Import Substitution Industrialization

10 Key excerpts on "Import Substitution Industrialization"

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  eBook - ePub

  Routledge Handbook of Industry and Development

  • John Weiss, Michael Tribe, John Weiss, Michael Tribe(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  9Import Substituting Industrialisation (ISI) Can or should we divorce industrialisation and trade strategies? Frederick Nixson

  Introduction

  Import substituting industrialisation (hereafter ISI) was the dominant strategy of industrialisation over the period from the early twentieth century until the late 1970s in a large number of less developed countries (LDCs). However, there was no one single ‘model’ of ISI and it varied over time and place with respect to the role of the state, the role of foreign capital via direct foreign investment (DFI), the variety and type of incentives offered to investors, the sectors accorded priority in investment and the political circumstances reigning at the time. Nevertheless, there are sufficient similarities in the variety of experiences of ISI to allow key characteristics and common problems to be identified and a ‘model’ of ISI to be described. The loss of momentum in, and the not uncommon collapse of, the strategy often in conditions of dramatic economic, social and political turbulence, allow a close examination of the dynamics of the ISI process and the identification of alternative schools of thought that have been advanced to explain the apparent failure of ISI.

  The establishment of import substituting industries was not always the result of a deliberate strategy. New market opportunities might emerge and investors, both local and foreign, might take advantage of them, with or without investment incentives. Some manufacturing activities, producing heavy, bulky low value commodities (for example building materials, furniture) would have a ‘comparative advantage’ – in part the result of poorly developed transport systems and consequent high transport costs – without the need for subsidies or protection (noted by Lewis, 1953).

  In other cases the imposition of import duties, intended to generate revenue for the government, might have the unintended consequence of providing protection to domestic producers. In the 1960s and early-1970s, import duties were a significant proportion of total tax revenue in both East and West African economies (Livingstone and Ord, 1968; Livingstone et al.

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  Latin American Economic Development

  • Javier A. Reyes, W. Charles Sawyer(Authors)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  In theory, ISI was supposed to transform Latin America from a relatively poor region in the world economy to relative prosperity. The goal seemed achievable, as parts of the region had been prosperous at various times in history. In the 1940s, it seemed obvious how to do this. The high-income countries had moved out of agriculture and into industry and got rich in the process. It seemed obvious that if Latin America could move out of commodities and agriculture and industrialize, the same result would follow. Further, the new development theory indicated that economic development was a relatively simple process. If a country could increase its capital stock and the K–L ratio, then GDP per capita would surely rise. In the previous section, we indicated that things did not work out as planned. GDP per capita in the region increased from 1950 to 1980, but at a relatively slow rate. This was disappointing, but the collection of policies created numerous unintended consequences. In this section, we review a partial list of these problems.

  Industrialization

  The main purpose of ISI was to produce industry in a country as rapidly as possible. In the case of Latin America, the policies produced a dramatic increase in the ratio of manufacturing to GDP. If it were true that rapid industrialization automatically meant rising GDP per capita, all would have gone to plan. However, one needs to go back and think about the phrase “import substitution” for a moment. Simple trade theory indicates what should be occurring in foreign trade and by extension, what domestic production should look like. A country should be exporting products that it can produce more inexpensively than other countries. The earnings from these exports can then be used to buy imported products. The products that a country imports should be products that can be made in other countries more inexpensively than domestic producers can make them. This is how a country maximizes its welfare by trading. One of the main benefits of trade is that a country can improve its welfare by buying goods cheaply from foreigners as opposed to producing them domestically at a high cost. In the jargon of economics, a country exports goods in which it has a comparative advantage. It imports goods in which it has a comparative disadvantage. Now consider the likely results of ISI. By definition, a country imports products for which it has a comparative disadvantage in production. By pursuing ISI, a country is deliberately building up industries in which it has already demonstrated that it has a comparative disadvantage in production. Imports will be replaced, but at a cost that is guaranteed to be higher than the cost of imported goods. Industry will be developed, but it will be industry in which the country has a comparative disadvantage in production. Industry has been developed, but it is an artificial and fragile sort of industry. It is a bit like growing a pine tree in a desert. It may be possible to do this, but only with a lot of care and feeding.

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  Development Economics

  Theory and Practice

  • Alain de Janvry, Elisabeth Sadoulet(Authors)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  Figure 7.8 Welfare analysis of an import quota INTERNATIONAL TRADE AND INDUSTRIALIZATION | 203 D YNAMIC G AINS FROM T RADE : I MPORT -S UBSTITUTION I NDUSTRIALIZATION AS A P OLICY G AMBLE An import-substitution industrialization (ISI) strategy is a dynamic gamble that can have a high development payoff if it succeeds, but which can also fail. It was followed by many countries that wanted to protect themselves from competition from more advanced countries in order to industrialize. The sequence of moves consists of the following four steps. 1. Before ISI with trade: the terms of trade between agriculture and industry for the country with free trade is the ratio of their border prices p A / p I . 2. Introduction of a protective tariff t M on industry under ISI: the terms of trade for the country become p A /[p I (1 + t M )]. This induces a shift of resources out of agriculture and into industry, and a welfare reduction (the reverse of the gain from trading under comparative advantage seen above). 3. The dynamic gamble is that industrial protection will induce investment and technological change in industry, shifting the PPF upward toward industry. 4. Returning to free trade under ISTE (import substitute then export), production will lead to a huge gain compared to the starting point thanks to progress in industrialization under temporary protective tariffs. The strategy can, however, fail, and it has critics such as Justin Lin (2009) as well as advocates such as Dany Rodrik (2004). It will fail if the PPF does not shift upward toward industry as expected in step Figure 7.9 Welfare analysis of a production subsidy in support of EOI Table 7.3 Gains and losses from a production subsidy to stimulate exports under EOI Consumer surplus Producer surplus Government budget Net social gain Net effect Sign of effect 0 0 a′ = a + − (a + b) − − − b −

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  Industrialization in Malaysia

  Import Substitution and Infant Industry Performance

  • Rokiah Alavi(Author)
  • 2006(Publication Date)
  • Taylor & Francis

    (Publisher)

  Thus, in terms of policy, not only is the domestic production of capital goods discriminated against by tariffs and exchange-control policies, but also by exchange rate policies that keep their imported costs below real costs. The rationale of these latter policies favouring the importing of capital goods rests in general on asspmptions as to the essentiality or the strategic role of physical capital/in the development process. The relatively low tariff rates on raw materials and intermediate goods mean further that the protection afforded to the value added of many consumergoods-producing activities is markedly higher than the nominal rate of protection on the good itself would indicate.

  The sequence of import substitution pictured by economists implied the growth process was to be spurred first by consumer goods industries, followed by an expansion of the production of supplies and intermediates and, later, capital goods (Ballance et al . 1982: 41). In other words, there is a need for existence of a systematic body of measures to encourage the development of different types of industries in different phases of the development process.

  The first stage of the ISI process ends when the expansion of finished consumer goods capacity hits the limit of the domestic market. At this point, the economy has a number of new activities, the survival of which depends on some form of protection and whose expansion cannot continue. Further growth then must take place in activities which are now importing or the recently established ISI activities must enter the export markets. Thus, a successful ISI strategy requires a systematic sequencing of industrial production from consumer goods to intermediate and capital goods, and from IS to exports.

  Protection policies

  Intervention to spur import-competing industrial activity is normally justified under the infant industry argument. Indeed, this argument has been widely used to justify protection for import-competing industries in developing countries. Therefore, in this section we will be focusing on the prescriptions of promotional incentives for infant industries in developing countries.

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  World Development

  An Introduction

  • Prodromos Panayiotopoulos, Gavin Capps(Authors)
  • 2001(Publication Date)
  • Pluto Press

    (Publisher)

  As such, the experiences of Latin America may be pre-figurative of indicators and outcomes in other parts of the Third World. Specifically, Latin American material allows us to investigate the relationship between state, industrial-isation and the ‘populist’, nationalist political mobilisations of the 1930s which propelled ISI to prominence. The example of East Asian industrial-isation illustrates the more contemporary experience of industrialisation, globalisation and crisis. A review of the development of crisis in the ‘miracle economies’ during the late 1990s points to a dynamic and much more difficult to predict environment facing Third World industrialisation in the early part of the twenty-first century. 65 Import Substituting Industrialisation attaches a critical role to state inter-vention and direction. Policy was frequently framed with the political objectives of ‘national economic development’ and the social objectives of ‘growth and equity’: by this it was meant that growth had to be consistent with elements of redistribution in the benefits of development and industrial policy. Whilst the redistributory effects of ISI were variable, this approach was very much driven by a recognition of market failure – a failure graphically illustrated in Myrdal’s early and influential Asian Drama (1968). In the case of Indian and Chinese variations of ISI, or ‘self-reliance’, the dispersion of industry and jobs to the poorer regions was a stated key aim of policy with the expectation that this would have a significant development impact. Export Orientated Industrialisation displaced ISI as the favoured industrial policy during the 1980s and 1990s, substantially as the result of the ‘success’ of the East Asian NICs. EOI represents the application of market theories of comparative advantage to industrialisation and trade policy in the developing economies.

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  The Political Economy of Latin America

  Reflections on Neoliberalism and Development after the Commodity Boom

  • Peter Kingstone(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  2 Import Substitution Industrialization and the Great Transformation in Latin America The choice between market-led and state-led development is not new in Latin America. In fact, it dates back to the early 20 th Century as Latin American societies and economies grew more complex. In that context, the simple commodity export model that had prevailed since colonial times appeared inadequate to meet the social and political goals of rising new classes. The state-led development process known as Import Substitution Industrialization (ISI) emerged out of the political conflicts of that period. In turn, the character of the ISI model shaped the subsequent challenges facing Latin America, and the way Latin American nations responded to those challenges produced the turn to neoliberalism. In essence, the models of development pursued in the region have been consistently direct responses to the failures of the pre-existing models. As Kurt Weyland has noted, one consequence of this style of policy making is to exaggerate the defects of the previous model and overestimate the benefits of the new one. 1 This chapter explores the antecedent politics and economic development leading up to the shift to neoliberalism. The central argument is that the ISI model was fundamentally flawed, but not as dysfunctional as its most ardent critics suggest. Import Substitution Industrialization led to a profound transformation of the region’ s economy, politics, and social structure. It was a period that witnessed rapid economic growth and the development of new technological capacity within a model that emphasized the expansion of internal markets. Along with that process of economic development, the urban population grew dramatically bringing with it new social policies that built social capital through increased access to education and health. The politics of the period was volatile. Few countries in Latin America remained democratic through the period.

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  The State And The Industrialization Crisis In Turkey

  • Henri J Barkey(Author)
  • 2019(Publication Date)
  • Taylor & Francis

    (Publisher)

  Whereas, the first two plans dealt with the first and easy phase of import substitution, the third and fourth plans had to come to terms with a more complex economy and the need to move into the more difficult and advanced stage of substitution. The plans, as the discussion above indicated, were, for the most part, guiding documents. The mechanisms for implementing ISI while influenced by the plans, were contained in other government policies. Implementing ISI The Import Regime The import regime, which establishes the guidelines of what can or cannot be brought into the country, constitutes a country's single most important mechanism for the implementation of import substitution. One basic principle guided the Turkish import regime of this era: all available foreign exchange resources were to be spent and distributed among the different sectors of the economy in accordance with the government's and SPO's development programs and goals. Through the import regime, the government controlled both the quantity and nature of imports, and attempted to strike a balance between the private and public sector requirements. Until 1980, when major revisions were made to the system, the import regime distinguished among three categories of commodities. (1) The first included freely imported goods. These consisted of necessary items, such as medicine, for which no domestic substitute existed. Goods crucial to the realization of the development plans were to be given priority in the import regime. 36 (2) The second category encompassed goods which were subject to quantity restrictions because local production partially satisfied domestic demand. Usually imported in quantities that, when added to the local supply, total availability would not exceed total demand. This was achieved through a permit system. Permits were issued in accordance with developmental priorities and foreign exchange availabilities

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  Trade Regime and Economic Growth

  • Charles L Chanthunya, Victor Murinde(Authors)
  • 2019(Publication Date)
  • Taylor & Francis

    (Publisher)

  By shutting off imports, import-substitution would avoid the uncertainties of estimating and hazards of creating new markets for the new industries to be established and secure an already established market of known dimensions. The advocates of self-sufficiency also took into account external factors in arguing for import-substitution. For example, Schmitz (1984) argued that the international circumstances during the period 1914-45 were the most frequently cited explanation for the emergence of import substitution in developing countries, particularly in Latin America. The two world wars and the great depression made continued importation of industrial goods difficult, or even impossible, because earnings from exporting primary commodities fell and because the nations at war were unable to supply industrial goods. This sparked off a wave of industrialisation in developing countries in order to Import substitution versus export promotion 3 3 Trade regime and economic growth reduce their dependence on the industrialised countries for the supply of manufactured products. In view of the arguments made in favour of import-substitution as a means for supporting modernisation industrialisation in developing countries, and given the arguments which were levied against the export of agricultural or mineral products, import-substitution greatly influenced development policies in the 1950s and 1960s and even subsequently. This coupled with political considerations and despite academic criticism against protectionism, industrialisation and planning, as well as the statistical evidence that the terms of trade had not shown a deteriorating trend, import-substitution dominated development policy in much of the developing world. As Fishlow (1984) pointed out, this happened not only because o f the persuasiveness o f the arguments in its favour but also because of the conditions that then prevailed.

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  The Limits to Capital in Spain

  Crisis and Revolt in the European South

  • G. Charnock, T. Purcell, R. Ribera-Fumaz(Authors)
  • 2014(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  2

  The Limits to Import Substitution Industrialisation

  Chapter 1 of this book outlined a relatively general and abstract theoretical approach to understanding the crisis-ridden development of global capitalism – largely from the perspective of the advanced or ‘classical’ capitalist countries. With this chapter, then, we begin our more focused examination of the development of capitalism within Spain. Our aim is to explain why the crisis that erupted in 2008 has deep historical roots. We make clear the link between Spain’s relatively ‘backward’ industrial status within Europe by the end of the 1970s and the subsequent cycles of growth, overaccumulation, and crisis from the 1980s onward. This requires that we now recognise – and briefly theorise – the specificity of national forms of capitalism in certain parts of the world, which cannot adequately be explained with recourse to the general approach provided in Chapter 1 , while also maintaining that the Spanish state had its own part to play in the processing of global class relations and in relation to the emerging NIDL from the 1960s.

  After offering a brief theorisation of ISI, and some background on Spain’s historical economic ‘backwardness’, we explain the material bases upon which Spain witnessed rapid economic development after the 1950s. We suggest this development was limited in key respects, and that it depended upon the mediation of state policies as a means of sustaining capital accumulation in the context of low productivity in agriculture and the weak development of the forces of production in industry. By the 1960s, the Spanish state was able to defer a serious crisis by being able to offer previously excluded foreign firms the opportunity to enter Spain and to enhance their profitability – and that of some Spanish industrial capitals – under the conditions peculiar to import substitution industrialisation (ISI). Concurrently, the Spanish state also managed a mass emigration of Spanish workers whose remittances took on an important compensatory function; and the state was also able to benefit from Spain’s increasing significance as a tourist destination for northern Europeans. By 1974, however, Spain eventually did experience the onset of a global crisis of overaccumulation in the form of a crisis of ISI and of the fascist state. A full-fledged strategy of austerity and industrial restructuring was deferred until after the transformation to a liberal state form and the election of the first Socialist government in 1982. In making this argument, we lay the groundwork for Chapter 3

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  Trade Policy and Industrialization in Turbulent Times

  • Gerry Helleiner(Author)
  • 2002(Publication Date)
  • Taylor & Francis

    (Publisher)

  The salient characteristic of the ISI policy was that it tended to bias trade and industrial incentives towards production for the domestic market and against exports. Protectionist measures (such as import licensing, quantitative restrictions on imports and domestic content regulations) coupled with an overvalued exchange rate, imposed a double burden on export firms in Sri Lanka. First, because of high import protection, firms faced increased costs of imported raw materials and machinery. 3 Second, the substitution of excessive administrative regulations for market forces generated a large bureaucracy and corruption that hindered private-sector initiatives. Firms went to considerable efforts and costs in securing licences and permits, classic rent-seeking activity (Bhagwati, 1988) distracting them from productive activity. The net result was that firms were discouraged from exporting and new investment was directed toward high-cost industries (largely in the public sector) manufacturing goods for the domestic market. A few studies have attempted to estimate the extent of trade bias facing manufacturing in Sri Lanka during the inward-oriented period. These studies use different measures of trade bias and are therefore not strictly comparable. Rajapathirana (1988), relying on the ratio of the nominal effective exchange rate for manufactured exports relative to that for total imports, reports that the trade regime favoured import substitution over export production up to the late 1960s. Pyatt and Roe (1977) calculate trade bias estimates from effective protection data and suggest that a bias against exporting was present in several manufacturing branches in 1970. There was an attempt at partial liberalization of the system of import controls and the promotion of non-traditional exports (i.e. gems, specie and manufactured exports) during the period 1965–70

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