Import Substitution Industrialization

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7 Dec 2010
October 25, 2010
Import Substitution Industrialization
Four Strategies of Economic Development
o A strategy might be a policy decision by the government or it might
just be the way things are
o Manufacture-export
You build up a strong manufacturing base and then you
produce secondary goods through that manufacturing
industry, and then they exported those secondary goods
(Britains economic strategy)
o Forced-capitalization
When you have forced savings and very low wages with a
goal of building up the reserves of capital to allow for
domestic investment in industrialization
It’s a way of building up a reserve of money through forced
savings and low wages
You then use that money to invest in industrialization
o Primary-product export
This is the strategy of economic development that most
countries in the global south engaged in up until mid-way
through the last century
You export primary products either that’s an end in itself
(primary agricultural goods or resources) or because it’s a
step toward capitalization; you export your primary goods as
a way to build up your capital (capital accumulation) and then
youre planning a further step to industrialize
o Import substitution industrialization
Organized and run by the government
It involves a lot of state interference in the market
A strategy might be something designed as a strategy or it
might be ex-post facto you look back on the strategy they
used even if it wasnt necessarily a conscious goal
You build up the manufacturing base by shutting down
imports on manufactured goods
The new manufactured center is able to take advantage of the
existing market
o History of ISI
This was a strategy used in particular parts of the world at a
particular time
The first wave of ISI was generated by WWI; during the war
and directly because of the war most developed country
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economies redeveloped their production to military needs and
they stopped exporting manufactured goods
Developed countries involved in WWI and involved in
supplying other countries for WWI reorient their economies
towards war-time production, so they stop producing a lot of
the goods that theyve been producing they stop exporting
goods to developing countries
There are a lot of shortages in the developed world and in the
developing world
Developing countries responded in one of two ways: either by
going without living with a shortage and just not consuming
that secondary product anymore, or by making an attempt to
produce those goods domestically
This happened again in the period of the Great Depression
(30s) and it happened again in WWII
It happens over and over again
By the time decolonization starts (starting with India), there
are a lot of leaders who understand the need of developing a
manufacturing base so they are not as dependent on
production in the developed world
ISI is initially forced on developing countries because of
changes in production in developed countries
o Focus of ISI
Building up manufacturing enterprises to produce higher-
value goods that were formerly imported; reducing economic
focus on primary resources
Light consumer goods: textiles, processed foodstuffs…
o ISI is the solution to dependency: build up a manufacturing base by
withdrawing from the global market
o Dependency - some countries are selling cheap agricultural
products and theyre forced to buy expensive manufactured
products uneven economy
o The internal balance of trade in these countries (between imports
and exports) cannot be sustained
o This is what causes the problem of dependency - what you're
importing costs more than what you're exporting
o In order to break out of this dependency logic a country can
withdraw from the global market
o You can withdraw in one of two ways:
Stop importing secondary goods
and you can stop exporting raw materials
o Developing your own domestic manufacturing base
o There are two reasons to develop your own domestic manufacturing
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You can stop importing those expensive secondary goods;
youre not spending all that money in buying these expensive
Hopefully, you will actually become an exporter of
manufactured goods you’re no longer an exporter of
bananas and coffee and cocoa; now you might be an exporter
of textiles, electronic equipment, etc.
o Now youre going to look more like a core country rather than a
periphery country
What are the reasons to implement ISI?
o Volatility of primary commodity prices
The prices for agricultural products fluctuate dramatically
from year-to-year
Agricultural products are very volatile; they're vulnerable to
forces that are totally beyond the developing countrys
capacity to control
Overproduction in other developing countries; changes in
consumer-preferences in developed countries; technological
advances; weather and natural catastrophe and the
imposition of tariffs and quotas by developed countries
o Declining terms of trade
Poor countries experience a long-term product of declining
terms of trade
Primary goods have lower income elasticity
When people get wealthier, they dont buy more primary
goods they buy more secondary goods
Theres a limit to the amount of food a family can consume
These trends are not likely to change
When it becomes cheaper to produce food, the cost of food
actually goes down
Higher productivity has not meant higher wages commodity
prices are driven down
o Developing and protecting infant industry
You start manufacturing in areas or products where you
already know there is an internal market you produce an
item that is already consumed domestically but you cut off
imports so people can no longer import that product
You know theres a market for x product but you caught off
imports and create an internal solution
Britain could charge as much as it wanted to the early
factories could be as inefficient as they wanted to be because
there was no competition in any other part of the world
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