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Import Substitution Industrialization

Import substitution industrialization (ISI) is an approach to national development based on the notion that conditions in the developing world vary markedly from conditions in the developed world. In an attempt to reconcile some of these differences, ISI relies on strong state intervention to protect developing industries from competition with foreign firms. This protection is most commonly in the form of high tariffs on imported goods. After the initial period of protection, the state then is supposed to remove protections to allow the now established industries to compete with foreign firms. The result of a successful implementation of ISI should be the development of national value-added industries. These industries in turn lead to a reduction in the country's dependence on foreign markets, which is symptomatic of economies based on the export of raw goods. ISI was most popular between the 1930s and the 1980s in Latin America, though some countries in Asia and Africa also adopted it in the 1950s.

Theoretical Roots and Background

ISI is partially based on the idea of the “infant industry” put forth by Friedrich List, a 19th-century German economist. List argued that, contrary to what free-market proponents such as Adam Smith and his followers were saying, state intervention was needed in less developed countries to protect their fledgling industries from competition with much further developed industries from other countries such as Britain. Once the infant firms had caught up with the mature foreign firms, they could then participate in unregulated competition in the world market. List's ideas represented an important departure from the neoclassical model of economic development. They have influenced and continue to influence several popular state-led development models since the 19th century, including ISI. Another important influence for ISI is the Singer-Prebisch thesis, which calls for a move away from exporting raw materials and toward exporting value-added goods to improve a country's position in the global market.

Both the infant industry model (IIM) and ISI, two of the main development models based on the ideas of List, have in common an emphasis on developing human capital and local markets and an initial reliance on capital raised by the state to start an industry. However, they have two important differences. First, the IIM favors selective protection of industries most likely to succeed, while ISI calls for indiscriminate protection of local industries. Second, IIM favors building export industries, while ISI often relies on industries that will satisfy local demand.

ISI in Practice

Application of ISI in practice began in Latin America in the 1930s, during the Great Depression. The global market for primary goods from Latin America plummeted as a result of the Depression, and later, as a result of the outbreak of World War II. Without a market for their primary goods, Latin American countries were unable to import manufactured goods and realized that they would need to develop their own industries to satisfy local demand. They began to build their industries by focusing on domestic markets and regional trading rather than on the volatile world market. Evidence of increasing state involvement in industry at this time can be seen, for example, in the nationalization of foreign-owned railways and oil companies in Mexico. Further development and support of the ISI approach came from the structuralist ideas underlying the United Nations Economic Commission for Latin America (ECLA). Some of the key proponents and theorists for this approach included ECLA Executive Secretary Raúl Prebisch and the Brazilian economist Celso Furtado.

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