Import Substitution Industrialization

Definition

Import substitution industrialization (ISI) is an economic policy that emphasizes the development of domestic industries by reducing dependency on imported goods. This strategy is often employed by developing countries to promote local production, create jobs, and stimulate economic growth, particularly during periods when global markets are unstable or unwelcoming. By fostering local industries, ISI aims to achieve self-sufficiency and drive economic development.

5 Must Know Facts For Your Next Test

1. ISI gained prominence in Latin America during the mid-20th century as a response to the Great Depression and was seen as a way to foster economic independence.
2. This strategy often involved government intervention, including subsidies and tariffs, to protect nascent industries from foreign competition.
3. While ISI initially led to rapid industrial growth in some countries, it often resulted in inefficiencies and a lack of competitiveness due to reliance on local markets.
4. Many countries that implemented ISI eventually faced challenges such as trade imbalances and foreign debt, leading them to pivot towards export-oriented growth strategies in the late 20th century.
5. Critics argue that ISI can create an uncompetitive manufacturing sector and may limit innovation due to the absence of external market pressures.

Review Questions

• How does import substitution industrialization aim to foster domestic industries and reduce reliance on imports?
  • Import substitution industrialization seeks to build domestic industries by encouraging local production over imports. This is achieved through protective measures such as tariffs and subsidies that make imported goods more expensive and less appealing. By promoting local businesses and manufacturing, countries aim to create jobs, boost economic activity, and reduce dependency on foreign markets, ultimately striving for greater self-sufficiency.
• What were some of the key outcomes of import substitution industrialization in Latin America during the 20th century?
  • Import substitution industrialization led to significant industrial growth in many Latin American countries during the mid-20th century. While it succeeded in creating jobs and developing local industries, it also resulted in inefficiencies due to a lack of competition and innovation. Over time, these economies faced challenges such as trade deficits and dependency on foreign technology, which led many countries to reconsider their ISI strategies in favor of more open market policies.
• Evaluate the long-term effectiveness of import substitution industrialization as a development strategy compared to export-oriented growth.
  • The long-term effectiveness of import substitution industrialization is often debated in comparison to export-oriented growth. While ISI initially provided benefits like job creation and industrial development, it frequently resulted in inefficiencies and limited competitiveness in global markets. In contrast, export-oriented growth strategies tend to encourage innovation and market responsiveness by integrating into global supply chains. As economies evolve, many countries have transitioned away from ISI due to its shortcomings, highlighting the need for a balanced approach that incorporates both local development and global integration.

Related terms

Protectionism: An economic policy that restricts imports through tariffs, quotas, and other regulations to protect domestic industries from foreign competition.

Economic Development: A broad concept that includes the improvement of economic well-being, quality of life, and the standard of living in a country, often associated with policies that promote industrialization and investment.

Export-Oriented Growth: An economic strategy that focuses on increasing exports as a means of driving economic growth, contrasting with import substitution industrialization.