Import Substitution Industrialization Overview

Import Substitution Industrialization (ISI)

• 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.

ISI Policies

• 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

Mexican "Economic Miracle" (1956-1970)

• 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

ISI Outcomes

• 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

Why did ISI Fail?

• 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

Additional Notes

• 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.

This quiz explores the concept of Import Substitution Industrialization (ISI) and its impact on economic development in the Global South from 1930 to the 1980s. It covers the shift from export-led growth to protectionist policies aimed at fostering domestic industries. Test your knowledge on ISI principles, policies, and historical context.