What is import-substituting industrialization?

For most developing countries, the greatest challenge is to become self-sufficient. To do so, these countries have to reduce their dependence on developed countries. Most developing nations depend on foreign exports to sustain themselves. Say, for instance, a developing country wants to import plastic from a developed nation. Now plastic has multiple usages. It can be used as a packaging material. It can be used for domestic purposes, and then again, it has numerous commercial usages. However, while importing tons of plastic, be it as raw material or as finished goods, the developing nation has to pay extensive sums of money in place of tax, tariff, and customs duty. Then there are international trade laws and sanctions that both countries have to abide by.

Moreover, it has been found that in most cases, such a transaction has always been more profitable for the exporter than the importer not only from a fiscal point of view but also from a global political perspective. Given the scenario, economic theory has been developed known as Import Substituting Industrialization or ISI. This has been generated from a Keynesian and socialist school of thought, which prioritizes the community. Here more than giving importance to the creation of capital, the utilization of the labor force is given importance. Some of the essential features of ISI are as follows:

Creation of domestic goods

The primary objective of developing nations should be to become self-sufficient. Once they have imported products from a developed country, they could try replicating the products in the factories and manufacturing units in their own countries. However, in doing so, care must be taken that it should be done in strict adherence to international laws and patent laws. While certain products can be replicated, certain items like pharmaceutical products are guarded under strict patent laws and hence, cannot be replicated. Other than that, most questions can be developed in domestic manufacturing units. This is essential to become self-sufficient. This also requires increased government spending in encouraging the public to get involved in the production process. In other words, the government has to take proactive efforts to build factories where products can be manufactured using locally sourced raw materials. For example, if a particular nation has a surplus of jute, then agro-based industries can be set up where jute can be used as a suitable packaging material. This will prove to be a highly successful endeavor. Primarily because it is locally sourced, secondly, it is environment friendly, thirdly it represents sustainable industrialization, and finally, it will reduce dependency on foreign imports. Moreover, it will also encourage the local labor force to get involved in the production process and help in the creation of a self-sustaining domestic market economy.

Reducing fiscal burden

The importing of goods manufactured in developed countries has always been a burden on developing nations. The primary reason for this is payment for any such transaction has to be made in a stronger currency. Say, for instance, if a Latin American nation imports certain products from a European country, then the importing nation will have to make the payment in either Euros or American Dollars. Since the currency of the Latin American society will always be undervalued in comparison to the currencies of developed nations, it will be an added burden on the economy of the country. This kind of fiscal strain can often result in a budgetary deficit. In other words, the state might end up spending more than its earnings, as it had to import products from developed nations to meet the requirements of its country. Continuous fiscal deficits can create an undue strain on the economy, leading to hyperinflation. Given all of these conditions, economists have been encouraging developing countries to reduce their imports and increase their domestic production. Sometimes the import of certain products like heavy machinery and capital goods become almost essential for developing countries. But even these should be one time imports. Developing countries should try and build manufacturing units that can also manufacture such products. In the long run, this will help developing countries become all the more self-sufficient.

Discouraging foreign direct investment

Developing nations should also discourage foreign direct investment. A branch of the ISI school of thought believes that FDI proves to be more harmful than helpful for a developing nation. The primary reason for this is that a company when investing in a foreign country will ask for facilities like tax holidays, low corporate tax, preferential tariffs, investment subsidies, and other such facilities that the government will be forced to provide because of the investment. This will subsequently prove harmful to the economy as a whole. In comparison to this, if domestic industries are encouraged, then the country will move towards becoming economically independent. It will not require any investment from foreign companies to sustain their economic and fiscal requirements. Moreover, the capital generated by the domestically supported companies will remain within the economy of the country itself. In the case of FDI, resources are often found, leaving the state in which it has been created. Thus, the developing countries with the help of FDI will not become self-sufficient instead become all the more reliant on developed nations.

Therefore, the objective of ISI is to help developing nations to become self-sufficient. But for this, the government of the land needs to invest heavily in the economic development of the country. The government should also invest heavily in developing the infrastructural facilities of the country. It should invest in building railroads, bridges, harbors, highways, and roads. These are essential to ensure that there is a smooth movement of raw materials from the production units to the manufacturing units. Moreover, for the success of ISI, mobilization of the labor force is essential, and for that, it is crucial to train them. Thus, proactive effort should be taken by the government of the developing nation that seeks to implement the ISI policy to make it a success.

Reference URL

https://www.investopedia.com/terms/i/importsubstitutionindustrialization.asp

https://en.wikipedia.org/wiki/Foreign_direct_investment