Import substitution model

We explain what the import substitution model is, its objectives, advantages, disadvantages and other characteristics.

1. Import substitution model

The import substitution model, also called import substitution industrialization (ISI), is the economic development model adopted by numerous countries in Latin America and other regions of the so-called Third World during the early twentieth century, especially in the postwar period of the two World Wars (since 1918 and since 1945).

As the name implies, this model consists in the substitution of imports with products made nationally . This requires the construction of an independent economy .

This was especially necessary in times of drastic decline in products made at the European industrial pole, as a result of both the Great Depression of 1929, and the devastation of the World Wars.

To achieve import substitution industrialization was essential to have a state strong and protectionist in Latin America to conduct major interventions to the national trade balance .

Among the measures taken were the application of import tariffs, high exchange rates, subsidies and support for local producers. A whole series of measures that aspired to strengthen national industries and make local consumption independent of the industries of international powers.

2. Origin of the ISI model

Import substitution has an early history in the mercantilism of seventeenth-century colonial Europe, especially in the customs fees of Louis XIV’s minister in France, Jean Baptiste Colbert. The idea was to achieve a favorable trade balance, allowing the accumulation of monetary reserves.

But the contemporary idea of ​​the ISI arises in a historical context of great economic depression in Europe . This crisis had a severe impact on the economy of peripheral nations, characterized by their great dependence since post-colonial times.

Seeing their economy in crisis , the European nations decided to minimize the purchase of imported goods or rate them with high tariffs. Thus they tried to protect their own consumption and mitigate the effect of the collapse of their currencies.

Logically, this caused a significant decrease in the currencies of Third World countries , mostly suppliers of raw materials , but importers of everything else. To maintain their consumption, they opted for this model as a mechanism to respond to the global crisis, proposing to industrialize their nations on their own.

3. Objectives of the ISI model

The fundamental objective of the ISI has to do with the development and growth of the local productive apparatus of the nations of the so-called Third World. For this, they begin to produce those goods traditionally imported gradually.

The trade balance of the countries depends on what is exported (that generates foreign exchange) and what is imported (that consumes them), so a healthy trade balance implies greater exportation. The idea was to abandon the dependent economic model , which imported much of its consumer goods, being particularly susceptible to foreign influences.

4. ISI model features

To achieve the ISI it was essential that the State offered local economic benefits and incentives, as well as a system of protection of national products, to artificially build certain economic conditions , which were favorable to the nascent local industry.

In that sense, it was a model of developmental growth, focused on indoor growth. Hence, the main measures and strategies of import substitution were:

• Many subsidies to local producers , especially industry.
• Imposition of taxes , tariffs and barriers (constraints) on imports .
• Avoid or hinder foreign direct investments in the country.
• Promote the consumption of local products instead of foreigners, as well as allow and promote export .
• Overvalue the local currency , to reduce the costs of purchasing supplies and machinery abroad, and at the same time make the local product more expensive.
• Facilitate bureaucratic access to credits for local growth.

5. Stages of the ISI model

The ISI was planned based on two recognizable stages:

• First stage . Blockade and rejection of the importation of products manufactured abroad, through tariff schemes and other barriers, while economic stimuli and other protection measures are applied to the local manufacturing industry.
• Second stage . Progress in the replacement of consumer goods towards the intermediate and durable consumer sectors, investing in it the set of capital saved during the first stage, that is, a stock of national currencies.

6. Advantages and disadvantages of the ISI model

Like any other economic model, import substitution had advantages and disadvantages. Among the advantages are:

• Increase in local employment in the short term.
• Increase in the welfare state and better social guarantees for the worker.
• Less local dependence on international markets and their fluctuations.
• Blossoming of small and medium industries throughout the country.
• Reduction of the cost of local transport , which in turn decreased the final costs of the product, lowering the merchandise and promoting consumption.
• Increase in local consumption and improvement in the quality of life .

On the other hand, import substitution brought the following disadvantages :

• Gradual general increase in prices , the result of the unexpected rise in consumption.
• Emergence of monopolies and state oligopolies , depending on who accessed the incentives and benefits.
• State intervention weakened the natural mechanisms of market self-regulation .
• In the medium and long term, there was a tendency towards ankylosing and obsolescence in local industries , given that they lacked competition and therefore technological updating .

7. Application in Mexico

The Mexican case is important in the continent, along with the Argentine. We must consider that the end of the Mexican Revolution in 1920 facilitated the improvement of the quality of life of peasant and indigenous groups, who had participated significantly in the popular revolts and were now key recipients of the State’s attention.

The governments of the time nationalized oil and mining industries, as well as railroads and other transports that were in foreign hands. Thus, when Lázaro Cárdenas assumed the presidency , Mexico had faced the Great Depression.

It was then that the ISI began , promoting growth “inward”: the increase in the road network, the boost to the agricultural sector and the reduction of foreign control over the local economy. All this required the State a leading role in the economic order of the nation.

Thus, when the 1940s arrived , the Mexican manufacturing sector was one of the most dynamic in the region . It was able to take advantage of public investment in the form of subsidies and tariff exemptions, as well as growth in exports to other countries in Latin America.