However, it is used primarily in reference to the development economic theories of the 20 th century. He believed that needed to create local , and they could only succeed by creating industries that used the primary products already being produced domestically. International firms often play a positive role in helping enhance efficiency. Protectionism is a government policy that attempts to reduce imports, and often exports too. Latin America and the Caribbean: A Systematic and Regional Survey. From these postulates, it derives a body of practices, which are commonly: an active industrial policy to subsidize and orchestrate production of strategic substitutes, protective barriers to trade such as , an overvalued currency to help manufacturers import capital goods heavy machinery , and discouragement of. However, it was a disappointment.
It classified countries according to four categories of trade strategy. By relying on traditional exports with low income elasticities instead of moving into exports with greater growth potential, African countries have sacrificed many of the potential gains that could have been had from fast proliferating globalisation. There is also ample evidence that producers in these respond favourably to economic incentives. It is a mechanism mostly deployed by emerging economies that for long periods have been dependent on developed economies. In this case, the exports tend to be greater than the imports with the imports being minimized to restrict competition with local goods. Mercantilist economic practices and theory adopted by some nations in the 18 th, 17 th and 16 th century frequently advocated for the establishment of domestic import substitution and manufacturing. Moreover, government policies toward investment were not always opposed to foreign capital: the Brazilian industrialization process was based on a tripod which involved governmental, private, and foreign capital, the first being directed to infrastructure and heavy industry, the second to manufacturing consumer goods, and the third, to the production of durable goods such as automobiles.
Such markets are necessary to encourage local production. Hence, local resources are redirected to the production of such services and goods leading to the formation of new industries. The focus of countries that employ this theory is on the incubation and protection of the domestic infant producers or industries to enable them to emerge as the producers of goods that can compete with those of the developed countries. New, protected industries and government planning were deemed inefficient in comparison with those encouraged through market-led development strategies. The dependency theorists contend that developing nations are bound to experience problems due to declining terms of trade; that is, their ability to use earnings from agricultural or other primary exports to pay for industrialized and high value-added imports from developed nations is likely to diminish Hirschman 1971. This is not current static comparative advantage, based on existing resources and knowledge. Foreign Exchange Reserve: Another benefit of outward-looking strategy is that foreign exchange reserve is earned permanently.
So, what is called for is a strategy which seeks to combine the virtues of the two strategies. One of the conditions was that the borrowing nations should pursue market-driven, free trade policies. In conclusion, the essay has analyzed the import substitution mechanism. The initial date is largely attributed to the impact of the of the 1930s, when Latin American countries, which exported primary products and imported almost all of the industrialized goods they consumed, were prevented from importing due to a sharp decline in their foreign sales. Philadelphia, Pennsylvania: Institute for the Study of Human Issues, Inc.
Industries did not thrive, inefficiency got worse, product quality was poor, and innovation and creativity suffered. A huge amount of resources has to be devoted for necessary skill formation and knowledge acquisition. The presence of polarized internal income distribution. Restriction on imports creates increased demand for the products. But import substitution policies are now seen as having failed to bring rapid economic growth to developing countries. Import substitution was heavily practiced during the mid-20th century as a form of developmental theory that advocated increased productivity and economic gains within a country. Although results varied from country to country, 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.
The economic success of the during the first half of the twentieth century also inspired policy makers throughout the developing world, including proponents of capitalism, who were persuaded by the apparent efficacy of a centrally planned economy. In the 1950s, critics such as Argentine economist claimed that this division of labour would ensure continued poverty for primary-product producers. An Overall Assessment : Does the choice of which trade strategy to employ make a difference in the performance of the developing country economy? This is because while the investment to produce cheap consumer products may be profitable in small markets, the same cannot be said for capital-intensive industries, such as automobiles and heavy machinery, which depend on larger markets to survive. This, in turn, reduces the unemployment rate in the economy. The widespread abandonment of import-substitution policies in recent decades should, therefore, not be surprising.
Domestic industries can grow by being accustomed to protection from foreign competition and have no incentive to become more efficient. The export-led growth paradigm replaced—what many interpreted as a failing development strategy—the paradigm. But, by and large, the countries following these strategies stagnated or grew very slowly. Since the labour-intensive manufactured exports pose a threat to well-established industries in industrialised countries e. Wanted: A Combination Strategy : In the ultimate analysis, it seems that the two trade strategies—import substitution and export promotion—are not mutually exclusive.
The small sized domestic markets may not exploit the economies of scale from the home production. Following the war both Germany and Japan, while advantage of reconstruction aid from the U. In matters of economic development, the last 40 or so years have been dominated by what have come to be known as export-led growth or export promotion strategies for industrialization. Although import substitution industrialization theory is considered as a development theory, it has political implementation as well as theoretical rationale. This theory is considered as being counter-comparative advantage theory. This policy was intended to promote industrialization by protecting domestic producers from the competition of imports.