Import Substitution

Import substitution was a strategy for economic development that was popular in the 1950s and 1960s. Advocates of import substitution development strategies believed that industrialization was the key to economic development and looked for policies that would encourage domestic industries to grow. Although it is now largely discredited as an economic development strategy, it has been resuscitated in recent years by antiglobalization and environmental activists as an alternative to free trade not because it can bring about economic development but because of a preference for locally produced goods.

To use import substitution as an economic development strategy, a country would erect tariff and other trade barriers to raise the cost of goods and services imported from elsewhere. The trade barriers would provide a sheltered market in which a domestic company could learn the business without competition. For example, a country lacking a domestic automobile industry might place a high tariff on imports of automobiles. A domestic auto manufacturer would then be established and, protected by the tariffs from international competition, could compete for domestic market share despite its higher costs. In practice, import substitution policies proved largely ineffective at fostering economic development. India aggressively pursued an import substitution strategy during the 1950s through the 1970s and as a result developed a locally based industrial sector, but did not significantly raise living standards until it began to dismantle trade barriers in the 1980s and 1990s.

In practice, import substitution strategies were difficult to implement. In theory, once the local industry had developed, the tariff barriers could be lowered and the domestic company would then compete with the foreign companies both domestically and internationally. In practice, a flaw in the import substitution policy was that the protected industries rarely agreed that they were ready to face international competition and lobbied fiercely to maintain the trade barriers. India's example demonstrates this as well. Import substitution strategies produced what some economists have termed near-autarky by the mid-1970s, with ever-tightening controls. Only when the inability to import domestically unavailable machinery and other supplies began to hamper Indian business generally did the business community begin to support reducing the protective trade barriers.

An additional problem with import substitution as a development strategy was that the sheltered firms were not competitive internationally. As a result, to [Page 846]the extent countries diverted resources into industries producing substitutes for imports, they harmed their competitive position in export industries. This effect can be seen in the stagnation of Brazilian exports at the end of the 20th century. Brazil's economic program for much of the 1970s and 1980s was built around import substitution. During that same period, Brazilian exports remained at roughly 7 percent of gross domestic product.

A final problem with import substitution strategies is that they introduced significant rigidities into economies where they were pursued. This made the economies less able to respond quickly to economic change. For example, Latin American economies recovered much more slowly from the 1970s oil price shock than did many east Asian economies, in part because Latin American economies were burdened more heavily with debt relative to their exports than were east Asian economies, with the extra debt from investment in uncompetitive industries as part of import substitution strategies.

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