Analyse the Problems That Developing Countries Experience in Adopting Import Substituting Industries (Isi) Strategy as an Approach to Industrial Growth and Development.

Topics: International trade, Economics, Export Pages: 5 (1419 words) Published: June 19, 2013


Developing countries have adopted a number of approaches in their attempts to move their economies and societies from So-called “backward” orientation towards a more “modern” one. Crucial to this process was a desire to change from a rural-traditional dominance to a more modern-industrial mode of the simple reason that development was equated with industrialization. As a result developed countries pursued a policy of rapid industrialization primarily through a process of import substitution. In this essay the writer is going to analyse the problems that developing countries experience in adopting Import Substituting Industries (ISI) strategy as an approach to industrial growth and development.

According to Michael Todaro (1994:681), ISI is “A deliberate effort to replace major consumer imports by promoting the emergence and expansion of domestic industries such as textiles, shoes, household appliances,” usually requiring the imposition of protective tariffs and quotas to protect new or infant industries.

Specifically, import substitution has been based on the following arguments: infant industry protection, instability of foreign market earnings and the need for self-sufficiency. Prebisch (1962) savings for investment, since industries are assumed to save more, a need to conserve foreign exchange and d improve balance of payments and additional exports of primary products would turn the terms of trade against the exporting country. Cypher and Dietz (1997).

The policy instruments supporting import substitution regimes are an assorted mix of tariffs ,quotas exchange control and overvalued currencies .Restrictions on imports protect domestic firms from competition with produces from other countries and are measured using effective rate of protection. Empirical estimates by Basassa (1971) and Lewis and Gulsinger (1968) indicated an excessively high rate of effective protection and by implication, a heavy movement of resources into manufacturing sectors. It gives an empirical estimate of the domestic marginal rate of transformation by adjusting domestic prices for monopolistic rents and factor market distortions in order to reflect the opportunity cost of producing various commodities.

There is a very large body of research on the effect of import substitution regimes in developing countries. A major effect cited is the discrimination against agriculture. This happens because protection raises the price paid for manufactures while depressing those for farm produce. A related effect has been the favouring of profits over wage within manufacturing sector with a resulting increase in inequality of income distribution .Since import substitution initially focuses on the production of final consumer goods in created a demand for a variety of new import to be used in production process. This led to an increase in dependence on import with even more serious consequences in the event of foreign exchange shortages. Now there would be effect on employment and capacity utilization instead of there being only shortages of the formerly imported product. This kind of situation resulted in the difficulty of further import substitutions. Briton (1998).The net result was that import substitution did not lead to economic self-sufficiency.

While several of the large developing countries (e.g. Brazil, Mexico, India) were reasonably successful in fomenting industrialization through ISI strategies, this approach did have several negative impacts as well. There are sectorial disparities. Not all sectors of industry benefited equally. By protecting infant industries from competition, many sectors could produce inefficiently and...

References: Bruton H. J (1998) A reconsideration of import substitution. Journal of Economic literature.
Balassa H et al. (1971) The structure of Protection in Developing Countries. Johns Hopkins Press, Baltmoe.
Cypher, J. M and Dietz, J. L (1997) The process of economic Development. Rautledge, New York.
Findlay, R. (1973) International trade and development theory. Columbia University Press, New York
Todaro, M (1977) Economic Development in the Third World. Longman, London.
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