Report on Import substitution industrialization


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This concept must be adopted by the underdeveloped countries to establish good economic condition & reduce the unemployment.

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Report on Import substitution industrialization

  1. 1. 1ImportThe term import is derived from the conceptual meaning as to bring in the goods and services into theport of a country. The buyer of such goods and services is referred to an "importer" who is based inthe country of import whereas the overseas based seller is referred to as an "exporter". Thus an importis any good (e.g. a commodity) or service brought in from one country to another country in alegitimate fashion, typically for use in trade. It is a good that is brought in from another country forsale. Import goods or services are provided to domestic consumers by foreign producers. An import inthe receiving country is an export to the sending country.Types of importThere are two basic types of import: 1. Industrial and consumer goods 2. Intermediate goods and servicesCompanies import goods and services to supply to the domestic market at a cheaper price and betterquality than competing goods manufactured in the domestic market. Companies import products thatare not available in the local market.There are three broad types of importers: 1. Looking for any product around the world to import and sell. 2. Looking for foreign sourcing to get their products at the cheapest price. 3. Using foreign sourcing as part of their global supply chain.Direct-import refers to a type of business importation involving a major retailer (e.g. Wal-Mart) and an overseas manufacturer. Aretailer typically purchases products designed by local companies that can be manufactured overseas. In a direct-import program,the retailer bypasses the local supplier (colloquial middle-man) and buys the final product directly from the manufacturer, possiblysaving in added costs. This type of business is fairly recent and follows the trends of the global economy.Definition"Imports" consist of transactions in goods and services (sales, barter, gifts or grants) from non-residents residents to residents. The exact definition of imports in national accounts includes andexcludes specific "borderline" cases. A general delimitation of imports in national accounts is givenbelow:An import of a good occurs when there is a change of ownership from a non-resident to a resident;this does not necessarily imply that the good in question physically crosses the frontier. However, inspecific cases national accounts impute changes of ownership even though in legal terms no change ofownership takes place (e.g. cross border financial leasing, cross border deliveries between affiliates ofthe same enterprise, goods crossing the border for significant processing to order or repair). Alsosmuggled goods must be included in the import measurement.Imports of services consist of all services rendered by non-residents to residents. In national accountsany direct purchases by residents outside the economic territory of a country are recorded as importsof services; therefore all expenditure by tourists in the economic territory of another country areconsidered as part of the imports of services. Also international flows of illegal services must beincluded
  2. 2. 2Import substitution industrializationImport substitution industrialization or "Import-substituting Industrialization" (called ISI) is a tradeand economic policy that advocates replacing imports with domestic production. It is based on thepremise that a country should attempt to reduce its foreign dependency through the local productionof industrialized products. The term primarily refers to 20th century development economics policies,though it was advocated since the 18th century.It has been applied to many countries in Latin America, where it was implemented with the intentionof helping countries to become more self-sufficient and less vulnerable by creating jobs and relyingless on other nations. The ISI is based primarily on the internal market. The ISI works by having thestate lead economic development through nationalization, subsidization of vital industries (includingagriculture, power generation, etc.), increased taxation to fund the above, and highly protectionisttrade policy. Import substitution industrialization was gradually abandoned by developing countries inthe 1980s and 1990s due to disappointment with the results.Adopted in many Latin American countries from the 1930s until around the 1980s, and in some Asianand African countries from the 1950s on, ISI was theoretically organized in the works of RaúlPrebisch, Hans Singer, Celso Furtado and other structural economic thinkers, and gained prominencewith the creation of the United Nations Economic Commission for Latin America and the Caribbean(UNECLAC or CEPAL). Insofar as its suggestion of state-induced industrialization throughgovernmental spending, it is largely influenced by Keynesian thinking, as well as the infant industryarguments adopted by some highly industrialized countries, such as the United States, until the 1940s.ISI is often associated with dependency theory, though the latter adopts a much broader sociologicaloutlook which also addresses cultural elements thought to be linked with underdevelopment.HistoryEven though ISI is a development theory, its political implementation and theoretical rationale arerooted in trade theory – it has been argued that all or virtually all nations that have industrialized havefollowed ISI.Mercantilist economic theory and practices of the 16th, 17th, and 18th century frequently advocatedbuilding up domestic manufacturing and import substitution. In the early United States, theHamiltonian economic program, specifically the third report and magnum opus of AlexanderHamilton, the Report on Manufactures, advocated that the US become self-sufficient in manufacturedgoods. This formed the basis of the American School, which was an influential force during theUnited Statess 19th century industrialization.Indeed, Baer contends that all countries which have industrialized after the United Kingdom wentthrough a stage of ISI in which the large part of investment in industry was directed to replace imports(Baer, pp. 95–96). Going further, in his book Kicking away the ladder, Korean economist Ha-JoonChang also argues, based on economic history, that all major developed countries – including theUnited Kingdom – used interventionist economic policies to promote industrialization and protectednational companies until they had reached a level of development in which they were able to competein the global market, after which those countries adopted free market discourses directed at othercountries in order to obtain two objectives: to open their markets to local products and to prevent themfrom adopting the same development strategies which led to the developed nations industrialization.
  3. 3. 3Theoretical basisAs a set of development policies, ISI policies are theoretically grounded on the Singer-Prebisch thesis,on the infant industry argument, and on Keynesian economics. From these postulates, it derives abody of practices, which are commonly: an active industrial policy to subsidize and orchestrateproduction of strategic substitutes, protective barriers to trade (such as tariffs), an overvalued currencyto help manufacturers import capital goods (heavy machinery), and discouragement of foreign directinvestment.In many cases, however, these postulates did not apply: on several occasions, the Brazilian ISIprocess, which occurred from 1930 until the end of the 1980s, involved currency devaluation as ameans of boosting exports and discouraging imports (thus promoting the consumption of locallymanufactured products), as well as the adoption of different exchange rates for importing capitalgoods and for importing consumer goods. Moreover, governmental policies toward investment werenot always opposed to foreign capital: the Brazilian industrialization process was based on a tripodwhich involved governmental, private, and foreign capital, the first being directed to infrastructureand heavy industry, the second to manufacturing consumer goods, and the third, to the production ofdurable goods (such as automobiles). Volkswagen, Ford, GM and Mercedes all established in Brazilin the 1950s and 1960s.The major and unifying postulate of ISI can thus be described as an attempt to reduce foreigndependency of a countrys economy through local production of industrialized products, whetherthrough national or foreign investment, for domestic or foreign consumption. It should be noted, aswell, that import substitution does not mean import elimination: as a country industrializes, it beginsto import other kinds of goods which become necessary for its industry, such as petroleum, chemicals,and the raw materials it may lack. The real objective of import substitution is therefore not toeliminate trade but to lift it to higher stage, that of exporting value-added products, not as susceptibleto economic fluctuations as raw materials, according to the Singer-Prebisch thesis.East AsiaISI was rejected by most nations in East Asia in the 1960s, and some economists[who?] attribute thesuperior performance of East Asia in the 1970s and 1980s to this difference in policies. Indeed, EastAsian policies are most commonly not referred to as ISI.Most "East Asian Tigers" rejected import substitution policies, though they maintained high tariffbarriers. The strategy followed by those countries was to focus subsidies and investment on industrieswhich would make goods for export, and not to attempt to undervalue the local currency. This exportpromotion approach to industrialization in the East Asian countries contrasts with the strategy of ISI.In pursuing this and to boost its competitiveness in the 1970s, South Korea made large investmentsinto heavy and chemical industries, such as shipbuilding, steel and petrochemicals. This focus onexport markets allowed them to create competitive industries.
  4. 4. 4Advantages and disadvantagesThe major advantages claimed for ISI include increases in domestic employment (reducingdependence on labor non-intensive industries such as raw resource extraction and export); resiliencein the face of global economic shocks (such as recessions and depressions); less long-distancetransportation of goods (and concomitant fuel consumption and greenhouse gas and other emissions).A disadvantage claimed for ISI is that the industries that it creates are inefficient and obsolete as theyare not exposed to internationally competitive industries, which constitute their rivals, and that thefocus on industrial development impoverishes local commodity producers, who are primarily rural.Reasons for ISI • It is dangerous to rely on one primary commodity export industry. • Deteriorating terms of trade for necessitate intervention. • Labor intensive exports trap workers in low wage industries. • Helps “infant industries” grow. • Cut imports rather than encourage exports .
  5. 5. 5Externally: ISI Distorts BoP  Imports are blocked = less currency in international market = inflated exchange rate.  This contributes to less competitive export industries = reduced tax revenue from abroad. High Fx = negative BoP = budget deficitDomestic Effects of ISI  At the same time, ISI necessitates government investment in modernization at expense of traditional industries.  Demands for skilled workers.  Low interest rates cause low savings rate and investment in heavy industry.  Inflation due to high cost of goods manufactured domestically.Concluding Thoughts
  6. 6. 6 • ISI served a purpose. • It was a step in the process of industrialization. • Government can stimulate free market forces, but not replace them. • ISI needed an exit (transition) strategy from the start.CrisesISI can cause crises by several ways:Chronic problems with the balance of trade and paymentsImport substitution was supposed to reduce reliance on world trade, but every nation needs to importsomething not available locally like raw materials, machinery, spare parts. The more a countryindustrialized, the more it needs these imports, and ISI is strongly biased against exports. Tradeprotection and overvalued exchange rates raised domestic prices and made export less competitiveand export taxes furthermore discourage foreign sales. So the industrializing countries are unable toexport enough to buy the imports they needed.Deep recessionsThe faster the economy grows, the more it needs imports, but exports cannot keep up with the pace ofimports and so the country runs out of foreign currency. The governments try to restrict import toessentials and raise interest rate to bring money to the country and keep it at home. They devalue thecurrency to raise the price of imports and make exports more attractive, also reducing the countriespurchasing power, which resulted in usually deep recessions.ISI countries tended to run substantial budget deficits and inflationGovernment subsidized industrial investments give tax breaks to industrial investors and targetedspending at politically important groups but such spending chronically outpaces government revenue,and these budget deficits atr usually covered by printing more money. The result was inflation, whichmakes domestic goods more expensive, which in turn reduces exports even further.
  7. 7. 7Negative impact on income distributionMany farmers migrated to the cities in search for jobs in the new industries. Since import-substitutiongrowth was very capital intensive. Few of the farmers who flooded into the cities find the jobs thatindustrialization had promised. ISI countries end up with dual economies;On one hand, modern capital-intensive industries with skilled, well-organized workers earningrelatively high wagesOn the other hand, a mass of struggling farmers and urban poor frozen out of the modern economy,given very low wages and excluded from the social protections which modern sector workers receivedIncentive for capitalists to resist state planningTo carry out industrial planning, states need to build the necessary state institutions, such as aPlanning Commission, to formulate production targets and later enforce them. But since ISI industrieswere protected from international competition, capitalists are not compelled by the market to meetinternational standards of efficiency. Thus, capitalists often resist state efforts to enforce industrialplans and force investments in improving productivity.Goodbye ISI – Hello Trade Reform • Strong labor unions wanted, government could grow fast enough, and class tension erupted. • Crawling peg Fx rate = inflation. • Export subsidies = government borrowing = more deficit & more imports.The Rise of ISI • The Great Depression caused a drop in commodity prices, foreign exchange reserves dried up, and countries could not buy necessary imports. • Lots of exports and nothing to import.
  8. 8. 8Implementation of ISI • Economy-wide strategy designed to establish new industries. • Included: licensing, tariffs, overvalued Fx, and government investment in local industry (built plants, etc.) • Easy access to credit / low interest rates.International Trade relation table of Bangladesh:-Major Exports : Readymade garments, frozen foods (shrimps), leather, leather products, jute, jute products, tea, ceramic, textile fabrics, home textile, chemical product, light engineering products including bi- cycle.Major Imports : Oil, edible oil, petroleum product, wheat, seeds, fertilizer, yarn, capital goods, machinery, power generating machinery, scientific & medical equipment, iron & steel, motor vehicles, raw cotton, chemicals.Major Trading Partners : USA, EU countries, China, India, Pakistan, Japan, South Korea, Canada, Australia, Malaysia, Hong Kong, Taiwan, Thailand, Indonesia, Saudi Arabia and UAEwww.mincom.infoExport Import & Foreign Remittance Earnings Information:-Fiscal Year Total Export Total Import Foreign Remittance Earnings2007–2008 $14.11b $25.205b $8.9b2008–2009 $15.56b $22.00b+ $9.68b2009-2010 $16.7b ~$24b $10.87b2010-2011 $22.93b $32b $11.65b
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  11. 11. 11ConclusionFrom the above discussion we are understand the ISI. In our developing country we are consider theSME & small business. This is only the way how we can overcome the problems. We can make oureconomy better & prosperous. Easily implement the ISI, export more & import less. We can controlthe high inflation of our currency take our country as a export based country.The major advantages claimed for ISI include increases in domestic employment (reducingdependence on labor non-intensive industries such as raw resource extraction and export); resiliencein the face of global economic shocks (such as recessions and depressions); less long-distancetransportation of goods (and concomitant fuel consumption and greenhouse gas and other emissions).