Import Substitution Industrialization – ISI

Definition

Import substitution industrialization is a trade and economic policy which advocates replacing foreign imports with domestic production. ISI is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. The term primarily refers to 20th-century development economics policies, although it has been advocated since the 18th century by economists such as Friedrich List and Alexander Hamilton.

Import Substitution Industrialization – ISI

What is the ‘Import Substitution Industrialization (ISI)’

Import substitution industrialization (ISI) is a theory of economics typically utilized by developing countries or emerging market nations seeking to decrease dependence on developed countries and to increase self-sufficiency. The implemented theory targets protection and incubation of newly-formed domestic industries, aiming to fully develop the sectors so that goods produced have the ability to compete with imported goods. Under the ISI theory, this process makes local economies self-sufficient.

Explaining ‘Import Substitution Industrialization (ISI)’

The ISI theory emerged in Latin American countries following World War II. The primary goal of the implemented theory is to protect, strengthen and grow local industries utilizing a variety of tactics, including tariffs, import quotas, and subsidized government loans. Countries implementing this theory are aiming to build up production channels for each stage of a product.

A Brief History of the ISI Theory

The term “import substitution industrialization” is a primary reference to development economics policies of the 20th century. The ISI theory has, however, been advocated since the 18th century, supported by economists such as Alexander Hamilton and Friedrich List.

Theoretical Basis

The ISI theory is based on a group of developmental policies. The foundation for this theory is composed of the infant industry argument, the Singer-Prebisch thesis and Keynesian economics. From these postulations, a group of practices can be derived: a working industrial policy that subsidizes and organizes a production of strategic substitutes; barriers to trade, such as like tariffs; an overvalued currency that aids manufacturers in importing goods; and a lack of support for foreign direct investment (FDI).

Import Substitution Industrialization – ISI

Definition