Import Substitution

By
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 Introduction
• Growth and development are often uttered in the same breath and yet
the goals of each are actually quite different. Growth can be thought of as
expanding the size of the community through the use of land and other
natural resources.
• Development, on the other hand, can be thought of as improving
liveability through, among other things, jobs, education, cultural
preservation, public safety, and sense of community. But this distinction is
not often made resulting in growth being seen as a solution to the
problems that local communities face. Growth advocates are insistent that
their projects will improve the local economy.
• In a time when many communities face financial crises, this is an
appealing but misguided proposition, since the existence of rundown
urban areas shows that growth does not necessarily lead to development.
Fortunately, there exist ways for communities to develop out to growth.
One of those ways is through import substitution.
 Definition
• What is import substitution?
• The import substitution approach substitutes externally produced
goods and services, especially basic necessities such as energy, food,
and water, with locally produced ones. By doing so, local communities
can put their (hard-earned) money to work within their boundaries.
• Import substitution industrialization or "Import-substituting
Industrialization" (called ISI) is a trade and economic policy based on
the premise that a country should attempt to reduce its foreign
dependency through the local production of industrialized products.
The term primarily refers to 20th century development
economics policies, though it was advocated since the 18th century.
 The history of import substitution
• The notion of import substitution was popularized in the
1950s and 1960s as a strategy to promote economic
independence and development in developing countries
(Bruton 1998). This initial effort failed due in large part to the
relative inefficiency of 3rd world production facilities and as a
result their inability to compete in a globalizing marketplace.
• Since then, those countries and the rest of the world rely a
great deal on foreign-produced products and, as globalization
trends suggest, an export oriented approach has became the
norm. Despite this, in the 1970s, import substitution came
into the U.S. consciousness as a means to promote national
(Buy American campaigns) and regional development and the
debate continues as to its effectiveness 
 Cont…..
• A strategy for economic development which
encourages industrial growth within a nation in
order to reduce imports of manufactures, save
foreign exchange, provide jobs, and reduce
dependency.
• The United Nations Commission for Latin
America promoted import substitution policies
in the 1960s, but they were not successful.
 Strong Points
• In developing countries there are always large
domestic markets for manufactured goods, so
developing an import substitution industry
involves a low degree of risk.
• For developing countries, to protect local
industries against foreign competition is easier
than forcing developed countries to lift trade
barriers against manufactured goods from
developing countries.
 Difficulties
• Bad management and technology, and protectionism
usually lead to low product quality and high production
cost because of a lack of improvements. So it's difficult to
require local industries to supply high-quality substitutes
for imports. Moreover, in small countries with small
domestic industries, carrying out the import substitution
strategy is no easy task.
• A lack of capital and new technology has made local
industries failed to meet diversified tastes of customers,
and has made imported goods cheaper than locally-made
counterparts.
 Pros
• In developing countries, low personal income
makes the domestic market less attractive, so
aiming at larger foreign markets seems to be a
good solution which could help to:
– Create more jobs and stabilize socio-political life
– Bring in more foreign exchange needed for importing
new technologies and increasing manufacturing
output.
• less long-distance transportation of goods (and concomitant
fuel consumption and greenhouse gas and other emissions).
 Cons
• Countries adopting this strategy meet with a lot of
difficulties in gaining a foothold in the world market which
is relatively stable and is controlled by more reliable
suppliers from developed countries.
• In addition, developed countries are experts in protecting
their labour-intensive industries against products from
developing countries with better comparative advantages.
• Larger, richer economies were more likely to make ISO
succeed efficiently, whereas smaller countries with lower
per capita incomes were less likely to succeed with ISI.
 Implementations (Local Supply with Local
Demand)
• Oregon Marketplace
– In the 1980s, without the communication efficiencies of the
internet, Alana Probst of Eugene, asked 10 local businesses to list
40 items which they purchased from out of state. Armed with
this list of 40 items, she went to local businesses in search of
potential bidders. In its first year, Oregon Marketplace generated
over 100 new jobs as well as 2.5 million dollars in contracts.
– One example of its use involved an airline company which used
to purchase chicken for its meals from Arkansas despite several
growers just outside Eugene. In 1987, once computers were
brought into the system, the program was implemented state-
wide to similar success
 Implementations (Energy Efficiency)
• Osage, Iowa
– The community of Osage, Iowa with a population of
merely 3,800 people tried out this idea with great success.
– Its energy saving initiatives involved weatherization
techniques, use of efficient electric motors, appliance
replacement rebates, etc. and received support from
businesses and residents alike. Between 1974 and 1991,
they saved 7.8 million dollars and at least some of that
money filtered its way back to the local economy.
– Besides retaining money for local circulation, Osage
residents’ energy bills as of 1995 were 50% lower than the
state average
 Conclusion
• For all its benefits, import substitution is not free of drawbacks. For one
thing, its benefits can be difficult to measure since import substitution
strategies are often lumped with other strategies and its effects are
difficult to tease apart.
• As in many economic development scenarios, the counterfactual provides
fodder for criticism--it is often quite difficult to say whether import
substitution strategies led to better economic performance or whether
that performance would have come to fruition regardless of the strategies.
Also, local industries often cannot take advantage of economies of scale in
manufacturing their products. For example, a manufacturer who mass
produces shoes with streamlined processes and exports them all over the
world may be able to sell shoes at a lower price than a local shoemaker
and as result the local shoemaker may not be able to compete.
• Despite these drawbacks, if we assume that the import substitution
strategies described earlier are able to plug the leaks of capital from the
local economy and provide more dollars that could potentially be spent
locally, can we know for sure whether that money actually will be spent
locally