IMPORTANCE OF IMPORTSUBSTITUTION POLICY

Abstract

Import substitution industrialization (ISI) was pursued mainly from the 1930s through the 1960s in Latin America—particularly in Brazil, Argentina, and Mexico—and in some parts of Asia and Africa. In theory, ISI was expected to incorporate three main stages: (1) domestic production of previously imported simple nondurable consumer goods, (2) the extension of domestic production to a wider range of consumer durables and more-complex manufactured products, and (3) the export of manufactured goods and continued industrial diversification.The theoretical foundation for deliberate, government-promoted ISI emerged from critiques of the international division of labour, 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 Raúl Prebisch claimed that this division of labour would ensure continued poverty for primary-product producers. Prebisch and others argued that developing countries must promote industrialization through practices that encourage domestic manufacturing. Promotion policies involved both protection of “infant industries” for imports and incentives to encourage capital and technology imports. Tariffs were often used in addition to exchange controls, exchange-rate manipulation, and import licenses for particular products necessary for manufacturing.