Import substitution model

What Does Import Substitution Model (ISI) Mean

We explain what the import substitution model is, its objectives, advantages, disadvantages and other characteristics.

The import substitution model creates favorable conditions for the industry.

Import substitution model

The import substitution model, also called import substitution industrialization (ISI), is the economic development model adopted by many countries in Latin America and other regions of the so-called Third World during the early twentieth century, especially in the postwar period of the two World Wars (since 1918 and since 1945).

As its name indicates, this model consists of the substitution of imports for products produced in a national way . This requires the construction of an independent economy .

This was especially necessary in times of drastic decline in the products made in the European industrial pole, a consequence of both the Great Depression of 1929, and the devastation of the World Wars.

To achieve import substitution industrialization was essential to have a state strong and protectionist in Latin America to conduct major interventions to the national trade balance .

Measures taken included the application of import tariffs, high exchange rates, subsidies and support for local producers. A whole series of measures that aspired to strengthen national industries and make local consumption independent from the industries of international powers.

It can serve you: International trade

Origin of the ISI model

Import substitution has an early antecedent in the mercantilism of 17th century colonial Europe , especially in the customs tariffs of Louis XIV's minister in France, Jean Baptiste Colbert. The idea was to achieve a favorable trade balance, allowing the accumulation of monetary reserves.

But the contemporary idea of ISI arises in a historical context of great economic depression in Europe . This crisis had a severe impact on the economy of peripheral nations , characterized by their great dependence since post-colonial times.

Seeing their economy in crisis , European nations decided to minimize the purchase of imported goods or tax them with high tariffs. In this way they tried to protect their own consumption and mitigate the effect of the collapse of their currencies.

Logically, this caused a significant drop in the foreign exchange of Third World countries , mostly suppliers of raw materials , but importers of everything else. To maintain their consumption, they opted for this model as a response mechanism to the global crisis, proposing to industrialize their nations on their own.

Objectives of the ISI model

The fundamental objective of the ISI has to do with the development and growth of the local productive apparatus of the nations of the so-called Third World. To do this, traditionally imported goods are gradually being produced.

The trade balance of countries depends on what is exported (which generates foreign exchange) and what is imported (which consumes it), so a healthy trade balance implies greater exports. The idea was to abandon the dependent economic model , which imported a large part of its consumer goods, being particularly susceptible to foreign influences.

Characteristics of the ISI model

In addition to promoting domestic consumption, the ISI facilitates exports.

To achieve ISI, it was essential that the State offer local economic benefits and incentives, as well as a system of protection of national products, to artificially build certain economic conditions that would be favorable to the nascent local industry.

In that sense, it was a developmental growth model, focused on growth indoors. Hence, the main measures and strategies for import substitution were:

  • Large subsidies to local producers , especially to the industry.
  • Imposition of taxes , tariffs and barriers (limitations) on imports .
  • Avoid or hinder direct foreign investment in the country.
  • Promote the consumption of local products instead of foreign ones, as well as allow and promote exports .
  • Overvalue the local currency , to lower the cost of purchasing inputs and machinery abroad, and at the same time make the local product more expensive.
  • Bureaucratically facilitate access to credit for local growth.

Stages of the ISI model

The ISI was planned based on two recognizable stages:

  • First stage. Blocking and rejection of the importation of products manufactured abroad, through tariff schemes and other barriers, while applying economic stimuli and other protection measures for the local manufacturing industry.
  • Second stage. Progress in the substitution of consumer goods towards the intermediate and durable consumer sectors, investing in this the set of capital saved during the first stage, that is, a stock of national currencies.

Advantages and disadvantages of the ISI model

Like any other economic model, import substitution had both advantages and disadvantages. Among the advantages are:

  • Increase in local employment in the short term.
  • Increase in the welfare state and better social guarantees for the worker .
  • Less local dependence on international markets and their fluctuations.
  • Small and medium industries flourish throughout the country.
  • Reduction in the cost of local transport , which in turn reduced the final costs of the product, making the merchandise cheaper and promoting consumption .
  • Increase in local consumption and improvement in quality of life .

On the other hand, import substitution brought with it the following drawbacks :

  • Gradual general increase in prices , the result of the unexpected rise in consumption.
  • Appearance of state monopolies and oligopolies , depending on who accessed the incentives and benefits.
  • State intervention weakened the market's natural self-regulatory mechanisms .
  • In the medium and long term, a tendency to stagnation and obsolescence prevailed in local industries , given that they lacked competition and therefore technological updating.

Application in Mexico

The Mexican case is famous on the continent, along with the Argentine. We must consider that the end of the Mexican Revolution in 1920 facilitated the improvement of the quality of life of peasant and indigenous groups, who had participated significantly in popular revolts and were now key recipients of the attention of the State.

The governments of the time nationalized oil and mining industries, as well as railways and other transportation that were in foreign hands. Thus, when Lázaro Cárdenas assumed the presidency , Mexico had faced the Great Depression.

It was then that the ISI began , fostering “inward” growth: the increase in the road network, the boost to the agricultural sector and the reduction of foreign control over the local economy. All of this required the State to play a leading role in the economic order of the nation.

Thus, when the 1940s arrived , the Mexican manufacturing sector was one of the most dynamic in the region . It was able to take advantage of public investment in the form of subsidies and tariff exemptions, as well as the growth in exports to other Latin American countries.

Follow with: Neoliberalism

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