Import Substitution Industrialization

Definition

Import substitution industrialization (ISI) is an economic development strategy that focuses on reducing a country's dependence on foreign imports and promoting domestic production of goods. The goal is to build up a country's industrial base and improve its standard of living by replacing imported goods with locally manufactured alternatives.

5 Must Know Facts For Your Next Test

1. ISI strategies typically involve the use of tariffs, quotas, and other trade barriers to restrict imports and encourage the development of domestic industries.
2. The infant industry argument is often used to justify ISI policies, as it suggests that new domestic industries need temporary protection to become competitive.
3. ISI policies can lead to the development of a more diverse and self-sufficient industrial base, but they may also result in higher consumer prices and less competition.
4. Successful ISI strategies often require significant government investment and support, including subsidies, tax incentives, and infrastructure development.
5. The effectiveness of ISI policies can be limited by factors such as the size of the domestic market, access to raw materials and technology, and the ability to achieve economies of scale.

Review Questions

• Explain how import substitution industrialization (ISI) can help improve a country's standard of living.
  • ISI aims to reduce a country's dependence on foreign imports and promote the development of domestic industries. By replacing imported goods with locally manufactured alternatives, ISI can help build up a country's industrial base, create jobs, and increase the availability of affordable consumer goods. This can lead to economic growth, improved trade balances, and ultimately, a higher standard of living for the population. However, the success of ISI policies often depends on factors such as the size of the domestic market, access to resources and technology, and the ability to achieve economies of scale.
• Analyze the role of tariffs and other trade barriers in supporting import substitution industrialization.
  • Tariffs and other trade barriers are key tools used in ISI strategies to protect domestic industries from foreign competition. By making imported goods more expensive, these policies create a price advantage for locally produced alternatives and encourage consumers to buy domestic products. The infant industry argument is often used to justify the use of these protectionist measures, as they are seen as necessary to allow new, domestic industries time to develop and become competitive. However, the overuse of trade barriers can also lead to higher consumer prices, less competition, and potential retaliation from trading partners, limiting the long-term effectiveness of ISI policies.
• Evaluate the potential drawbacks and unintended consequences of import substitution industrialization.
  • While ISI strategies can promote the development of domestic industries and improve a country's standard of living in the short-term, they may also have several drawbacks and unintended consequences. Protectionist measures like tariffs and quotas can lead to higher consumer prices, reduced product variety, and less competition, which can ultimately harm consumers and limit economic efficiency. ISI policies often require significant government intervention and investment, which can be a drain on public resources and distort market signals. Additionally, the focus on domestic production may limit a country's ability to take advantage of comparative advantages and participate in global trade, potentially stunting long-term economic growth. Careful evaluation of the costs and benefits of ISI is necessary to ensure it aligns with a country's broader economic development goals.

Related terms

Protectionism:

Protectionism refers to government policies and actions designed to restrict or regulate trade between nations in order to protect domestic industries and jobs.

Infant Industry Argument:

The infant industry argument suggests that new, domestic industries need temporary protection from foreign competition in order to develop and become competitive.

Tariffs:

Tariffs are taxes or duties imposed on goods imported from other countries, making them more expensive and less competitive compared to domestic products.