Import substitution industrialization
Import substitution industrialization is a protectionist trade and economic policy that advocates replacing foreign imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. The term primarily refers to 20th-century development economics policies, but it has been advocated since the 18th century by economists such as Friedrich List and Alexander Hamilton.
ISI policies have been enacted by developing countries with the intention of producing development and self-sufficiency by the creation of an internal market. The state leads economic development by nationalization, subsidization of manufacturing, increased taxation, and highly protectionist trade policies. In the context of Latin American development, the term "Latin American structuralism" refers to the era of import substitution industrialization in many Latin American countries from the 1950s to the 1980s. The theories behind Latin American structuralism and ISI were organized in the works of economists such as Raúl Prebisch, Hans Singer, and Celso Furtado, and gained prominence with the creation of the United Nations Economic Commission for Latin America and the Caribbean. They were influenced by a wide range of Keynesian, communitarian, and socialist economic thought, as well as dependency theory.
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. 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. In contrast to ISI policies, the Four Asian Tigers have been characterized as government intervention to facilitate "export-oriented industrialization".
ISI policies generally had distributional consequences, as the incomes of export-oriented sectors declined while the incomes of import-competing sectors increased. Governments that adopted ISI policies ran persistent budget deficits as state-owned enterprises never became profitable. 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 was weakened; as a result, ISI countries ended up importing more. ISI policies were also plagued by rent-seeking.
History
ISI is a development theory, but its political implementation and theoretical rationale are rooted in trade theory. It has been argued that all or virtually all nations that have industrialized have followed ISI. Import substitution was heavily practiced during the mid-20th century as a form of developmental theory that advocated increased productivity and economic gains within a country. It was an inward-looking economic theory practiced by developing nations after World War II. Many economists then considered the ISI approach as a remedy to mass poverty by bringing a developing country to a developed status through national industrialization. Mass poverty is defined as "the dominance of agricultural and mineral activities – in the low-income countries, and in their inability, because of their structure, to profit from international trade."Mercantilist economic theory and practices of the 16th, 17th, and 18th centuries frequently advocated building up domestic manufacturing and import substitution. In the early United States, the Hamiltonian economic program, specifically the third report and the magnum opus of Alexander Hamilton, the Report on Manufactures, advocated for the U.S. to become self-sufficient in manufactured goods. That formed the basis of the American School in economics, which was an influential force in the country during its 19th-century industrialization.
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. 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.
Theoretical basis
As a set of development policies, ISI policies are theoretically grounded on the Prebisch–Singer thesis, on the infant industry argument, and on Keynesian economics. The associated practices are commonly:- an active industrial policy to subsidize and orchestrate production of strategic substitutes
- protective barriers to trade
- an overvalued currency to help manufacturers import capital goods
- discouragement of foreign direct investment
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.
Local ownership import substituting
In 2006, Michael Shuman proposed local ownership import substituting, as an alternative to neoliberalism. It rejects the view that there is no alternative. Shuman claims that LOIS businesses are long-term wealth generators, are less likely to exit destructively, and have higher economic multipliers.Latin America
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.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 and Brazil had the precedent of Fascist Italy as inspirations of state-induced industrialization. Positivist thinking, which sought a strong government to modernize society, played a major influence on Latin American military thinking in the 20th century. The officials, many of whom rose to power, like Perón and Vargas, considered industrialization to be synonymous with "progress" and naturally placed as a priority.
ISI gained a theoretical foundation only in the 1950s, when the Argentine economist and UNECLAC leader Raúl Prebisch was a visible proponent of the idea, as well as the Brazilian economist Celso Furtado.
Prebisch had experience running his country's central bank and started to question the model of export-led growth. Prebisch came to the conclusion that the participants in the free-trade regime had unequal power and that the central economies that manufactured industrial goods could control the price of their exports. The unequal powers were taking the wealth from developing countries, leaving them with no way to prosper. He believed that developing countries needed to create local vertical linkages and that they could not succeed except by creating industries that used the primary products already being produced domestically. Tariffs were designed to allow domestic infant industries to prosper. In doing so, Prebisch predicted many benefits: dependence on imports would lower, and the country would not be forced to sell agricultural goods for low prices to pay for industrial goods, the income rate would go up, and the country itself would have a strong growth.
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 had the most success with ISI.
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.
To overcome the difficulties of implementing ISI in small-scale economies, proponents of the economic policy, some within UNECLAC, suggested two alternatives to enlarge consumer markets: income redistribution within each country by agrarian reform and other initiatives aimed at bringing Latin America's enormous marginalized population into the consumer market and regional integration by initiatives such as the Latin American Free Trade Association, which would allow for the products of one country to be sold in another.
In Latin American countries in which ISI was most successful, it was accompanied by structural changes to the government. Old neocolonial governments were replaced by more-or-less democratic governments. Banks, utilities, and certain other foreign-owned companies were nationalized or had their ownership transferred to locals.
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, 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."