Import Substitution

Topics: Economics, International trade, Free trade Pages: 5 (1509 words) Published: July 26, 2011
Import Substitution Industrialization (ISI)
Government strategy that emphasizes replacement of some agricultural or industrial imports to encourage local production for local consumption, rather than producing for export markets. Import substitutes are meant to generate employment, reduce foreign exchange demand, stimulate innovation, and make the country self-reliant in critical areas such as food, defense, and advanced technology.

What Does Import Substitution Industrialization (ISI) Mean?
An economic theory employed by developing or emerging market nations that wish to increase their self-sufficiency and decrease their dependency on developed countries. Implementation of the theory focuses on protection and incubation of domestic infant industries so they may emerge to compete with imported goods and make the local economy more self-sufficient.

Investopedia explains Import Substitution Industrialization (ISI) Import Substitution Industrialization (ISI) came to emergence in the post-World War II era in Latin American countries. ISI seeks to protect local industries through various avenues such as tariffs, import quotas and subsidized government loans. Those countries practicing ISI seek to develop production channels for every stage of a product, not just the final product. ISI runs counter to the economic theory of comparative advantage, where countries specialize in the production of goods in which they have a particular advantage, and then engage in international trade

1. a) The failure of the import substituting industrialisation --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 1. Abstract

Until the 1930s Latin Americas economic export-led concept of selling raw materials to Europe and North America in order to earn foreign currency worked (in Argentina even well); but this classic free-trade model fell apart after the Wall Street Crash in 1929 and the ensuing depression in North America and Europe. Repression, economic recession, less exports, followed by growing poverty and an increasing social disparity, forced the economies to change. As a kind of emergency reaction, caused by a lack of manufactured goods, which were not available and affordable any more, the rulers changed the free-market model into the model of import substitution. This strategy became the unchallenged paradigm in Latin America after the Second World War up to the 1970´s. The underdeveloped national industry should be pushed, protected by an intervening state from the impact of the world market. This Latin American way of industrialisation and economic doctrine was mainly created by the United Nations Economic Commission for Latin America and the Caribbean – better known as CEPAL. The first step is a description of the theoretical concept and strategies of import substitution, the second is the analysing of results and finally the outline of the Chilean way of import substitution.  

2. Theoretical model of import substitution
This concept is based on the ideas of the Argentine economist Raul Prebisch. After the period of desarrollo hacia afuera, the strategy turned to the inward looking period desarrollo hacia adentro. The role of the state was obvious, state management of the economy should led the national industry away from its dependence on primary exports and give impetus to the production of goods for the domestic market. The market was closed for foreign companies, and national industries were forced to develop and maintain the consumers´ wishes. The countries tried to get self-sufficient – independent from the world market and a national industrialisation at any price. The state acted as engine of development for the economy:

* The state tried to set up the required infrastructure (roads, dams, electrification, communication system, energy etc.) to maintain the...
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