dictionary: The use of economic, political, cultural, or other pressures to control or influence another country; esp. ... Democracy is a form of government under which the power to alter the laws and structures of government lies, ultimately, with the citizenry. ... Nationalization is the act of taking assets into state ownership. ...


The ISI strategy ultimately proved a failure for Latin America, being one of many factors leading to the so-called Lost Decade of Latin American economics. A lack of comparative advantage in many industries led to gross inefficiencies, not to mention that their domestic markets were not large nor strong enough. Government subsidies to support domestic production led to a lack of incentive for innovation and improving efficiency.[citation needed] The 1980s were known as the lost decade for Latin America, in which the area occurred a significant economic depression. ...


East Asia

ISI was rejected by most nations in East Asia in the 1960s, and many economists attribute the superior performance of East Asia in the 1970s and 1980s to this difference in policies. Typically, import substitution policies resulted in inefficient industries. East Asia is a subregion of Asia that can be defined in either geographical or cultural terms. ... Paul Samuelson, Nobel Prize in Economics winner. ... The 1970s decade refers to the years from 1970 to 1979, inclusive. ... The 1980s refers to the years of 1980 to 1989. ...


In addition, the focus of import substitution in promoting industrialization typically resulted in policies which benefited industrial workers at the expense of farmers which made up most of the population of the nations involved. For example to reduce the cost of industrialization, the cost of food was often fixed at an artificially low level. In addition the licensing schemes required for an import substitution strategy led also to rent seeking behaviors which increased economic inefficiency. The phenomenon of rent-seeking was first identified in connection with monopolies by Gordon Tullock, in a paper in 1967. ...


In order to build up their manufacturing bases, many countries imposed high tariffs on manufactured goods, so that multinational companies would instead produce or assemble them locally. One example of this was in the motor industry, in which manufacturers exported vehicles in 'completely knocked down' (CKD) kit form, for local assembly. This often resulted in products that were of poorer quality and more expensive than those imported 'completely built up'. It also became increasingly inefficient for manufacturers to have identical products assembled locally in several countries in the same region, which only served to duplicate resources and reduce economies of scale.


South Korea

One strategy that Korea adopted to boost its competitiveness in the 1970s were export oriented and import substitution industrialization strategy. Investments were made into heavy and chemical industries, such as shipbuilding, steel and petrochemicals.


From: http://hdr.undp.org/docs/publications/ocational_papers/oc24aa.htm


Perceived failure

The policy began to fail in the early 1980s, as a result of overspending by the governments involved, mostly from spending foreign exchange reserves trying to keep the currency stable. As the Latin American governments failed, they began to default on their debts and were forced to turn to the International Monetary Fund for help. The failure of ISI led to the rise of the Washington Consensus. Foreign exchange reserves are the foreign currency deposits held by central banks and monetary authorities. ... Default is the name of a number of quite different concepts. ... The International Monetary Fund (IMF) is an international organization that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical assistance when requested. ... The Washington Consensus is a phrase initially coined in the early 1990s to describe a relatively specific set of ten macroeconomic policy prescriptions that were considered by the phrases originator to constitute a standard reform package promoted for crisis-wracked countries by Washington-based institutions such as the International...


However, some economists have pointed out that the failure of import substitution should not necessarily be taken as an endorsement of globalization. They note that most East Asian countries while rejecting import substitution 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. The focus on export markets allowed them to create competitive industries. Although these policies later created inefficiencies and other problems, as seen during the Asian financial crisis. A KFC franchise in Kuwait. ... The term East Asian Tigers (Simplified Chinese: 亚洲四小龙; Traditional Chinese: 亞洲四小龍; Hanyu Pinyin: yǎzhōu sì xiǎo lóng (lit. ... The Asian financial crisis was a financial crisis that started in July 1997 in Thailand and affected currencies, stock markets, and other asset prices in several Asian countries, many considered East Asian Tigers. ...


By the end of the 1990's, the Washington consensus was being questioned. Nevertheless, there has not been a return to import substitution as a developmental strategy. The Washington Consensus is a phrase initially coined in the early 1990s to describe a relatively specific set of ten macroeconomic policy prescriptions that were considered by the phrases originator to constitute a standard reform package promoted for crisis-wracked countries by Washington-based institutions such as the International...


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.


See also


  Results from FactBites:
 
Import substitution is a strategy that has enjoyed little explicit practice and limited academic study (3429 words)
Import substitution causes the existing level of injections from exports to have a larger multiplier effect on the local community by stemming income leakage.
Import substitution strategies are rarely enacted in isolation, but tend to form one facet of a broader strategy, becoming inextricably linked with other development goals and programs such as economic self-sustainability, entrepreneurial development, or location incentives.
Quite commonly, the import substitution portion of a program or strategy remains implicit or even incidental, and import substitution is not acknowledged as an underlying basis for the economic development measure.
Import substitution - Wikipedia, the free encyclopedia (1062 words)
Import substitution industrialization (also called ISI) is a trade and economic policy based on the premise that a developing country should attempt to substitute products which it imports, mostly finished goods, with locally produced substitutes.
Hence import substitution policies are not favored by advocates of absolute free trade.
Import substitution policies were adopted by most nations in Latin America in the 1930s and 1940s because of the Great Depression of the 1930s.
  More results at FactBites »

 
 

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