Import Substitution Industrialization

Import substitution industrialization (ISI) refers to a development strategy used primarily during the 1930s through 1960s in Latin America—particularly Brazil, Argentina, and Mexico—and in some parts of Asia and Africa. The general focus is on trade and economic strategies that promote domestic production of previously imported goods to foster industrialization. In theory, ISI is expected to incorporate three main stages: first, domestic production of previously imported simple nondurable consumer goods; second, extension of domestic production to a wider range of consumer durables and more complex manufactured products; and third, export of manufactured goods and continued industrial diversification.

Four major drivers of domestic goods production have been identified: First, decreases in the availability of imports, as occurred during the Great Depression and World War I; second, balance of payments difficulties that encourage governments to impose import controls; third, gradual income growth through exports that increases domestic market size; and fourth, official development policies aimed at promoting industrialization.

The latter case of ISI has received the most attention and critique from development analysts. The theoretical foundation for deliberate, government-promoted ISI emerged from critiques of the international division of labor in which developing countries largely exported primary products and imported finished, manufactured goods from Europe and the United States. Critics, such as the Argentine economist Raúl Prebisch, argued that this division of labor would ensure continued poverty for primary product producers. The subsequent deterioration in trade for poor countries could be explained through productivity gains in the north that resulted in increased wages, rather than lower demand for manufactured exports. In the south, lower productivity rates in agriculture and mining led to low and stagnant wages. In addition, the industrial countries were seen to have industrialized through use of high protective tariffs, which provided additional support for similar policies in Latin America.

Prebisch and others thus argued that developing countries must promote industrialization through practices that promote domestic manufacturing. Promotion policies involved both protection of “infant industries” for imports and incentives to encourage capital and technology imports. Tariffs were often used in addition to controls on the availability of foreign exchanges, exchange rate manipulation, and import licenses for particular products necessary for manufacturing.

Key to the implementation of these policies was an alignment that emerged between three key actors in these societies: the government, including state-owned firms, domestic private enterprises, and transnational corporations (TNCs). This “triple alliance” involved government investment in intermediate and capital goods sectors to support industrial [Page 437]expansion, domestic enterprise production of import substitutes, and TNC production of high-tech goods needed for manufacturing that could not yet be produced domestically. Although promoters of ISI anticipated that this alignment would last only until access to capital improved and production spilled into additional industries, the interactions between these actors were often mutually reinforcing. Participation by other actors was then limited, as was continued industrial expansion.

By the 1960s, ISI strategies were seen to have important drawbacks. Results were different in every country, but general trends included production that often did not extend into industries other than consumer goods, slow employment growth, agricultural sector decline, and minimal productivity growth. Social strife also emerged and is seen in part as resulting from increased internal migration and greater inequality. Although large countries such as Brazil and Mexico produced at least short-term growth with ISI policies, smaller countries, including Ecuador and Honduras, were less successful in fully implementing these policies.

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