Import Substitution Industrialization

Definition

Import substitution industrialization (ISI) is an economic policy aimed at reducing a country's dependence on foreign imports by fostering local production of goods. This strategy encourages the development of domestic industries to produce products that were previously imported, allowing countries, especially in the Third World, to strengthen their economies and create jobs.

5 Must Know Facts For Your Next Test

1. ISI gained popularity in many developing countries during the mid-20th century as a response to the challenges posed by globalization and dependency on foreign economies.
2. The approach typically involved government support for new industries, including financial assistance, tariffs on imported goods, and establishing state-owned enterprises.
3. While ISI initially led to some economic growth and diversification in many countries, it often resulted in inefficiencies, lack of competition, and an over-reliance on state intervention.
4. Critics of ISI argue that it can create a cycle of dependency on government support rather than fostering true economic independence and innovation.
5. By the 1980s, many countries began shifting away from ISI policies in favor of more market-oriented approaches due to economic stagnation and external pressures from international financial institutions.

Review Questions

• How did import substitution industrialization impact the economies of developing countries during the mid-20th century?
  • Import substitution industrialization (ISI) had a significant impact on the economies of developing countries as it aimed to reduce dependency on foreign goods. By promoting local production, many nations experienced initial economic growth and job creation. However, this growth was often accompanied by inefficiencies in production and reliance on state support, leading some countries to reevaluate ISI's effectiveness over time.
• Discuss the advantages and disadvantages of adopting import substitution industrialization as an economic strategy.
  • The advantages of adopting import substitution industrialization include fostering domestic industries, creating jobs, and reducing vulnerability to global market fluctuations. However, its disadvantages often include inefficiency due to lack of competition, potential corruption in state-led initiatives, and a dependency on government subsidies. These drawbacks can hinder long-term economic development if not addressed appropriately.
• Evaluate the long-term effects of import substitution industrialization on global economic trends in the late 20th century.
  • The long-term effects of import substitution industrialization were complex as they contributed to a shift in global economic trends by highlighting the need for more competitive markets. Many developing countries that initially adopted ISI found themselves facing stagnation by the 1980s. This led to a broader movement toward liberalization and globalization as nations recognized the importance of integrating into the global economy, which ultimately reshaped international trade dynamics.

Related terms

Economic Nationalism: A political ideology that emphasizes the importance of protecting and promoting the economic interests of a nation, often through state intervention and protectionist policies.

Protectionism:

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

Industrialization: The process of transforming an economy from primarily agricultural to one based on the manufacturing of goods, often involving technological advancements and urbanization.