import substitution model (isi)

Economy-And-Finanzas

2022

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

The import substitution model creates favorable conditions for the industry.

Import substitution model

The import substitution model, also called import substitution industrialization (ISI), is the model of economic development adopted by many countries of the Latin America and from 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 its name indicates, this model consists of the substitution of imports for products produced in a national way. This requires the construction of a economy Independent.

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

To achieve import substitution industrialization, it was essential to have a Condition strong and protectionist in Latin America, which will carry out important interventions in the national trade balance.

Measures that were taken included 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 the consumption local of the industries of international powers.

Origin of the ISI model

Import substitution has an early history in the mercantilism of the Europe 17th century colonial, especially in the customs tariffs of the minister of Louis XIV 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 ​​ISI arises in a historical context of great economic depression in Europe. This crisis had a severe impact on the economy of the nations peripheral, characterized by their great dependence since postcolonial times.

Viewing your economy in crisis, European nations decided to minimize the purchase of imported goods or tax them with high tariffs. In this way they tried to protect their own consumption and mitigate the effect of the collapse of their currencies.

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

Objectives of the ISI model

The fundamental objective of the ISI has to do with developing and growth of the local productive apparatus of the nations of the so-called Third World. For this, those traditionally imported goods are gradually being produced.

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

Characteristics of the ISI model

In addition to promoting domestic consumption, the ISI facilitates exports.

In order to achieve ISI, it was essential for the State to offer local economic benefits and incentives, as well as a system for the protection of national products, to artificially build certain economic conditions that would be favorable to the nascent local industry.

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

  • Huge subsidies to local producers, especially industry.
  • Imposition of taxes, tariffs and barriers (limitations) on imports.
  • Avoid or hinder direct foreign investment in the country.
  • Promote the consumption of local products instead of foreign ones, as well as allow and promote exports.
  • Overvalue the local currency, to lower the costs of purchasing inputs and machinery abroad, and at the same time make the local product more expensive.
  • Bureaucratically facilitate access to credit for local growth.

Stages of the ISI model

The ISI was planned based on two recognizable stages:

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

Advantages and disadvantages of the ISI model

Like any other economic model, import substitution had advantages and disadvantages. Advantages include:

  • Increase in local employment in the short term.
  • Increase in the welfare state and better social guarantees for the employee.
  • Less local dependence on international markets and their fluctuations.
  • Small and medium industries flourish throughout the country.
  • Reduction of the cost of local transport, which in turn reduced the final costs of the product, making the merchandise cheaper and promoting the consumption.
  • Increase in local consumption and improvement in quality of life.

On the other hand, import substitution brought with it the following drawbacks:

  • Gradual general increase in prices, the result of the unexpected rise in consumption.
  • Appearance of monopolies Y oligopolies state, depending on who accessed the incentives and benefits.
  • State intervention weakened the market's natural self-regulatory mechanisms.
  • In the medium and long term, a tendency towards stagnation and obsolescence prevailed in local industries, given that they lacked competence and therefore update technological.

Application in Mexico

The Mexican case is notable in the continent, along with the Argentine. We must consider that the end of the Mexican Revolution in 1920 it facilitated the improvement of the quality of life of peasant and indigenous groups, who had participated significantly in 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 railways and other transportation 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, fostering “inward” growth: increasing the road network, boosting the agricultural sector and reducing foreign control over the local economy. All of this required the State to play 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. He was able to take advantage of investment public in the form of subsidies and tariff exemptions, as well as the growth in exports to other Latin American countries.

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