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Import Substitution Industrialization

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University of Toronto St. George
Political Science
Sophia Moreau

Politics of Development: Week 7 J October 25, 2010 Import Substitution Industrialization - A strategy of economic development o Other strategies: manufacture-export strategy (strategy of Britain), forced-capitalization (other strategy of Britain during first years of Industrial Revolution), primary-product export (strategy of countries in global South, up until mid 20 century) o ^šŒš2]ZKlj}o] Ç ]Z]}LZ‰ ]] ooÇ]Lš]]Ç }µLšŒÇ[Z2}ÀŒLKLš}Œ]š may just occur without being an orchestrated policy decision - ISI occurs when you build up the manufacturing base by shutting down imports on manufactured goods o New manufacturing sector is able to take advantage of the domestic market by producing the same goods that were formally imported - History: first wave was generated by WWI o Because of war, most developed country economies reoriented production towards military needs and stopped exporting manufactured goods to developing countries ƒ Shortages in developed and developing worlds as a result ƒ Developing countries responded by either living with the shortage or by making an attempt to produce those goods domestically N Happened again during Great Depression and during WWII o By decolonization starts, a lot of national liberation leaders convinced of need to build up own independent manufacturing base so not as dependent on developed world ƒ Strategy forced on developing countries because of changes in production in developed countries Focus of ISI: - Building up manufacturing enterprises to produce higher-value goods that were formerly imported; reducing economic focus in primary resources - Light consumer goods: textiles, processed foodstuffs, metallurgical products - Heavy industry: iron and steel, heavy chemicals, automobiles ISI is the solution to dependency: build up a manufacturing base by withdrawing from the global market. - Condition of dependency is caused by unequal terms of trade, balance of trade between imports and exports cannot be sustained, spending a lot of money on imports and not making a lot of money on exports o In order to break out, a country can withdraw from the global market ƒ Two ways: stop importing secondary goods and stop exporting raw materials N ISI solution to both N Both involve developing own domestic manufacturing base o Two reasons: can stop importing expensive secondary goods as can produce them yourselves, and can become an exporter of manufactured goods (rather than raw materials) ƒ Look like a core country rather than a periphery country Reasons to Implement ISI: - Volatility of primary commodity prices o Prices for agricultural products fluctuate dramatically from year to year as vulnerable to forces beyond developing countries capacity to control (e.g. overproduction in other developing countries, changes in consumer preferences in importing countries, technological advances, weather, tariffs) - Declining terms of trade o Demand and prices for primary goods decrease significantly over time ƒ >}ÁŒ]L }KoZš] ]šÇ~ÁZL‰}‰o2šÁošZ]Œ7}L[ššLš}µÇK}Œ primary goods) ƒ Structural changes: productivity gains in agricultural (cheaper and more efficient š}‰Œ}µ 2}}ZKLZ o]L]L }ZšZ}}}7}ZL[šKLZ]2ZŒÁ2Z - Safe way of developing and protecting infant industry o Start manufacturing in areas or products where you already know there is a domestic market, cut off imports, no external competition o Protection of infant industry is a problem that Britain never had to contend with as was no competition from other countries of the world ƒ Could be inefficient and expensive for a period of time as no competition ƒ After Britain, every other industrialized nation faced this problem and used protectionist policies towards nascent industries - Forward and backward linkages o Invest in one industry, has spill over effects if has a lot of forward and backward linkages ƒ E.g. Auto industry: supplier of raw materials J suppliers of components J assemblers J center of pre-delivery J dealers ƒ Create a number of industries at once ƒ E.g. Real estate o Investing in car manufacturing sector will drive other sectors of economy, economy will spontaneously produce itself without the government having to do it all - Balance of payments deficits o Caused when countries regularly import more than they export, created by unequal terms of trade o In 1950s, this becomes major problem for many countries o ISI promises to put an end to some imports, assist in balancing payments Implementation of ISI: - Import licensing o Have quotas, individuals or companies need licenses in order to import certain goods, need to buy license from government in order to license o Government tried to control goods like capital equipment o Purpose is to limit domestic competition, government controls number of licenses ƒ Also to control imports, and hand out government licensing to particular individuals (vehicle for nepotism and patronage) - Tariffs to limit imports o Taxes imposed on secondary goods to make imported goods prohibitively expensive, in particular more expensive than the domestically-available alternative - Direct government investment o Under most ISI regimes, were not able to rely on private investment, most plants were started with government funding ƒ In particular, government constructed plants in the heaviest industries ƒ ISI required government investment as not a lot of domestic capital available for investment and very risky, firms not necessarily going to be profitable in the short-term N Government bears burden in investing in them, very expensive - Overvalued exchange rates o Counter intuitively to make imports cheap as do have to import items for start-up of
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