Assistant professor of public affairs at the Lyndon B. Johnson School of Public Affairs, University of Texas. Her contributions to SAGE Publicationsâ Encyclopedia of Governance (2007) formed the basis of her contributions to Britannica.
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What is import substitution industrialization (ISI)?
Import substitution industrialization (ISI) is an economic development strategy that encourages a country to make goods at home that it had previously imported. The strategy was based on the idea that countries dependent on exports of primary products were at a disadvantage relative to industrialized countries that exported manufactured goods. In the 1950s, structuralist economist RaĂșl Prebisch and others argued that developing countries could reduce this disadvantage by building domestic manufacturing.
How did governments promote import substitution industrialization (ISI)?
Governments promoted import substitution industrialization (ISI) by protecting new domestic industries from foreign imports and encouraging the import of capital and technology. They often used tariffs, exchange controls, exchange-rate manipulation, and import licenses for products needed in manufacturing. Government investment also supported intermediate and capital-goods sectors. Domestic private businesses made import substitutes, while transnational corporations supplied high-tech goods that could not yet be produced locally.
What limitations did import substitution industrialization (ISI) face?
Import substitution industrialization (ISI) often failed to advance beyond making simple consumer goods into more complex manufacturing and competitive exports. General problems included slow job growth, decline in agriculture, and little productivity growth. Social conflict was linked in part to internal migration and greater inequality. Results differed by country: Brazil and Mexico had some short-term growth, while smaller countries such as Ecuador and Honduras were less successful.
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Can raw materials help fuel industrialization? Structuralists argued that developing countries needed to move beyond dependence on commodity exports.
Import substitution industrialization (ISI) is an economic development strategy that promotes domestic production of previously imported goods to foster industrialization. ISI was pursued mainly from the 1930s through the 1960s in Latin Americaâparticularly in Brazil, Argentina, and Mexicoâand in some parts of Asia and Africa.
In theory, ISI was expected to incorporate three main stages:
Domestic production of previously imported simple nondurable consumer goods
The extension of domestic production to a wider range of consumer durables and more complex manufactured products
The export of manufactured goods and continued industrial diversification
In practice, however, many countries struggled to move beyond the earlier stages of ISI, particularly into more complex manufacturing and competitive exports.
Origins of ISI
The theoretical foundation for deliberate, government-promoted ISI emerged from critiques of the international division of labor, in which less-developed countries largely exported primary products and imported finished manufactured goods from Europe and the United States. In the 1950s, critics such as Argentine economist RaĂșl Prebisch argued that this division of labor put primary-product exporters at a persistent economic disadvantage. Prebisch and others argued that developing countries must promote industrialization through practices that encourage domestic manufacturing.
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Economist Dr. RaĂșl Prebisch at the United Nations Conference on Trade and Development (UNCTAD), April 28, 1966.
Promotion policies involved both protection of âinfant industriesâ from imports and incentives to encourage imports of capital and technology. Tariffs were often used in addition to exchange controls, exchange-rate manipulation, and import licenses for particular products necessary for manufacturing.
Key to the implementation of the policies was an alignment that emerged between three actors in these societies: the government, including state-owned firms; domestic private enterprises; and transnational corporations (TNCs). This âtriple allianceâ involved government investment in intermediate and capital-goods sectors to support industrial expansion, domestic production of import substitutes, and TNC production of high-tech goods needed for manufacturing that could not yet be produced domestically.
Although promoters of ISI anticipated that this alignment would last only until access to capital improved and production spilled into additional industries, the interactions between these actors were often mutually reinforcing. Government investment supported domestic businesses and TNCs, while the growth of those businesses increased demand for continued government support and for the technology and capital supplied by TNCs.
Shortcomings and critiques of ISI
By the 1960s, ISI strategies were seen to have significant drawbacks. Although results varied from country to country, general trends included production that often did not extend into industries other than consumer goods, slow employment growth, agricultural-sector decline, and minimal productivity growth. Social conflict also emerged and was seen in part as resulting from increased internal migration and greater inequality. Although large countries such as Brazil and Mexico produced at least short-term growth with ISI policies, smaller countries, including Ecuador and Honduras, were less successful.
Critics within Latin America, particularly at the Economic Commission for Latin America and the Caribbean (ECLAC) and the University of Chile in Santiago, condemned ISIâs dependence on TNCs and its failure to promote more equal economic development. These scholars, and others in Mexico, often pushed for socialist models free of TNC participation.
These concerns also contributed to the development of dependency theory, which questioned whether developing countries could overcome their economic dependence on wealthier countries within the existing global capitalist system.
Promoters of free trade instead decried ISIâs protective measures, arguing that they created inefficient investment decisions and prevented developing countries from pursuing their comparative advantage in international trade. New, protected industries and government planning were deemed inefficient in comparison with those encouraged through market-led development strategies. These critiques, supported in part by early observations of export-led growth in East Asia, produced a strong emphasis by economic and development agencies on export promotion beginning in the 1960s.
A third perspective highlights the relevance of national social and political histories to the success, or lack thereof, of ISI strategies. The ability of the government to learn and adapt production strategies to local conditions depended highly on the character of local institutions and social organization. Also, even though the producers of consumer goods may have been initially successful, they had little incentive to support industrial expansion, because this would require protection of those industries on which they relied for their production tools, thus potentially limiting their supply of high-quality inputs. In addition, the opportunities available to expand domestic production into new industries were limited by the lack of support by TNCs for domestic technological development, compounded by low levels of technical training in the domestic population. In each country, the opportunity to expand industrial production often depended on variations in these social and political constraints.
The shortcomings of ISI raised broader questions about the role of government in economic development. Market-led and export-driven growth strategies have also faced criticism, leaving continued debate over how governments can promote industrial development while participating in international trade.
