Import-substituting industrialization

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The import substitution industrialization (ISI) is a commercial strategy of developing countries , which is intended to promote domestic production. Import substitution attempts to restrict imports into the developing country through import restrictions, such as B. tariffs or import limits to restrict.

variants

On the one hand, import substitution is the result of development-related structural change that is induced by international shifts in supply and demand conditions. This is known as natural import substitution . On the other hand, import substitution can be promoted through economic measures.

With relative import substitution , the import share is only partially replaced by domestic production. The rate of import should be lower than the proportion of domestically manufactured goods. With absolute import substitution, certain imported goods are completely replaced by domestic production so that the volume of imported goods decreases in absolute terms.

Political measures

Effect of an Import Duty. “Demand”: national demand curve; "Supply": national supply curve

As a rule, a strategy of import substitution is accompanied by various economic policy measures. Typically, import duties are levied and subsidies are paid to the domestic industry. In addition, programs of import-substituting industrialization are often combined with foreign exchange management measures . This can have an impact on the supervision and control of all payments, credit and capital transactions with foreign countries.

For example, the state uses import restrictions such as tariffs to reduce the import share of certain goods and to promote domestic industries. The following numerical example: Assume that the price of an imported car in a developing country is € 10,000. A corresponding vehicle could also be manufactured domestically. For this, however, preliminary work (preliminary products) worth € 6,000 would have to be imported; the total price was € 12,000. The theoretically possible domestic added value of € 6,000 (sales price - advance performance) does not exist, since the consumer or consumers only ask for cheaper imported cars. Now, in line with import-substituting industrialization, a protective tariff of 100% on imported cars and 50% on intermediate consumption is being introduced to establish a national automotive industry. The import car would cost € 20,000, the national car € 15,000 (€ 6,000 + € 6,000 * 50%). There is a domestic value added of € 9,000 for each car sold. Although fewer cars in total are sold at a higher price (see next paragraph), the introduction of the tariffs initially has a positive production effect for the domestic automotive industry.

Free trade excludes influencing the world market price W for a certain good. The difference between the demanded quantity G and the supply quantity H provided by the domestic economy denotes the import demand . The country imports GH units of the property. If an import duty of TW is introduced, the domestic price increases to T. At price T, the demand quantity drops to B. At this higher price, however, the domestic industry can provide the higher quantity A of the good. The imported quantity is reduced accordingly to BA. In the short term there is a production incentive for the domestic economy, which is bought with a reduction in the total supply of the population with cars by GB.

Subsidies to domestic industry can consist, for example, of export subsidies or investment subsidies (direct payments, especially tax cuts ). Similar to an import tariff, such measures support the competitiveness of an industry that is developing, at least in the short term. On the other hand, there is a higher tax burden on the population and lower consumption.

Influencing factors

In developing countries there is often a large and free internal market. The use of import substitution leads to a reduction in market risk. This means that there is a sales market and no new one has to be established. There is thus an increase in employment and a decrease in the unemployment rate. Furthermore, a small amount of imports from abroad is expected, the transport costs and the associated environmental problems could thus be partially solved.

Due to poor management, technology and protective tariff policies , domestic industrial products tend to be of poor quality and / or higher production costs . Isolation from competition from abroad can mean that domestic producers lack incentives to innovate, increase efficiency and intensify competition. In addition, you lose the chance to benefit from economies of scale . If economies of scale are important, opening up to the world market can open up the opportunity for industrialization and rapid growth.

The profits generated under the protection of trade barriers are often a source of corruption within governments. In addition, once in place, trade barriers often persist for many years and are difficult to remove. In some cases, the added value of the protected industries even develops negatively. An example of an automobile manufacturer that produces in a developing country: The added value of this automobile manufacturer does not correspond to the total value of a car, but only to the difference between the import costs of the individual parts and the value of the car. Assuming that the imported parts of a car are damaged, it would be cheaper to import the entire car than to only have assembly work carried out domestically. Consumers suffer from higher prices.

High inflation rates are associated with this strategy. Goods can become scarce because foreign competition is hindered or prevented. Market prices will rise due to companies that benefit from protectionism. Investment incentives are also financed by increasing the amount of money. The domestic currency is devalued in a system of flexible exchange rates.

Import substitution versus export diversification

The advantage of export diversification over import substitution is that the structure of the export industries is inevitably under the control of international competition, while the import substitution industries for the domestic market are easily protected from outside competition. In the case of the import substitution strategy, there is thus a greater risk of an error in the allocation of resources than in the case of export diversification.

Import substitution as a precondition for export diversification: Using the example of Japan, which has implemented a successful growth policy through export diversification. All traditional Japanese export products before and during the take-off period, such as china, silk and cotton products, were imported beforehand. Porcelain and silk mostly came from China and cotton products from Europe. In Japan, such imported goods were further processed into various types of products that were later exported. Prior import substitution was necessary for this.

Historical context

Latin America

The first phase of globalization between the independence of the Latin American states and the Great Depression (1823–1929) deepened the pattern of the colonial division of labor. Latin America exported agricultural and mining products that were often produced by a quasi-feudal hacienda system or by oligarchically organized mining companies. The small, wealthy upper class satisfied their need for high-quality consumer goods primarily through imports from Europe and the USA. While the subcontinent's export sectors were modernized with technology and capital from the north, the rest of this “dual economy” was decoupled and stagnated. The most important respective export goods from 1900 in the countries of Latin America: Argentina (wool), Bolivia ( silver ), Brazil ( coffee ), Chile ( saltpeter ), Colombia (coffee), Mexico (silver), Peru ( sugar ), Uruguay (wool) and Venezuela (coffee). Most states were also dependent on only two goods for 50–80% of their exports.

The import substitution strategy was implemented in most Latin American countries from 1930 to 1980. The first wave started under the influence of the Great Depression in the 1930s. Latin America used to export primary products (agricultural products, mining products) and import consumer goods and capital goods . As a result of the global economic crisis in the 1930s, exports collapsed. This created a shortage of foreign currency, which meant that fewer goods could be imported. This brought about the first phase of import-substituting industrialization in South America. The first steps towards import substitution were largely practical and based on pragmatic decisions on how to deal with the restrictions imposed by the collapse in exports and foreign exchange shortages. The second wave of the strategy did not take place until the 1950s on the basis of structuralist economic policy . Raul Prebisch , an Argentine economist and Secretary General of UNCTAD (1963–1969) took the position that developing countries could only be successful if they had a sales-oriented network. This means that the primary domestically manufactured products can still be used by other industries. Import substitution has mostly been successful in countries with large populations and sufficient income levels to consume local products. Latin American countries like Argentina, Brazil, Mexico, Chile, Uruguay and Venezuela have had success with this strategy (see also Mexican miracle ).

Chile implemented the import substitution strategy in the second half of the 20th century. Until the 1970s, Chile followed the same policies as other Latin American countries. In the period from 1940 to 1954, the state preserved industrialization through a variety of measures, such as high tariff walls as protection for the domestic market, inexpensive loans and tax exemptions for domestic investors and direct foreign investments. Over time, the demand for industrial products moved to the center of economic and socio-political development. The consumer goods industry grew rapidly, especially the textile and shoe industries. The share of industry in the gross national product increased in the 1940s and early 1950s from 13.6 to 24.9 percent and industrial employment rose by 70 percent. From 1970 the production base was developed behind the extensive import restrictions, while the export of agricultural and mineral raw materials continued, especially copper. In the mid-1970s, the country's economy entered a difficult phase as import restrictions were dismantled and replaced by lower customs tariffs. The reason was primarily the fall in the price of copper on the world market.

For the six largest South American economies, the phase of import-substituting industrialization between 1940 and 1980 was the fastest-growing phase with an average of 2.7% economic growth per year. In the phase of export-oriented economic policy between 1900 and 1939 there was an average economic growth of 1.3% per year, in the neoliberal era between 1980 and 2000 economic growth was 0.6% per year.

Asia

In Asia, especially in Taiwan , China , India and Korea , a policy of import-substituting industrialization followed with the introduction of free trade. The governments purposefully selected individual companies that were supported by subsidies. The technological development was also driven by state research institutions until the development of marketable products, with successful research groups then being privatized as spin-offs .

See also

Flying goose model

literature

  • Norbert Wagner, Martin Kaiser, Fritz Beimdiek: Economics of developing countries , Gustav Fischer Verlag, Stuttgart 1983, ISBN 3-437-40133-5
  • Robert Alexander: The Import Substitution Strategy of Economic Development , in: Dietz, James / Street, James: Latin America's Economic Development. Institutionalist and Structuralist Perspectives, Boulder and London, 1987, pp. 118-127.
  • Helmut Hesse: Import substitution and development policy in: Journal for the entire state economy, 124, 1968, pp. 641–683.
  • Felipe Pazos: Import Substitution Policies, Tariffs, and Competition , in: Dietz, James / Street, James: Latin America's Economic Development. Institutionalist and Structuralist Perspectives, Boulder and London, 1987, pp. 147-155.

Individual evidence

  1. ↑ T. An Chen; On the problem of import substitution and export diversification , Diss. Münster (1969), p. 49.
  2. ↑ cf. Numerical example in Juergen B. Donges Foreign Trade and Development Policy , Springer (1981), p. 39.
  3. ↑ cf. JB Donges Foreign Trade and Development Policy , Springer (1981), p. 35
  4. ↑ a b Stiglitz; Economics , 2nd edition, Oldenbourg, pp. 1125–1126.
  5. ↑ Lachmann; Development Policy , Volume 1: Fundamentals, 2nd Edition, Oldenbourg, p. 173.
  6. ^ Lutz Hoffmann: Import substitution and economic growth in developing countries , Tübingen (1970), p. 41ff.
  7. ^ Heinz Preuße: Retail pessimism old and new , JCB Mohr, Tübingen, 1991, ISBN 3-16-145780-3 . P. 9.
  8. ^ Walther Bernecker, Hans Werner Tobler : State, Economy, Society and External Relations of Latin America in the 20th Century , in: Walther Bernecker, Hans Werner Tobler (Ed.): Handbuch der Geschichte Latinamerikas , Volume 3, Stuttgart, ISBN 3-608-91497 -8 , p. 15.
  9. ↑ Rosemary Thorp: Progress, Poverty and Exclusion. An Economic History of Latin America in the 20th Century , Washington, 1998, ISBN 1-886938-35-0 , pp. 53, 347.
  10. ^ Joseph L. Love: The Rise and Decline of Economic Structuralism in Latin America. In: Latin American Research Review. Vol. 40 No. 3 (2005), pp. 100-125. P. 114.
  11. ↑ Paul R.Krugman, Maurice Obstfeld; international economics , 6th edition, Addison-Wesley (2003), p. 260.
  12. ^ Joseph L. Love: The Rise and Decline of Economic Structuralism in Latin America. In: Latin American Research Review. Vol. 40 No. 3 (2005), pp. 100-125. P. 107.
  13. ↑ Alice H. Amsden, Import substitution in high-tech industries: Prebisch lives in Asia! , CEPAL Review 82, April, 2004