Import substitution industrialization

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The import substitution industrialization (ISI ) is a trade policy strategy of developing countries, which aims to promote domestic production. In the import substitution is attempted imports in the developing country through import restrictions, such as To limit duties or import limits.

• 4.1 South America
• 4.2 Asia

Species

The import substitution is on the one hand the result of developmental structural changes induced by international shifts in supply and demand conditions. This is referred to as natural import substitution. On the other hand, the import substitution can be promoted through economic measures.

With the relative import substitution, the import share is only partially replaced by domestic production. However, the rate of import should be lower than the proportion of home-produced goods. At the absolute import substitution import certain goods are completely replaced by the domestic production, so that the volume of imported goods decreases absolutely.

Policies

In general, a strategy of import substitution with different economic policies goes hand in hand. Typically, import duties shall be levied and paid subsidies to the domestic industry. In addition, programs of import-substituting industrialization are often enriched with measures of foreign exchange controls. This may relate to the supervision and control of the entire payment, credit and capital transactions with foreign countries.

The state uses such as import restriction such as tariffs, to reduce the share of imports of certain products and to promote domestic industries. Consider a simple numerical example. Suppose the price of imported cars in a developing country amounts to € 10,000. It could be a suitable vehicle to be produced domestically. For this, however, intermediate consumption ( precursors) in the value of € 6,000 would have to be imported; the total price would amount to € 12,000. The theoretically possible domestic value added of € 6,000 (selling price - wholesale ) can not be realized because the consumer / inside only ask the cheaper import cars. Now, a protective tariff of 100 % on import cars and 50% is introduced on inputs according to the import-substituting industrialization to build a national automotive industry. The import car so cost € 20,000, and the national car € 15,000 ( € 6,000 € 6,000 * 150 %). Each sold car have now a domestic value of 9,000 €. Even if sold at the higher price less total cars ( see next paragraph), but is mainly determined by the imposition of duties, a positive output effect for the local automotive industry.

Figure 1 shows the effect of the import duty on the import demand of a developing country for a particular good. In the free trade state, the developing country can the world price W for a particular good does not affect. The difference between the quantity demanded and the G provided by the domestic economy offer quantity H is the demand for imports. Thus, the country imported G -H units of the good. If an import duty of TW is introduced, the domestic price on T. For T price increase reduces demand amount to B. At this higher price, however, the domestic industry will be the higher quantity A of the material ready. The imported amount shall be reduced accordingly to BA. In the short term therefore results in a production incentive for the domestic economy, which is, however, the expense of a reduction in the total supply of the population with cars by GB.

Subsidies to the domestic industry can, for example, export subsidies or investment subsidies (direct cogging, special tax incentives ) are made. Similarly, an import tariff support such measures at least kurzfrisitg the competitiveness of an under construction industries. However, this advantage is paid for by a higher Steurerbelastung of the population, ie by a low consumption.

Factors

In developing countries there is often a large and open internal market. The use of import substitution leads to the reduction of risk of the market. This means that the market is there and you do not have to build new ones. It is thus to increase employment and reduce unemployment. Furthermore, less transportation is expected from abroad, the transport costs and the environmental problem linked to might thus be more or less solved.

Due to the ill-developed management, technology and the protective policy of the domestic industry products usually have a poor quality and / or higher production costs. The isolation of the competition from abroad could incentives for innovation, efficiency and competition domestic producers fail. You also lose the opportunity to benefit from economies of scale. If economies of scale are important, the opening to the world market can provide the opportunity to industrialization and rapid growth.

The profits that arise under the protection of trade barriers, are often a source of corruption in the government. Trade barriers remain when they are introduced, often for many years exist and can be difficult abolished. In some cases the value of the protected industries is even negative. Consider an example of a car manufacturer that produces in a developing country, the value of this automobile manufacturer is not the entire value of a car, but only the difference between the import cost of the individual parts and the value of the car. Assuming that the imported parts of the cars are damaged, it would be cheaper to import the whole car than to assemble at home only. Consumers suffer to pay the higher price.

High inflation rates are associated with this strategy. There is a scarcity of goods, because foreign competitions are disabled. The market prices will rise by companies that are protected by protection. Investment incentives are also funded through the enlargement of a monetary amount. The domestic currency is devalued in a system with flexible exchange rates.

Import substitution versus export diversification

The advantage of export diversification towards import substitution is that the design of the export industries is necessarily under the control of international competition, while import substitution industries can easily be protected from the outside to the internal market before the competition. In the import substitution strategy thus the risk is greater that a failure of resource allocation arises as to the export diversification.

Import substitution as a condition of export diversification: Consider an example of Japan, which has established a successful policy of growth via export diversification. All products which are usually regarded as Japanese dynamic export products before and during the take-off period, such as porcelain, silk and cotton products were previously imported. Porcelain and silk came mostly from China and cotton products from Europe. The Japanese produced such imported goods continued to different types of products that could be exported later. This was a previous import substitution mandatory condition.

Historical Context

South America

The first phase of globalization between independence of Latin American countries and the global economic crisis (1823-1929) deepened the pattern of the colonial division of labor. Latin America exported agricultural products and mining products, which were produced by a quasi- feudal often hacienda system of oligarchic or organized mining entrepreneurs. The small propertied upper classes satisfy their need for high-quality consumer goods mainly by imports from Europe and the USA. While the export sectors of the subcontinent were modernized after all, through technology and capital from the north, the rest of these "dual economy" was disconnected and stagnated. The most important export commodity of 1900 in the countries of South America: Argentina ( wool ), Bolivia (silver), Brazil (coffee), Chile ( saltpeter ), Colombia (coffee), Mexico (silver), Peru (sugar), Uruguay (wool) and Venezuela ( coffee). Most States also depends to 50-80 % of exports of only two goods.

The strategy of import substitution was carried out in most Latin American countries in the period 1930-1980. The first wave started by the influence of the world economic crisis in the 30s. Latin America had earlier primary products (agricultural products, mining products ) exported and imported consumer goods and capital goods. As a result of the Great Depression in the 1930s broke the exports. This created a shortage of foreign exchange, due to its less goods could be imported accordingly. This caused the first wave of industrialization importsubstituierdenden in South America. The first steps in the import substitution were largely untheoretical and based on pragmatic decisions, such as the restrictions imposed by the slump in exports and lack of foreign exchange restrictions should be managed. The second wave of the strategy was only in the 50s based on the structuralist economic policy. Raul Prebisch, an Argentine economist and Secretary-General of UNCTAD (1963 - 1969) in this case took the position that developing countries could only be successful if they have a sales-oriented integration. This means that the primary, domestically manufactured products continue to be used by different industries. Import substitution was most successful in countries which had a large population number and had a sufficient level of income to consumption of local products. Latin American countries such as Argentina, Brazil, Mexico, Chile, Uruguay and Venezuela had achieved great success with this strategy (see also Mexican miracle ).

Chile has carried out the import substitution strategy in the second half of the 20th century. Up to the 1970s, Chile has pursued the same policy as other Latin American countries. In the period 1940-1954, the state kept the industrialization through a package of measures, such as high tariff walls as protection for the internal market, low-cost loans and tax exemptions for domestic investors and direct investment. In time, the demand for industrial products was placed at the center of the economic and socio- political development. The consumer goods manufacturing industry grew rapidly, especially in the textile and shoe industry. The industry's share of GDP increased in the 40s and early 50s, from 13.6 to 24.9 percent and the industrial employment increased by 70 percent. As of 1970, the manufacturing base behind the detailed restriction of imports has been developed during the export of the country was continued as traditional products, especially copper. Mid-70s entered the country's economy in a difficult phase since import restrictions were dismantled and replaced by low tariffs. The reason lay in the dramatic reduction of the global copper price.

For the six largest South American economies, the phase of import-substituting industrialization 1940-1980 with an average of 2.7 % economic growth per year, the fastest-growing phase had. In the phase of export-oriented economic policy 1900-1939 there was an average economic growth of 1.3% per year, in the neoliberal era between 1980 and 2000, economic growth was 0.6 % per year.

Asia

In Asia, especially in Taiwan, China, India and Korea carried out a policy of import substitution industrialization, while free trade policy. Governments sought purposefully out individual companies, which have been built up by subsidies. Similarly, the technological development has been driven by government research institutions to the development of marketable products, where successful research groups were then privatized as a spin -off.