What is 'Import Substitution Industrialization (ISI)'?

Import substitution industrialization is a theory of economics typically adhered to by developing countries or emerging-market nations that seek to decrease their dependence on developed countries and increase their self-sufficiency. The theory targets the protection and incubation of newly formed domestic industries to fully develop sectors so the goods produced are competitive with imported goods. Under ISI theory, this process makes local economies self-sufficient.

BREAKING DOWN 'Import Substitution Industrialization (ISI)'

The ISI theory emerged in Latin American countries following World War II. The primary goal of the implemented theory is to protect, strengthen and grow local industries using a variety of tactics, including tariffs, import quotas and subsidized government loans. Countries that implement this theory attempt to shore up production channels for each stage of a product's development. This theory runs directly counter to comparative advantage, which is when countries specialize in producing goods at a lower opportunity cost and export them.

A Brief History of the ISI Theory

The term "import substitution industrialization" is a primary reference to the development economics policies of the 20th century, although the ISI theory has been advocated since the 18th century and supported by economists such as Alexander Hamilton and Friedrich List.

ISI policies were initially implemented by countries in the global south, where the intention was to develop self-sufficiency by creating an internal market within each country. The success of ISI policies was facilitated by subsidizing prominent industries such as power generation and agriculture, as well as subsidizing nationalization, greater taxation and protectionist trade policies. Developing countries slowly turned away from ISI in the 1980s and 1990s after insistence was placed on global market-driven liberalization, a concept based on the structural adjustment programs of the International Monetary Fund and the World Bank.

"Latin American structuralism" is a term that references the era of ISI in various Latin American countries from the 1950s to the 1980s. Theories behind structuralism were conceptualized in works by Hans Singer, Celso Furtado, Raul Prebisch and other structural economic-minded idealists. These theories also gained prominence with the creation of the United Nations Economic Commission for Latin America and the Caribbean (UNECLAC or CEPAL, the Spanish equivalent).

Theoretical Basis

The ISI theory is based on a group of developmental policies. The foundation for this theory is composed of the infant industry argument, the Singer-Prebisch thesis and Keynesian economics. From these economic perspectives, a group of practices can be derived: a working industrial policy that subsidizes and organizes the production of strategic substitutes, barriers to trade such as tariffs, an overvalued currency that aids manufacturers in importing goods, and a lack of support for foreign direct investment.

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