Import Substitution Industrialization Overview

Study Notes

ISI was the dominant economic development model in the Global South from 1930 to 1980s
Prior to 1930, the primary export-led growth model was dominant in the Global South
Exports led to substantial economic growth in Latin America in the late 19th and early 20th centuries, but prices tumbled during the Great Depression
Prebisch-Singer thesis: Demand for food and raw materials remained constant while demand for manufactured goods grew. As a result, costs for imports tended to exceed revenues from exports, resulting in a growing trade deficit.
Solution: Developing countries needed to industrialize instead of importing manufactured goods.

Protectionism: tariffs, quotas, and licensing requirements on certain imports to shield newly established domestic industries
High exchange rates and foreign currency rationing reduced imports and channelling foreign direct investments to industrial development
Tax exemptions and cheap loans encouraged investment in newly established industries
Public ownership of strategic sectors and banks, often involved government intervention
Low-interest rates

GDP averaged 6.7% per year
Fixed investment increased from 15% to 20% of GDP
Labor productivity increased by 3.3% per year
Real wages increased by 4.5% per year
Share of manufacturing increased from 17.5% to 23.3% of GDP
Tariffs up to 85% on consumer durables and over 40% on other consumer goods (very high protections)
Certain imports needed prior government approval (licensing)
Domestic content requirements for certain products

Substantial and sustained economic growth
Growing importance of manufacturing and growing investment and productivity
Stable employment rates in large enterprises alongside informal work
Rising living standards, especially in urban areas
Declining poverty, but persistent inequality
International trade accounted for less than 20% of GDP in 1970, significantly less compared to more than 60% in 2000
Mexico's GDP per capita in 1970 grew from 30 to 45% of the US GDP per capita
Productivity still lagged substantially behind the US

Inward instead of outward industrialization
Lack of exports; increasing current account deficits
Inflation, and in many cases, hyperinflation
Growing interest rates, which increased borrowing costs
Growing Latin American debt: From 20% of GDP in 1974 to 60% in 1984; structural adjustment imposed by IMF/ World Bank
Declining exports as a share of world trade
Increasing current account deficit
Continuously increasing public debt

Graphs exhibit the trends of: GDP growth, trade as a share of GDP, exports as a share of GDP, current account deficits, real interest rates, and government spending .
Data on average real annual percentage interest rate on developing countries' floating-rate debt is presented (1977-1983).
The data on effective protection rates (1960-1980) are presented showing the levels of tariff protection in Mexico.