Import Substitution Industrialization (ISI) Free Essay Example

Import Substitution Industrialization (ISI) Definition Government strategy that emphasizes replacement of some agricultural or industrial imports to encourage local production for local consumption, rather than producing for export markets. Import substitutes are meant to generate employment, reduce foreign exchange demand, stimulate innovation, and make the country self-reliant in critical areas such as food, defense, and advanced technology. What Does Import Substitution Industrialization (ISI) Mean?

An economic theory employed by developing or emerging market nations that wish to increase their self-sufficiency and decrease their dependency on developed countries.

Implementation of the theory focuses on protection and incubation of domestic infant industries so they may emerge to compete with imported goods and make the local economy more self-sufficient. Investopedia explains Import Substitution Industrialization (ISI) Import Substitution Industrialization (ISI) came to emergence in the post-World War II era in Latin American countries.

ISI seeks to protect local industries through various avenues such as tariffs, import quotas and subsidized government loans. Those countries practicing ISI seek to develop production channels for every stage of a product, not just the final product.

ISI runs counter to the economic theory of comparative advantage, where countries specialize in the production of goods in which they have a particular advantage, and then engage in international trade 1. ) The failure of the import substituting industrialisation 1. Abstract Until the 1930s Latin Americas economic export-led concept of selling raw materials to Europe and North America in order to earn foreign currency worked (in Argentina even well); but this classic free-trade model fell apart after the Wall Street Crash in 1929 and the ensuing depression in North America and Europe.

Repression, economic recession, less exports, followed by growing poverty and an increasing social disparity, forced the economies to change. As a kind of emergency reaction, caused by a lack of manufactured goods, which were not available and affordable any more, the rulers changed the free-market model into the model of import substitution. This strategy became the unchallenged paradigm in Latin America after the Second World War up to the 1970? s. The underdeveloped national industry should be pushed, protected by an intervening state from the impact of the world market.

This Latin American way of industrialisation and economic doctrine was mainly created by the United Nations Economic Commission for Latin America and the Caribbean – better known as CEPAL. The first step is a description of the theoretical concept and strategies of import substitution, the second is the analysing of results and finally the outline of the Chilean way of import substitution. 2. Theoretical model of import substitution This concept is based on the ideas of the Argentine economist Raul Prebisch. After the period of desarrollo hacia afuera, the strategy turned to the inward looking period desarrollo hacia adentro.

The role of the state was obvious, state management of the economy should led the national industry away from its dependence on primary exports and give impetus to the production of goods for the domestic market. The market was closed for foreign companies, and national industries were forced to develop and maintain the consumers? wishes. The countries tried to get self-sufficient – independent from the world market and a national industrialisation at any price. The state acted as engine of development for the economy: * The state tried to set up the required infrastructure (roads, dams, electrification, communication system, energy etc. to maintain the industry. * An overvalued exchange rate to keep inflation down and imports expensive. * Nationalisation of key-industries such as iron, steel, wood, utilities and oil. * Protection of national markets against foreign competition by imposing import taxes and state control of foreign currency dealings. * Price controls and subsidised food to keep the wages cheap. 1. The outcome of import substituting industrialisation (ISI) The goals of higher efficiency, productivity and more competitiveness – a development apart from the pressure of the world market – have not been reached.

The process of organisational, technical, and social development of the industries was slow and highly protected. During the 1950s the countries decided to open the market to foreign direct-investments restrictively, which, after a short period of time, ruled the more dynamical and technical sectors. The state controlled the raw materials sector, the national private sector got less and less opportunities to develop. * The policy was focused one dimensionally on the industrial sector. The agri-cultural and the services sectors were neglected. The import substitution was aimed at replacing imports from abroad, but nevertheless in most Latin American countries the import of manufactured goods in fact increased. The terms of trade got worse, caused by low prices for exported raw materials and expensive imports. The industrialisation could not keep up with the technical and innovative development of the free world markets. As a result, new technologies and machinery had to be bought from transnational companies. * The import substitution strategy led to over-intrusive, bloated and inefficient state-owned enterprises (SOEs).

Large SOEs and private sector companies operated as monopolies/oligopolies within a protected market. * Internal demand was not strong enough. The needed goods got expensive and only affordable for the upper classes. There was no need to upgrade productivity. * The bloatedness, inefficiency, and corruptness of the states bureaucracy limited the scope of action and reforms. * The industrialisation failed in ending the social disparity, it got worse ever since. The unequal distribution of the income supported this trend. * The ISI had massive influence on capital formation and the financial ystem. State development banks and the expansive investment for the ISI, financed by overseas credits, led to the dept crisis. * Inefficient SOEs, large state subsidies, bad terms of trade, foreign credits and a inability to collect taxes (low and largely unpaid) led to fiscal deficits and inflationary pressures. The countries economies got more and more unattractive for foreign investors. * The strategy to develop the market under protection first and open it for the world market afterwards did not work out. The conditions for a world market integration did not improve. . The Chilean way of import substitution The new industrial bourgeoisie co-operated with the working class to face the powerful landowners and the trade-elites. The people’s front of 1938/39 tried already to implement the populist strategies: reduction of the power of the landowners, concentration on the domestic market, a better education system, social securities for employees and a better infrastructure for the industrial development were on their agenda. But with Jorge Alessandri elected in 1958 the ISI was interrupted.

As Alessandri claimed himself an independent, he wanted the market to be independent as well. He approved of the liberal position for the free-trade market-concept and refused any intervention by the government. After a short period of success, the exports decreased and Alessandri took foreign credits. The Chilean industrials preferred a policy of protection and monopolies to the free market-policy. The support for Alessandri fell apart, working class protests and inflation rose. The elections of 1964 were regarded as an important economical and political turning point.

The economic concept of the elected president Eduardo Frei and his Partido Democrata Christiano (PDC) favoured stability. They tried to gain more stability by economic growth, state interventions and an redistribution of the income. The PDC tried to reach a “Chileanisation” of the copper-sector. Two thirds of the Chilean export-income was made by this industry, but most mines were owned by US-companies. The government bought an ownership of one of the three major mines and changed the economical and political course.

The government strove for an agrarian reform as well. Till 1969, about 1300 big farms (6 % of the arable land) got expropriated and transformed into 650 asentamientos, agrarian collectives, which were given after a short period to 20 000 families. The redistribution helped to strike against the social disparity. Others were given credits with low interest rates, which were covered by overseas borrowings. The government supported the trade unions, which were founded widespreadly during that period. After two years of economic growth the inflation rate rose again.

The government changed its growth-strategy – the trade unions disagreed. The industrialists did not support the government any more because of the trade union-friendly course and their policy-making and interventions in the economy sector. The left and the right wing of the Chilean society and party system did not support the government of Frei any more. The election campaign in 1970 was accompanied by violence. Salvador Allende and the Unidad Popular gained – theoretically – the political power in Chile.

Their plans were to nationalise the central elements of the economic system, a big style redistribution of the income, the break of the power of the landowners, the transformation of the political system to a one chamber parliament … a legal way to socialism. However the growing hyperinflation, a failure of the distribution system, the atomised political dispositions, the break-down of the economical system, the engagement of the USA … made the socialist experience ending bloody and deadly in the military coup of the 11th September 1973.