Sample Essay on Import Substitution Industrialization

Import Substitution Industrialization

Import substitution industrialization is an economic and trade theory that advocates for the replacement of foreign imports with products that are produced domestically. The premise of this theory is that a nation should try to reduce foreign dependency by producing industrialized products locally. Emerging markets and developing nations employ this economic theory to decrease dependency on the developed countries by increasing their self sufficiency.

The focus of countries that employ this theory is on the incubation and protection of the domestic infant producers or industries to enable them to emerge as the producers of goods that can compete with those of the developed countries. This policy also enhances self-sufficiency of the local economy.

Import substitution industrialization emerged during the post-World War II era in the Latin American nations. It uses different avenues that include subsidized loans from the government, tariffs and import quotas. Countries that practice import substitution industrialization policy aims at developing production channels for each stage of product’s development instead of focusing on the final products only.

This theory is considered as being counter-comparative advantage theory. Comparative advantage theory entails the specialization of countries in the production of items that have a specific advantage and engaging them in the international trade.

Import substitution industrialization theory has been advocated for by various economists including Friedrich List from the 18th centuries. However, it is used primarily in reference to the development economic theories of the 20th century. Its enactment is associated with the Global South countries that aimed at creating internal markets using this theory.

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Import substitution industrialization works when a country leads in its economic development via subdivision of major industries, power generation and nationalization, embracing highly protectionist policies in trade and increasing taxation. Developing countries abandoned import substitution gradually from the 1980s to the 1990s as a result of structural indebtedness that was caused by policies that are related to this economic and trade theory. The World Bank and the IMF insisted that these countries abandon the theory by introducing market-driven liberalization structural adjustment programs in the Global South.

Although import substitution industrialization theory is considered as a development theory, it has political implementation as well as theoretical rationale. Some experts have argued that some or all industrialized nations followed the import substitution industrialization theory at some point. Mercantilist economic practices and theory adopted by some nations in the 18th, 17th and 16th century frequently advocated for the establishment of domestic import substitution and manufacturing.

Hamilton economic program especially the magnum and report opus by Alexander Hamilton advocated for self-sufficiency of the U.S with regards to manufactured goods. The American School is based on this program and it acted as an influential force during the industrialization of the United States in the 19th Century.

Nevertheless, economists have proved that although import substitution industrialization theory has apparent gains, it also produces high social and economic costs.

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Sources

http://en.wikipedia.org/wiki/Import_substitution_industrialization

http://www.investopedia.com/terms/i/importsubstitutionindustrialization.asp

https://www.princeton.edu/~achaney/tmve/wiki100k/docs/Import_substitution_industrialization.html

http://www.businessdictionary.com/definition/import-substitution-industrialization-ISI.html