Import Substitution Industrialization (ISI)

Import Substitution Industrialization (ISI) is an economic theory that argues that a country, to achieve its development, must transform the raw materials it has instead of exporting them. That is, according to this current of thought, the State should encourage the local manufacture of first-order goods  that reach the final consumer. 

The objective of the ISI model is for the nation to depend less on the commercialization of its natural resources . To that end, the Government reduces taxes and / or grants financing to activities that add value to primary goods. We refer, for example, to the metalworking or textile sector.

Likewise, restrictions, such as higher tariffs or import ceilings , must be imposed , depending on the merchandise and its place of origin.

Origin of industrialization by import substitution

The origin of industrialization by import substitution is the stage after World War I and before World War II, that is, the 1930s.

At that time, due to the economic crisis they were going through, European countries began to reduce their imports from Latin America. These purchases were, above all, food and other raw materials. As a result, the entry of foreign exchange to the new continent fell .

In that context, the Real Exchange Ratio (RRI) in developing countries fell . This means that the average price they received for their exports had decreased in relation to the rate paid for their imports . In other words, international trade began to generate less profit.

To deal with this situation, we looked for ways to reduce dependence on the outside. Many Latin American governments adopted measures to decrease the importation of certain goods and, to replace them, their national production was encouraged.

However, by not showing the expected results, the ISI model was progressively abandoned in the last two decades of the last century in most countries where it was implemented.

Industrialization measures by import substitution

The main measures for industrialization by import substitution are:

  • Subsidies: They are financial support from the State to certain activities. In this way, losses are covered and / or companies in the sector are encouraged to expand their operations.
  • Barriers:High tariffs are imposed on goods that want to be produced locally. Import limits may be established, granting a cap according to the country of origin.
  • Intervened exchange rate : If the price of the foreign currency is kept high by state intervention, exporters will receive more for their sales, in terms of the national currency. Also, as imports become more expensive, they are discouraged.
  • Planning:The State decides which sectors are key and will finance and / or grant them tax benefits.

Countries like Mexico, Brazil, Argentina and Chile applied these policies, mainly between 1950 and 1970.

Industrialization stages by import substitution

There are two stages of industrialization by import substitution:

  • First phase:It consists in encouraging the production of consumer goods , those that directly meet the needs of the person. We refer to a broad category that ranges from food to appliances and toiletries.
  • Second phase:Its objective is the development of more complex industries, such as high technology. In addition, the production of capital goods is promoted , which are those used to create other goods or services.

 

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