Import substitution industrialization

Average Tariff Rates for Selected Countries (1913-2007)

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Tariff Rates in Japan (1870-1960)

Average Tariff Rates in Spain and Italy (1860-1910)

Average tariff rates (France, UK, US)

Average Tariff Rates in USA (1821-2016)

Import Substitution Industrialization (ISI) is an economic policy and development strategy aimed at reducing a country's dependence on foreign imports by developing local industries. Originating in the aftermath of the Great Depression and gaining prominence in several Latin American countries, Eastern Europe, and parts of Asia and Africa from the 1930s through the 1970s, ISI seeks to promote industrialization by substituting imports with domestically produced goods. The strategy involves the use of tariffs, import quotas, and exchange rate controls to protect nascent industries. It is often contrasted with export-oriented industrialization, which focuses on integrating domestic economies with the global market by targeting external demand for goods.

Background

The concept of Import Substitution Industrialization emerged as a response to the limitations of the classical economic theory of comparative advantage, which suggested that countries should specialize in the production of goods and services they can produce most efficiently. However, during the early 20th century, several economists began to critique this approach, arguing that it led to over-reliance on foreign imports and hindered the development of diverse domestic industries. The Great Depression of the 1930s, which caused a dramatic decline in international trade, further exposed the vulnerabilities of economies heavily dependent on foreign markets. In response, many countries, particularly in Latin America, began to adopt ISI policies to foster domestic industrialization and reduce external vulnerabilities.

Implementation

ISI policies typically involve a combination of protective tariffs, import quotas, and exchange rate controls to protect emerging domestic industries from foreign competition. Governments also often provide subsidies to key industries, invest in infrastructure development, and impose restrictions on foreign investment. The goal is to create a favorable environment for the growth of domestic industries that can produce substitutes for previously imported goods, thereby reducing the trade deficit and improving the balance of payments.

Phases

ISI can be divided into two main phases. The first phase focuses on the domestic production of non-durable consumer goods, such as textiles and food products, which are relatively easy to produce and have a high demand. The second phase involves moving towards more complex and capital-intensive industries, such as steel, petrochemicals, and machinery. This phase is more challenging and requires significant investment in technology and human capital.

Criticism and Challenges

While ISI has been successful in fostering industrial growth in several countries, it has also faced criticism and challenges. Critics argue that ISI can lead to inefficiency and stagnation, as protected industries may lack the incentive to innovate or improve productivity. Additionally, the focus on the domestic market can limit the potential for economies of scale and exposure to international competition, which are crucial for technological advancement. Moreover, the reliance on import tariffs can lead to higher prices for consumers and strained relations with trade partners.

Legacy

Despite its mixed outcomes, the legacy of Import Substitution Industrialization remains significant. It has contributed to the industrial base in many developing countries and has been a critical step in their economic development journey. However, by the late 20th century, many countries began to shift towards more open and export-oriented economic policies, recognizing the limitations of ISI and the benefits of global integration.