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Submitted to:- Gaurav Arora
11005059 B24 MBA-IB LPU 1/14/2012
It will conclude that the critiques against ISI from the neoclassical economists are based on a static equilibrium model. it will focus on some basic underlying models employed by the two school of thought. . In particular. then goes on to compare and contrast structuralist rationales for ISI and neoclassical rationales against it. which can not fully comprehend the dynamic relationship between growth and ISI at a macroeconomic level. This paper starts by examining the historical background and formative influences of ISI.ABSTRACT The purpose of this paper is to try to clarify and evaluate the major issues and arguments in the debate on Import substitution industrialization strategy between the neoclassical economist and the development economists. The general conclusion of the paper is that import substitution as an industrialization strategy remain viable and may be of great importance for less developed countries that want to catch up economically with industrialized countries. rather than on specific policy recommendation given by either school.
TABLE OF CONTENTS y y INTRODUCTION CONCEPT 4 5 y y DEFINITION LATIN AMERICA 6 7 y y EAST ASIA THEORETCAL BASIS 9 10 y y ADVANTAGE AND DISADVANTAGE SWOT ANALYSIS 11 12 y y CASE ON SRI LANKA ISI REFERENCES 13 14 .
´ ( Karugman . but a debate on two fundamentally different development strategy...INTRODUCTION Once upon a time there was a field called development economics ± a branch of economics concerned with explaining why some countries are so much poor then others and prescribing ways for poor countries to become rich. the debate on interventionist verses free market approach to economic development has not been ended in practice or in academic circles. Country after country was confronted with falling real income and heavy debt-servicing obligation. In the 1950s and 60s . it became evident in the 1980s that something had gone wrong in many countries that had practiced ISI. However. The recorded rates of growth in many less developed countries far exceeded what has been expected as possible in the three decades before the 1980s .1992 ) Gone with that field is also the popularity of import substitution industrialisation strategy (ISI). was fairly advance in almost every less developed countries. It has not been debate on protectionism verses free trade . as interpreted by some economists .. import substitution .. however. especially Latin American countries where ISI was first introduced. and therefore was forced to undergo reform programs. . That fields no longer exists. involving the development of domestic industry through varying forms of protection .
which is essentially a micro level concept. ISI is usually treated as a trade and tariff theory. ISI refers to the general practice of many LDC s. . as a historical phenomenon. import substitution is one of the tool that the government in LDCs may use to undertake industrialization and structural changes.CONCEPT There has been little attention devoted to a critical examination of the concept of ISI in the existing literature. especially Latin American countries. As a deliberate policy. A clear distinction should be made between ISI as a historical phenomenon and as a deliberate policy . which responded to external disruption of trade by domestically producing substitutes for those previously imported.
though it was advocated since the 18th century. The term primarily refers to 20th century development economics policies.). It has been applied to many countries in Latin America. and highly protectionist trade policy. power generation. . subsidization of vital industries (including agriculture. It is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. where it was implemented with the intention of helping countries to become more self-sufficient and less vulnerable by creating jobs and relying less on other nations. Import substitution industrialization was gradually abandoned by developing countries in the 1980s and 1990s due to disappointment with the results.DEFINITION Import substitution industrialization or "Import-substituting Industrialization" (called ISI) is a trade and economic policy that advocates replacing imports with domestic production. increased taxation to fund the above. The ISI is based primarily on the internal market. etc. The ISI works by having the state lead economic development through nationalization.
such as Ecuador. when Latin American countries. Prebisch believed that developing countries needed to create local vertical linkages. of the Soviet Union) as inspirations of state-induced industrialization. Honduras.Latin America Import substitution policies were adopted by most nations in Latin America from the 1930s until the late 1980s. and they could only succeed by creating industries that used the primary products already being produced domestically. through agrarian reform and other initiatives aimed at bringing Latin America's enormous marginalized population into the consumer market. To overcome the difficulties of implementing ISI in small-scale economies. Among the officials ± many of whom rose to power. Positivist thinking ± which sought a "strong government" to "modernize" society ± played a major influence on Latin American military thinking in the 20th century. Uruguay and Venezuela. The tariffs were designed to allow domestic infant industries to prosper. even though Populist governments in Argentina (Perón) and Brazil (Vargas) had the precedent of Fascist Italy (and. when Argentine economist and UNECLAC head Raúl Prebisch was a visible proponent of the idea. Thus. and regional integration through initiatives such as the Latin American . like Perón and Vargas ± industrialization (especially steel production) was synonymous of "progress" and was naturally placed as a priority. and. The initial date is largely attributed to the impact of the Great Depressionof the 1930s. This served as an incentive for the domestic production of the goods they needed. which depend on larger consumer markets to survive. proponents of this economic policy ± some within UNECLAC ± suggested two alternatives to enlarge consumer markets: income distribution within each country. and the Dominican Republic. ISI was most successful in countries with large populations and income levels which allowed for the consumption of locally produced products. Chile. the same can not be said for capital-intensive industries ± such as automobiles and heavy machinery ±. This is so because while the investment to produce cheap consumer products may pay off in a small consumer market. Mexico. could only implement ISI to a limited extent. to some extent. as well as Brazilian economist Celso Furtado. smaller and poorer countries. The first steps in import substitution were largely untheoretical and based on pragmatic choices of how to face the limitations imposed by recession. to a lesser extent. Latin American countries such as Brazil. were prevented from importing due to a sharp decline in their foreign sales. and the policy lasted through to the end of the decade in some form. had the most success with ISI. Peru implemented ISI in 1961. which exported primary products and imported almost all of the industrialized goods they consumed. ISI only gained a theoretical foundation in the 1950s.
being one of many factors leading to the so-called lost decade of Latin American economics. Banks and utilities and certain foreign-owned companies were nationalized or transferred ownership to local businesspeople." the period that lasted from 1940 to 1975 in which economic growth stood at 6 percent or higher. . which would allow for the products of one country to be sold in another. Other economists contend that ISI led to the "Mexican Miracle. Old neocolonial governments were replaced by more or lessdemocratic governments. Many economists[ contend that ISI failed in Latin America.Free Trade Association (ALALC). it was accompanied by structural changes to the government. In Latin American countries where ISI was most successful.
The strategy followed by those countries was to focus subsidies and investment on industries which would make goods for export. and some economists attribute the superior performance of East Asia in the 1970s and 1980s to this difference in policies. This focus on export markets allowed them to create competitive industries. such as shipbuilding. This export promotion approach to industrialization in the East asian countries contrasts with the strategy of ISI. In pursuing this and to boost its competitiveness in the 1970s. Indeed. Most "East Asian Tigers" rejected import substitution policies. and not to attempt to undervalue the local currency. . East Asian policies are most commonly not referred to as ISI. South Korea made large investments into heavy and chemical industries.East Asia ISI was rejected by most nations in East Asia in the 1960s. steel and petrochemicals. though they maintained high tariff barriers.
. an overvalued currency to help manufacturers import capital goods (heavy machinery). protective barriers to trade (e. and on Keynesian economics. that import substitution does not mean import elimination: as a country industrializes. according to the Singer-Prebisch thesis. governmental policies toward investment were not always opposed to foreign capital: the Brazilian industrialization process was based on a tripod which involved governmental. chemicals. the Brazilian ISI process. and discouragement of foreign direct investment. private. Ford. GM and Mercedes all established in Brazil in the 1950s and 1960s. The real objective of import substitution is therefore not to eliminate trade. It should be noted. which are commonly: an active industrial policy to subsidize and orchestrate production of strategic substitutes. Volkswagen. ISI policies are theoretically grounded on the SingerPrebisch thesis. the second to manufacturing consumer goods. such as petroleum. and the third. as well. it begins to import other kinds of goods which become necessary for its industry. From these postulates it derives a body of practices. to the production of durable goods (such as automobiles). however. as well as the adoption of different exchange rates for importing capital goods and for importing consumer goods. Moreover. on the infant industry argument. but to lift it to higher stage ± that of exporting value-added products. In many cases.g. for domestic or foreign consumption. The major and unifying postulate of ISI can thus be described as an attempt to reduce foreign dependency of a country's economy through local production of industrialized products. which are not as susceptible to economic fluctuations as raw materials. these postulates did not apply: on several occasions. and the raw materials it may lack. involved currency devaluation as a means of boosting exports and discouraging imports (thus promoting the consumption of locally manufactured products). and foreign capital ± the first being directed to infrastructure and heavy industry.THEORETICAL BASIS As a set of development policies. whether through national or foreign investment. which occurred from 1930 until the end of the 1980s.tariffs).
resilience in the face of a global economic shocks (such as recessions and depressions). .ADVANTAGE AND DISADVANTAGE The major advantages claimed for ISI include: increases in domestic employment (reducing dependence on labour non-intensive industries such as raw resource extraction and export). less long-distance transportation of goods (and concomitant fuel consumption and greenhouse gas and other emissions). A disadvantage claimed for ISI is that the industries that it creates are inefficient and obsolete as they aren't exposed to internationally competitive industries which constitute their rivals and that the focus on industrial development impoverishes local commodity producers who are primarily rural.
OPPORTUNITY Great opportunity for the infant industries to introduce product in the domestic market. So what the governments did was to restrict import to essentials and raised interest rate to bring money into the country and keep it at home. THREAT The faster the economy grew. which resulted in usually deep recessions. WEAKNESS Import substitution was supposed to reduce reliance on world trade.SWOT ANALYSIS STRENGTHS Out flow of currency will reduce that will improve country economical condition and by home production employment will increase. The more a country industrialized the more it needed these imports and ISI was strongly biased against exports. It devalued the currency to raise the price of imports and make exports more attractive also reducing the countries purchasing power. Trade protection and overvalued exchange rates raised domestic prices and made export less competitive. machinery. . and export taxes furthermore discouraged foreign sales. spare parts. So the industrializing countries were unable to export enough to buy the imports they needed. the more it needed imports. but exports could not keep up with the pace of imports and so the country ran out of foreign currency. but every nation needs to import something not available locally like raw materials.
growth rate exhibited by the export sector. any decline in export earnings which is not compensated by foriegn capital inflow or by the utilization of foreign reserves could lead to an industrial recession. However. Under this new form of dependence.CASE ON SRI LANKA ISI SUMMERY The import substitution attempts have. or perhaps negative. . It was because of the new growth momentum in industry and domestic agriculture that the economy was able to enjoy a positive moderate growth rate despite the near zero. these new developments have brought about a new and a more delicate form of trade dependency ± the increasing raliance of the production performance of the modern sector of imported inputs. During the IS era. through forced import curtailments. the overall pattern of sectoral interdependency of the economy also has begun to indicate some sign of improvements. In the colonial era and in the early part of the post-independence period. In line with the gradual expansion of the nascent industrial sector into the areas of intermediate and capital goods production. brought forward significant structural changes in the economy of Sri Lanka over the last two decades by way of contributing toward growth of industry and activization of domestic agriculture. These developments have resulted in a considerable decline in the relative direct contribution of export agriculture to total domestic output and employment. imports act as a major determinant of the level of activity in the manufacturing sector and the releted activity. in fact. distruption in import flows were directly reflected on the level of supply of imported consumer goods.
zdv.britannica.thefreedictionary.com/EBchecked/topic/284088/import-substitution-industrialization .swarthmore.edu/users/08/ajb/tmve/wiki100k/docs/Import_substitution_indus trialization.sccs.uni-tuebingen.de/webroot/sp/barrios/themeB1a.html http://tiss.com/Import+substitution+industrialization http://www.html http://financial-dictionary.References http://www.
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