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Political Science
Sophia Moreau

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 (Britain) 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 market 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
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