What Factors Propelled Many Countries to Implement Import Substitution Industrialisation

What factors propelled many countries to implement Import Substitution Industrialisation? To what extent did the strategy succeed in helping economies to boost growth rates and to overcome balance of payments constraints?
According to Braer, ‘import substitution and industrialisation is an attempt by economically less developed countries to break out of the world division of labour. (Braer 1972), This division of labour meant that the developing nations from Latin America, Africa and East Asia were mainly producers of foods and raw materials and felt they needed to enter into the world market through production of manufactured goods that were previously imported. The impetus for this was the need for growth in their respective economies.
A second propelling factor for the implication of ISI in these developing nations is that the firms believed that they needed protection from the free market and their international competitors, while they were in the infant stages of development. If left unprotected firms in the developing nations would have found themselves vulnerable to the low prices of the powerful developed nations who looking to export goods into the developing nations.
A further stimulus for country’s to implement an ISI policy on exports is the industrialisation that had already occurred in various developed nations. The developing nations set out to create a framework on domestic industry that would enable them to gain the technological expertise and infrastructure to enable them to become a permanent competitor in the world market and bridge the gap between themselves and the more developed nations. These developing nations were located mainly in 3 different areas of the world, Sub-Saharan Africa, Latin America and East Asia. Each engaging in ISI based strategies with a diverse range of methods, to varied success.
Further symptoms these nations shared before they implemented ISI strategies are; wages being held down by surplus labour, which can usually be attributed to large population or lack of non-agricultural employment equating to poor distribution in the economy. Strong competition on exports was also a property of many of the countries needing ISI policies within their economies, in many cases the competition may have been with developed nations who were able to produce with low costs due to economies of scale and strong political power.
Finally analysts derived from Engel curves the income elasticity of demand for agricultural products and raw materials declined as the incomes in the more developed nations reaches higher and higher levels, meaning that countries that were undeveloped and still saw agriculture and raw material production as there lead industries were doomed in terms of being able to experience growth on the back of production mainly to be exported to the north, as gradually over time the prices for their products would surely drop. (Bruton 1998)

There are many different examples for us to analyse the extent of the success that ISI policies brought to countries economies and their growth rates. Scholars have outlined many issues in implementing policies of ISI; these can be empirically referred to through the facts of what happened to countries in the earlier mentioned areas, Sub-Saharan Africa and Latin America. The policies being the countries in the respective area were similar, differences lay in other areas of the ISI they implemented Nissanke 2001;

One issue that stands out almost across all of the area’s are the problems that arose from implementing ISI to encourage heavy development in industry, through offering supportive policy and cheap finance for manufacturing firms looking to grow within their respective nations. This large transfer of labour between primary and secondary sectors through heavy taxation of agricultural firms, left the traditional primary product export sector was damaged. Also a few of the countries made mistakes in the way in which they injected their capital into the economy in order to stimulate growth. In Latin America for example where the governments created banks that were used to give out funds to firms looking to enter into manufacture but are unable to gain capital in order to set up elsewhere, however in the case of countries like Brazil and Mexico issue’s arose with their ISI policies, the south American developing nations found themselves lacking in strategy and infrastructure. The reason they were found lacking is explained by scholars to be down to the policies implemented under ISI, with them making the industry in their countries have lots of small firms unable to make up efficiency and reduce costs compared to international competition with larger firms able to experience economies of scale. The opposite happened in countries like Korea and China, where firms were given more government input and large corporations where encouraged, to allow firms to gain the previously mentioned economies of scale.

In contrast to their European counterparts in the car market who were always looking to increase their exports and consult with competitors both inside and outside their nation in order to reduce production costs and increase efficiency, the closed off nature of the ISI policies that there governments had imposed, car firms were found to be lacking in efficiency of production, management, and human capital. All of this meant that instead of developing in order to compete internationally through reducing imports to increase internal growth, south American firms found themselves unable to compete on price with the world car market, and getting further behind as time went by in terms of efficiency. (Baranson 1969)

Tariffs and non-tariff barriers were used by developing nations to help develop their industries and remove problems with their balance of payments caused by intense competition from external more developed economies. However scholars have commented that instead of the desired internationally competitive markets in industry and other secondary markets, Economies showed similar attributes, these attributes can be described as ISI syndrome, the first feature of this model being a heavy reliance by firms on the central planning agency (the government) to make strategic decisions and also for finance. This can partly be attributed to the idea that much of the technology used in developing nations to produce is learnt from firms who operate out of more developed nations (such as the US or the UK). The policies to discourage foreign direct investment from these nations also stopped this source of learning of technology and also strategy, production methods and management skills. Economists have noted that the effects of this lack of knowledge grew exponentially as the developed nations grew more and more productive, the non developed nations now lacking in FDI from productive firms lagged further behind, making price competition and growth through exports a very difficult task.

Exchange rates also caused problems in countries that had implemented ISI, with the conditions following ISI policies being ones of overvalued exchange rates, which then led to unemployment and underutilizations of the infrastructure of their economies. The lack of employment stumping the growth rates of the economy, as this can only be maximised by utilising the nation’s entire work for to as much extent as physically possible.

To conclude, in recent years (the last 15) economic policy and literature has been mostly based on outward oriented approach when looking at how a nations should go about developing at a strong growth rate with as little issues with balance of payments and efficiency. This is due to the many advantages of encouraging FDI economies can benefit from. Such as technological skills, management skills, and business strategy knowledge that filter out into other firms operating in the nation hosting the FDI. This leaking of knowledge appears to be lacking in the examples talked about above, as the resulting ‘ISI syndrome’ they experienced showed a lack of these mentioned assets in the firms of Latin America and sub-Saharan Africa. Also we can suggest that the extent to which ISI implementation was successful in these countries may have been reduced due to the government official’s abilities who actually put in place the specific tariffs, policies and funding required. It is suggested that many government officials at the time where remnants of previous regimes and sometimes ignored the specific advice of the forward thinking development advisors. This made policy and tariff instruments specific clauses sometimes random causing issues and failures in the market.