Import Substitution Industrialization

Definition

Import substitution industrialization (ISI) is an economic policy aimed at fostering domestic industries by reducing dependence on foreign imports through the promotion of local production. This strategy encourages countries, particularly in the developing world, to produce goods that they previously imported, ultimately striving for self-sufficiency and economic independence. ISI is often connected to broader discussions about economic development and the impacts of globalization, as it seeks to create a sustainable local economy while navigating global market dynamics.

5 Must Know Facts For Your Next Test

1. ISI was widely adopted in Latin America during the mid-20th century as a response to economic crises and dependency on foreign goods.
2. The approach often involved government intervention, including subsidies and state-owned enterprises, to support local industries.
3. Critics argue that ISI can lead to inefficiency and lack of competitiveness, as local industries may not face pressure from international competition.
4. Successful examples of ISI include Brazil and Mexico during their periods of rapid industrial growth in the 1960s and 1970s.
5. Over time, many countries shifted away from ISI toward more open trade policies due to the limitations and challenges faced by domestically produced industries.

Review Questions

• How does import substitution industrialization impact local economies compared to global trade?
  • Import substitution industrialization (ISI) directly impacts local economies by promoting domestic production over foreign imports. This strategy seeks to develop local industries, create jobs, and enhance self-sufficiency. However, while ISI can boost short-term economic growth by reducing reliance on imports, it can also lead to inefficiencies if local firms do not innovate or improve their competitiveness against international markets.
• Discuss the potential advantages and disadvantages of adopting an import substitution industrialization strategy in a developing country.
  • Adopting an import substitution industrialization strategy offers several advantages for developing countries, such as fostering local industries, creating jobs, and promoting economic self-sufficiency. However, it also comes with disadvantages like inefficiencies due to lack of competition and potential trade imbalances if local industries cannot meet demand. Additionally, prolonged reliance on ISI may hinder integration into the global market and reduce opportunities for growth through exports.
• Evaluate the long-term effects of import substitution industrialization on globalization and its economic implications for developing nations.
  • The long-term effects of import substitution industrialization on globalization have been complex. While ISI initially aimed to create self-reliant economies in developing nations, many countries eventually found that isolation from global markets limited their growth. As a result, many transitioned towards more open trade policies and embraced globalization. This shift often led to increased foreign investment and access to global markets but also raised challenges like economic volatility and exposure to external shocks that developing nations must navigate.

Related terms

Protectionism:

An economic policy that restricts imports from other countries through tariffs, quotas, and other measures to protect domestic industries.

Globalization: The process by which businesses or other organizations develop international influence or start operating on an international scale, affecting trade and economic policies.

Industrialization: The development of industries in a country or region on a wide scale, transforming economies from agrarian-based to industry-based.