Import substitution industrialization (ISI) is an economic strategy commonly implemented by developing countries to reduce their dependence on foreign goods. This approach aims to protect and cultivate domestic industries so they grow to compete with imported goods, leading to greater economic self-sufficiency.
Key Takeaways
- Economic Self-sufficiency: ISI aims to reduce dependence on imported goods and develop self-sufficient local economies.
- Industry Protection & Growth: The strategy involves nurturing new domestic industries until they are competitive with imports.
- Policy Shifts: By the late 20th century, many countries began shifting away from ISI policies in favor of open market strategies.
A Deeper Understanding of Import Substitution Industrialization (ISI)
The core objective of ISI is to protect, bolster, and grow local industries through tactics such as tariffs, import quotas, and government-subsidized loans. Implementing countries strive to strengthen production processes at each stage of product development.
ISI counters the comparative advantage concept, which suggests countries should specialize in goods they can produce at lower opportunity costs and export them.
The History of ISI Theory
Although the economic policies associated with ISI proliferated in the 20th century, the theory dates back to the 18th century, endorsed by economists like Alexander Hamilton and Friedrich List.
Initially applied in regions like Latin America, Africa, and parts of Asia, the aim was internal market development to achieve self-sufficiency. This often involved subsidizing vital industries such as power generation and agriculture, while employing protectionist trade policies.
However, during the 1980s and 1990s, many countries began abandoning ISI practices in favor of global market liberalization driven by structural adjustment programs from financial institutions like the International Monetary Fund (IMF) and World Bank.
Core Elements of ISI Theory
ISI is grounded in developmental policies including:
- Infant Industry Argument: Protecting nascent industries until they become globally competitive.
- Singer-Prebisch Thesis: Targeting the economic terms of trade to favor developing countries.
- Keynesian Economics: Implementing active government roles in economic interventions.
In practice, ISI involves subsidizing and organizing the production of strategic substitutes, imposing tariffs and trade barriers, supporting an overvalued currency to assist manufacturers with imports, and reducing reliance on foreign direct investment.
Structuralist Economics and ISI
Related to ISI is structuralist economics, focusing on political, social, and institutional factors impacting economic development. This approach gained traction through influential economists like Hans Singer, Celso Furtado, and Octavio Paz.
In the mid-20th century, structuralist economics was synonymous with Latin American economic policy, often conceptualized and promoted by entities like the United Nations Economic Commission for Latin America (ECLA or CEPAL).
Real-World Example: Latin America’s Journey with ISI
The establishment of ECLA in 1950, spearheaded by Argentine economist Raul Prebisch, marked a notable shift toward ISI in Latin America. This shift facilitated a transition from primary export-led growth to an internally focused urban-industrial development model across the region.
Inspired by Prebisch’s vision, Latin American nations expanded their manufacturing sectors, initially focusing on non-durable consumer goods like food and beverages, before moving into durable goods like automobiles and machinery. Notable progress was made by countries like Argentina, Brazil, and Mexico, which ventured into advanced industrial products, including electronics and aircraft.
While ISI brought several successes, its implementation also led to economic challenges such as high inflation. These issues, compounded by stagnation and foreign debt crises in the 1970s, eventually prompted numerous Latin American countries to seek financial aid from the IMF and World Bank. As a condition for receiving these loans, countries were required to dismantle ISI protectionist policies and embrace free trade.
By understanding the strategies and evolutions of ISI, modern policymakers can draw valuable lessons in balancing domestic industry promotion with global economic integration.
Related Terms: economic development, trade protectionism, industrial policy, economics, comparative advantage.
