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POL201Y1 Lecture Notes - Import Substitution Industrialization, Import License, Nepotism

Political Science
Course Code
Sophia Moreau

of 4
POL201Y1- Oct.25, 2010
Import Substitution Industrialization
Strategy of economic development, think about in the context of other developments
o Manufacture export: Strong manufacturing base built up then export secondary goods
o Forced Capitalization: done in the early years of industrialization, way of building up
reserve of money through forced saving and low wages (Britain)
o Primary-Product Export: Most countries in the global south engaged in until midway
through the last century, export primary products as a step to build up capitalization
and industrialization
Import Substitution: is a policy decision, involves a lot of state interference in the market
people think of it as a way to accumulate a goal
o Build up manufacturing goods through producing secondary goods through the use of
primary goods
o It’s not still primarily used by countries but once was due to WW1, as nations re-
orientated there economy to manufacturing warfare productions (stop importing such
things)…stop export goods as well
o Shortages all in developed countries, which was dealt with through going without the
item or manufacturing it themselves
o Happened again in WW2
o Period of decolonization, newly free/developing nations are forced into import
substitution because they can no longer rely on developed countries
Dependency theory also started to gain a following; they identify import substitution as a way to
help developing countries by building up a manufacturing base by withdrawing from the global
o Developing countries no longer have to buy expensive imports with their cheap exports
o Dependency theorists suggest a solution to this is to cut yourself off from the global
market (stop imports and stop exports)…develop your own domestic manufacturing
base, produce your required items yourself and could eventually become an exporter of
secondary manufactured goods
Reasons to implement Import Substitution Industrialization
o Volatility of primary commodity prices: if developing countries continue with just
primary products they have no control over the prices set in the world market (weather
affects, technological affects, tax/tariffs, other competing countries)
o Declining terms of trade: the amount of primary products purchased even with wealth
increase stays relatively the same
o Technological change: If primary products can be produced more efficiently it drives
down prices because there is an abundance of it that is produced efficiently
o Developing and protecting infant industry: protect your own domestic industry because
there is no external competition of the same item
o Forward and backward linages: investment in one industrial will have a spill over in
terms of investment with other industries
POL201Y1- Oct.25, 2010
Implementing Import Substitution Industrialization would help countries with their balance of
payment deficits (which are caused when a country imports more than it exports)
Lot of investment in capital to build up manufacturing industry (machinery in the factories)
Implementing can be done through:
o Import licensing quotas: people need to get a license to import certain goods, certain
number of licences are handed out and they cost money (to limit competition) but this
may turn into a tool for patronage or nepotism
o Tariffs: do most of the work for limiting the imports
o Direct Government Investment: Government funded factories, direct government
investment, very expensive for the government
o Overvalue exchange rates: make imports cheap, counterintuitive, their currency is
worth more than it should be as a result imports cheap but that’s they opposite of what
they are trying to do
o Low interest rates: more incentive to invest (burrow money), consumption increases
because pointless to save, spend money on domestic products
Effects of Implementing Import Substitution Industrialization
o Best known in South America
o For some reason most of the effects are negative
o Overvalue of exchange rates means slowed export growth, your exports are more
expensive, to stop your country from continuing to be an exporter of primary goods is to
export manufactured goods but with that comes competition and because it starts off
competition, having an overvalue means its more expensive…never really gets around to
the second stage where you get to export your manufactured goods
o Huge government deficits due to the investments governments put in manufacturing,
and they even financially support many companies which are not yet ready to export,
this protection lasts and they company never really becomes competitive
Often these countries also lack extensive bureaucratic taxation so it is easy for
taxes to do unpaid, often developed countries have their largest source of tax
from individuals but without extensive bureaucratic taxation that is not
possible…lot less money on unpaid taxes of things coming in
o Monetization: Printing money, when there is not enough money, leads to inflation and
huge drop in the value of money
o Dutch Disease: Any type of strategy of economic development the government decides
to focus on a certain sector, and ignores and disinvests in certain sectors of the
economy such as agricultural leading to less productive or failing industries, this lead to
Import Substitution Industrialization causing countries to be more dependent on
imports for basic food needs. Capital intensive industry relies more of capital than on
labour. Often governments would import capital intensive machinery (machines in
factories instead of actual human labour) people don’t get absorbed into the factory
system and the agricultural system fails as well
POL201Y1- Oct.25, 2010
Criticism of Import Substitution Industrialization
o Ideological critiques- Come from both the left and right of the spectrum
Puts power in the hands of the bourgeoisie and disadvantages the peasants and
even the workers (advantage to people who have the import licenses, the
quotas, etc) (LEFT)
Import Substitution Industrialization is inefficiently and interfering with the
natural way of the market, the market can fix itself this interference (RIGHT)
Import Substitution Industrialization has to interfere in the market over
and over again at the right time for it to work- against Right ideology
Uneven protection- some sectors are more protected than others (automakers>
agricultural); also doesn’t make sense because auto industry is protected but
steel and other sub-industries are not so no one is willing to produce steal
(problems with the forward and backward linkage)
Overcapacity- to much product for the domestic market, which cannot even be
exported because of overvalue there is also no competition, nor is it cheap
Harms agriculture (refer to Dutch Disease)
Budget Deficits ( look to notes above)
Capital flight- because the bank offers low interest rates this meant that wealthy
people started off shore bank accounts with high interest rates, domestic
products not bought as predicted
Two-tiered labour system- increase in inequality, polarization of the wealthy
and poor, ignoring sectors and protecting others caused a division of people in
terms of social class and wealth
(Bad) Foreign Direct Investment- Multinational/Transnational corps profits go
back to country of origin not local economy, many administrative workers are
also from the country of origin
Import Substitution Industrialization is not a success but it still exists, in the short term it created
an economic crises…many of these countries then turn to IMF or World Bank and a condition of
receiving their aid companies must give up the protective to they received from their domestic
governments, lead to the privatization of many companies and industries
o Chile- suffered negative effects of Import Substitution Industrialization
o Ex: the effects of oil cartels
o 1980s Import Substitution Industrialization experiment is over
In the long term however Import Substitution Industrialization has gone in the way that
dependency theory has predicted (refer to notes above) they do eventually rely less on
manufactured imports of the developed countries
o Trends over the last 40 years show that most of the manufactured products is still done
by developed countries however it has moved from 95% to 77%
o However you have to take into consideration that parts of a product is developed in
many parts of the world and the most wealthiest ‘part’/assembly is done in developed