Import substitution industrialization

Definition

Import substitution industrialization (ISI) is an economic policy aimed at reducing a country's dependence on imported goods by promoting domestic production. This strategy encourages the development of local industries to produce goods that were previously imported, thereby fostering economic self-sufficiency and creating jobs. It often involves protective tariffs, subsidies, and government support to nurture infant industries.

5 Must Know Facts For Your Next Test

1. ISI gained popularity in many Latin American countries during the mid-20th century as a response to the economic challenges posed by globalization and reliance on foreign imports.
2. The strategy often led to the establishment of state-owned enterprises that were intended to produce essential goods locally.
3. While ISI initially spurred industrial growth, it sometimes resulted in inefficiencies and a lack of competitiveness due to heavy government intervention.
4. Over time, many countries faced economic stagnation under ISI policies, prompting a shift towards export-oriented growth strategies in the late 20th century.
5. Critics argue that ISI can create an environment of dependency on state support and can limit innovation by protecting domestic firms from competition.

Review Questions

• How does import substitution industrialization contribute to structural transformation in developing economies?
  • Import substitution industrialization (ISI) facilitates structural transformation by shifting economies from agriculture-based systems to more industrialized ones. By promoting local manufacturing, ISI helps create new job opportunities, reduces reliance on imports, and encourages the development of domestic industries. This transition can lead to increased economic growth and a more diverse economic structure as countries invest in various sectors.
• What are some potential drawbacks of import substitution industrialization for developing nations, and how do these affect long-term economic sustainability?
  • Some potential drawbacks of import substitution industrialization include inefficiencies in local industries due to lack of competition, over-dependence on government support, and limited innovation. These factors can hinder long-term economic sustainability by creating a market that is not competitive on a global scale. As a result, when economies attempt to integrate into the global market later, they may struggle due to the lack of experience in competing with established international firms.
• Evaluate the historical impact of import substitution industrialization on Latin American economies and its role in shaping current economic policies.
  • Historically, import substitution industrialization had a significant impact on Latin American economies, fostering initial industrial growth and self-sufficiency. However, the inefficiencies and protectionist nature of ISI led many countries into economic stagnation during the late 20th century. This experience has shaped current economic policies as many Latin American nations now favor more open trade practices and export-oriented growth strategies, seeking a balance between protecting domestic industries while remaining competitive globally.

Related terms

Industrialization:

The process of developing industries in a country or region, transforming its economy from primarily agricultural to one focused on manufacturing and services.

Protectionism:

An economic policy that restricts imports through tariffs and other trade barriers to protect domestic industries from foreign competition.

Economic Diversification: The process of expanding an economy's range of products and services to reduce dependence on a single economic sector or industry.