Import Substitution Industrialization

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Table of Contents

Introduction
Discussion
Reasons for Abandoning ISI
Conclusion
References

Introduction

Import substitution industrialization (ISI) is a trade and economic policy based on the premise that a country should reduce its dependence on imports through local production of industrial goods (Barrett, 2008, p. 96). Countries that pursue the ISI strategy often implement trade protection policies that restrict importation of manufactured goods. These include import quotas, high import tariffs, and domestic subsidies. Several developing countries adopted ISI strategies in 1940s and 1950s. This paper will discuss the factors that led to adoption of ISI strategies in developing countries. It will also discuss the factors that motivated developing countries to abandon ISI strategies in 1970s and later.

Discussion

The factors that led to adoption of import substitution industrialization include the following. To begin with, developing countries adopted ISI to stimulate rapid economic growth (Chang, 2003). Before the introduction of the ISI strategy, most developing countries depended on the export of primary commodities as their main source of foreign exchange earnings. However, primary commodities were vulnerable to price fluctuations and intense competition in the international market. Thus, the income from primary commodity exports was not expected to grow in tandem with the incomes of the developed countries that bought the commodities. This was expected to cause deterioration of terms of trade and poor economic growth (Boyes & Melvin, 2012). As a result, developing countries decided to adopt policies that promoted domestic production of consumer and industrial goods to avoid economic stagnation.

ISI was also adopted to promote creation of jobs in developing countries (Pegurier & Salgado, 2002). Substituting imports with locally produced goods meant that more factories and companies had to be established in developing countries. Consequently, more people would get jobs, thereby solving the problem of high unemployment rate.

Reasons for Abandoning ISI

First, most countries overvalued their exchange rates to promote ISI (Chang, 2003). This led to a significant reduction in agricultural exports, thereby reducing the incomes of the rural populations that depended on agriculture. Thus, poverty and high unemployment rate persisted instead of declining. As exports declined, developing countries found it difficult to access adequate foreign exchange reserves to import intermediate goods that were required for local production. This led to a slow growth rate in the industrial sector.

Second, the countries that adopted the ISI strategy promoted importation of machines through subsidies. This strategy was meant to improve efficiency and the level of output in the industrial sector (Boyes & Melvin, 2012). However, increased use of machines created a capital-intensive industrial sector. As a result, ISI did not solve the problem of unemployment since workers were increasingly being replaced by machines. Third, ISI had a negative impact on the wellbeing of citizens in developing counties (Pegurier & Salgado, 2002). Specifically, the reduction in agricultural export earnings forced rural populations to migrate to urban areas to look for alternative economic activities. Overpopulation coupled with high unemployment rate in urban areas led to emergence of informal settlements, which had deplorable standards of living. This led to high mortality and morbidity rates, especially, among children whose parents migrated from rural areas to informal settlements in towns.

Conclusion

Developing countries adopted the ISI strategy in order to achieve rapid economic growth. The strategy was expected to create jobs and improve the incomes of households and individuals. However, the strategy did not achieve the desired outcomes. Specifically, ISI increased poverty and unemployment in most developing countries. Therefore, ISI was abandoned because it reduced economic growth and development instead of improving the fortunes of developing countries.

References

Barrett, C. (2008). Development economics. New York, NY: Routledge.

Boyes, W., & Melvin, M. (2012). Macroeconomics. London: Palgrave.

Chang, H. (2003). Rethinking development economics. London, England: Anthem Press.

Pegurier, F., & Salgado, G. (2002). Sustainable development: Promoting progress or perpetuating poverty? London, England: Profile Books.

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Import Substitution Industrialization

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