Import substitution industrialization

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Import substitution industrialization (ISI) is a

By the mid-1960s, many of the economists who had previously advocated for ISI in developing countries grew disenchanted with the policy and its outcomes.[9] Many of the countries that adopted ISI policies in the post-WWII years had abandoned ISI by the late 1980s, reducing government intervention in the economy and becoming active participants in the World Trade Organization.^{[10]: 164–165} In contrast to ISI policies, the Four Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan) have been characterized as government intervention to facilitate "export-oriented industrialization".^[11][12][13]

ISI policies generally had distributional consequences, as the incomes of export-oriented sectors (such as agriculture) declined while the incomes of import-competing sectors (such as manufacturing) increased.^{[10]: 180–181} Governments that adopted ISI policies ran persistent budget deficits as state-owned enterprises never became profitable.^{[10]: 193–197} They also ran current accounts deficits, as the manufactured goods produced by ISI countries were not competitive in international markets, and as the agricultural sector (the sector which was competitive in international markets) was weakened; as a result, ISI countries ended up importing more. ISI policies were also plagued by rent-seeking.^{[10]: 193–197}

ISI is a development theory, but its political implementation and theoretical rationale are rooted in

Werner Baer contends that all countries that have industrialized after the United Kingdom have gone through a stage of ISI in which much investment in industry was directed to replace imports.^[15] Going further, in his book Kicking Away the Ladder, the South Korean economist Ha-Joon Chang also argues based on economic history that all major developed countries, including the United Kingdom, used interventionist economic policies to promote industrialization and protected national companies until they had reached a level of development in which they were able to compete in the global market. Those countries adopted free market discourses directed at other countries to obtain two objectives: to open their markets to local products and to prevent them from adopting the same development strategies that had led to the industrialization of the developed countries.

As a set of development policies, ISI policies are theoretically grounded on the

• an active industrial policy to subsidize and orchestrate production of strategic substitutes
• protective barriers to trade (such as
  tariffs
  )
• an overvalued currency to help manufacturers import capital goods (heavy machinery)
• discouragement of foreign direct investment

By placing high tariffs on imports and other protectionist, inward-looking trade policies, the citizens of any given country by using a simple supply-and-demand rationale substitute the less expensive good for a more expensive one. The primary industry of importance would gather its resources, such as labor from other industries in this situation. The industrial sector would use resources, capital, and labor from the agricultural sector. In time, a developing country would look and behave similar to a developed country, and with a new accumulation of capital and an increase of total factor productivity, the nation's industry would in principle be capable of trading internationally and of competing in the world market. Bishwanath Goldar, in his paper Import Substitution, Industrial Concentration and Productivity Growth in Indian Manufacturing, wrote: "Earlier studies on productivity for the industrial sector of developing countries have indicated that increases in total factor productivity, (TFP) are an important source of industrial growth".^[16]: 43 He continued that "a higher growth rate in output, other things remaining the same, would enable the industry to attain a higher rate of technological progress (since more investment would be made) and create a situation in which the constituent firms could take greater advantage of scale economies." It is believed that ISI will allow that.^[16]: 148

In many cases, however, the assertions did not apply. On several occasions, the Brazilian ISI process, which occurred from 1930 to the late 1980s, involved currency devaluations to boost exports and discouraging imports, thus promoting the consumption of locally manufactured products, and the adoption of different exchange rates for importing capital goods and for importing consumer goods. Moreover, government policies toward investment were not always opposed to foreign capital: the Brazilian industrialization process was based on a tripod that involved governmental, private, and foreign capital, the first being directed to infrastructure and heavy industry, the second to manufacturing consumer goods, and the third to the production of durable goods such as automobiles. Volkswagen, Ford, GM, and Mercedes all established production facilities in Brazil in the 1950s and the 1960s.

The principal concept underlying ISI can thus be described as an attempt to reduce foreign dependency of a country's economy by the local production of industrialized products by national or foreign investment for domestic or foreign consumption. Import substitution does not mean eliminating imports. Indeed, as a country industrializes, it naturally imports new materials that its industries need, often including petroleum, chemicals, and raw materials.

In 2006, Michael Shuman proposed local ownership import substituting (LOIS), as an alternative to neoliberalism. It rejects the view that there is no alternative.^[17] Shuman claims that LOIS businesses are long-term wealth generators, are less likely to exit destructively, and have higher economic multipliers.^[18]

Import substitution policies were adopted by most nations in Latin America from the 1930s to the late 1980s. The initial date is largely attributed to the impact of the Great Depression of the 1930s, when Latin American countries, which exported primary products and imported almost all of the industrialized goods that they consumed, were prevented from importing because of a sharp decline in their foreign sales, which served as an incentive for the domestic production of the goods that they needed. The end date being the 1980s is largely due the emerging debt crisis that was occurring at the time, and through solving the crisis they turned away from import substitution and toward neoliberalism.^[19]

The first steps in import substitution were less theoretical and more pragmatic choices on how to face the limitations imposed by recession even though the governments in Argentina (

ISI gained a theoretical foundation only in the 1950s, when the

ISI was most successful in countries with large populations and income levels, which allowed for the consumption of locally produced products. Latin American countries such as Argentina, Brazil, and Mexico (and to a lesser extent Chile, Uruguay and Venezuela) had the most success with ISI.^[21]

While the investment to produce cheap consumer products may be profitable in small markets, the same cannot be said for capital-intensive industries, such as automobiles and heavy machinery, which depend on larger markets to survive. Thus, smaller and poorer countries, such as Ecuador, Honduras, and the Dominican Republic, could implement ISI only to a limited extent. Peru implemented ISI in 1961, and the policy lasted until the end of the decade in some form.^[22]

To overcome the difficulties of implementing ISI in small-scale economies, proponents of the economic policy, some within

Many economists contend that ISI failed in Latin America and was one of many factors leading to the so-called lost decade of Latin American economics.

Against most opinions, one historian argued that ISI was successful in fostering a great deal of social and economic development in Latin America:

"By the early 1960s, domestic industry supplied 95% of Mexico's and 98% of Brazil's consumer goods. Between 1950 and 1980, Latin America's industrial output went up six times, keeping well ahead of population growth. Infant mortality fell from 107 per 1,000 live births in 1960 to 69 per 1,000 in 1980, [and] life expectancy rose from 52 to 64 years. In the mid-1950s, Latin America's economies were growing faster than those of the industrialized West."^[23]

ISI policies were implemented in various forms across Africa from the early 1960s to the mid-1970s to promote indigenous economic growth within newly independent states. The national impetus for ISI can be seen from 1927, with the creation of the East African and Central African common markets in British and French colonies that recognized the importance of common trading tariffs in specific parts of the continent and aimed to protect domestic manufacturing from external competitors.^[24]: 124

Early attempts at ISI were stifled by colonial

While ISI under African socialism was purported to be an anti-Western development model, scholars such as Anthony Smith argued that its ideological roots came from Rostow's modernization theory, which maintains that commitment to economic growth and free-market capitalism is the most efficient means of state development.^[38] Kenya's implementation of ISI under state capitalism exemplifies the model of development. Tom Mboya, the first minister for economic development and planning, aimed to create a growth-oriented path of industrialization, even at the expense of traditional socialist morals.^[39] Kenya's Sessional Paper No. 10 of 1965 reinforced the view by claiming, "If Africanization is undertaken at the expense of growth, our reward will be a falling standard of living."^[40] Under such a development path, multinational corporations occupied a dominant role in the economy, primarily in the manufacturing sectors. Economic historians such as Ralph Austen argue that the openness to western enterprise and technical expertise led to a higher GNP in Kenya than comparative socialist countries such as Ghana and Tanzania.^{[25]: 246–247} However, the 1972 World Bank ILO report on Kenya claimed that direct state intervention was necessary to reduce the growing economic inequalities that had occurred as a result of state capitalism.^[41]

In all of the countries that adopted ISI, the state oversaw and managed its implementation, designing economic policies that directed development towards the indigenous population, with the aim of creating an industrialised economy. The

Sub-Saharan Africa's experiment with ISI created largely pessimistic results across the continent by the early 1980s. Manufacturing, which formed the core of the big push towards industrialisation, accounted for only 7% of GDP across the continent by 1983.[24]^: 135 The failures of the model stemmed from various external and domestic factors. Internally, efforts to industrialise came at the expense of the agricultural sector, which accounted for 70% of the region's workforce throughout the 1970s.^[45] The neglect was detrimental to producers as well as the urban population, as agricultural output could not meet the increasing demands for foodstuffs and raw materials in the growing urban areas. ISI efforts also suffered from a comparative disadvantage in skilled labor for industrial growth.^[46]

A 1982 World Bank report stated, "There exists a chronic shortage of skills which pervades not only the small manufacturing sector but the entire economy and the over-loaded government machine."^[46]: 32 Tanzania, for example, had only two engineers at the beginning of the import-substitution period.^[33]: 71 The skills shortage was exacerbated by the technological deficiencies facing African states throughout industrialisation. Learning and adopting the technological resources and skills was a protracted and costly process, something that African states were unable to capitalise on because of the lack of domestic savings and poor literacy rates across the continent.^[24]: 133

The failure of ISI to generate sufficient growth in industrialisation and overall development led to its abandonment by the early 1980s. In response to the underdeveloped economies in the region, the IMF and the World Bank imposed a

In 2014, customs duties were applied on imported products in the food sector. Russia has considerably reduced its food imports, and domestic production has increased considerably. The cost of food imports dropped from $60 billion in 2014 to $20 billion in 2017, and the country enjoys record cereal production. Russia has strengthened its position on the world food market and has become food self-sufficient. In the fisheries, fruit, and vegetables sectors, domestic production has increased sharply, imports have declined significantly, and the trade balance (the difference between exports and imports) has improved. In the second quarter of 2017, agricultural exports were expected to exceed imports, which would make Russia a net agricultural exporter for the first time in almost 100 years.[49]

Import substitution policies might create jobs in the short run, but as domestic producers replace foreign producers, both output and growth are lower than would otherwise have been in the long run.^{[citation needed]} Import substitution denies the country the benefits to be gained from specialisation and foreign imports. The theory of comparative advantage shows how countries within the model gain from trade, however, this concept has received criticism for its misguided underlying assumptions and inapplicability to modern production. Moreover, protectionism leads to dynamic inefficiency, as domestic producers have no incentive from foreign competitors to reduce costs or improve products. Import substitution can impede growth through poor allocation of resources, and its effect on exchange rates harms exports.^[15]

Despite some apparent gains, import substitution was "both unsustainable over time and produced high economic and social costs".^[50] Given import substitution's dependence upon its developed and isolated markets within Latin America, it relied upon the growth of a market that was limited in size. In most cases, the lack of experience in manufacturing and the lack of competition reduced innovation and efficiency, which restrained the quality of Latin American produced goods, and protectionist policies kept prices high.^[50] In addition, power was concentrated in the hands of a few, which decreased the incentive for entrepreneurial development. Lastly, the large deficits and debts resulting from import substitution policies are largely credited for the Latin American crisis of the 1980s.^[51]

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