Introduction:
Import substitution industrialization (ISI) is the policy that looks to subtract the importation of goods and divert this loss of imports by domestic production, altering the structure of the economy. The structural change is brought to effect by making apertures, through which investment can flow through to domestic producers, especially in the case of non-traditional industries.
For the pre-90s economy India had, Self-reliance was the primary goal in order to reduce the dependence of India on other countries for certain goods. By self-reliance or a self-sufficient economy, we mean a fully content economy that does not necessarily depend on the globe for going forward with its economic activities. Although looked at as a factor facilitating disguised ‘protectionism’, the postulated autarky is difficult to attain.
Origin
ISI owes its origin to the proponents of the ‘Infant Industry Agreement’. This setup is the grounds on which trade protectionism is carried forward. This is under the presumption that the domestic (especially rural maiden) industries do not have the economies of scale as equivalent to those large scale industries of the other developed countries and require a shield to protect and foster the production for the above mentioned small scale, domestic industries. The case of Latin America during the world-war II period could be a classic example of ISI implementation (gone wrong).
Stringent ISI measures were in Latin America that prohibited the inflow of goods, interrupted the US shipping, and implemented declined products from Europe. The Latin American economies were forced to produce heavily to meet the shortage of manufactured goods, which resulted in an increase in relative prices. This was the effect in prime areas of demand- food, clothing, and other consumer products. This was driven by export pessimism which was based on natural forces. The continuous decline in the world market prices had affected Latin America as their obsolete technology deterred progress. For example, synthetic nitrates replacing Chilean nitrates leaving the industries at a loss. This called for balanced growth. But, post-1950s the countries had to resort to ISI due to the crisis caused by the inconsistent Balance of Payment. The scholars who promoted this ISI at that time of desperation believed that ‘temporary quarantining’ of the economies would help them hop back on the race with the global economies.
Application of ISI
The developing economies start implementing ISI starting off with consumer goods as they are well aware the cost disadvantage on consumer goods is lower than that on capital goods and there is a guaranteed market for consumer goods as it is a universal truth that even at zero levels of income, there will be a minimum level of consumption.
ISI is achieved by discriminating capital goods against consumer goods by the imposition of tariffs, quotas, credit-fiscal policies, and exchange control policies. Credit incentives can also be given in the form of subsidies by manipulating the reserves which would in turn paved the way for the banking companies to finance the small scale industries which were taking baby steps. In Columbia, multiple exchange rates were imposed; high consumer goods tariffs by Pakistan; in Korea and Taiwan, differential tariffs on consumer goods depending on the availability of close substitutes were charged, and so on.
The scholars call the substitution of imports of consumer goods as the ‘easy stage’. The difficulties are said to arise in the subsequent stages whereby the problematic areas were to be dealt with ISI- intermediary and capital sectors. The limitations can be looked into in the next section.
Limitations of ISI
The ISI measures called for extremely high degrees of control on the economy. This leads to excessive bureaucratization and which in turn leads to corruption. The public was discouraged to invest due to the existing import restrictions and it restricted the growth of the potential industries who could have grown multifold if not for the stringent trade policies.
Goes without saying, the import restrictions lead to a decrease in the relative gains from the exporting as the countries were hesitant to trade with another nation whose import policies restricted them from practicing trade- reciprocal basis for imports and exports was absent.
Since only consumer goods were only targeted in the first stage, this resulted in additional imports of capital goods and caused an increase in import intensity. Although progress was seen for a temporary period, the economy was ultimately stuck as the country has exhausted all its import opportunities (consumer goods).
The structuralist problem was another factor for the failure of ISI as the productivity structure was inherently inefficient as it was what was given by their colonial masters, which had created many repercussions like the creation of class hierarchies, the influence of the failed colonial economic policies, etc. The pattern that existed was based on demand and distribution of income, which lead to the elimination of domestic production. Atop which, the technology adopted was inconsistent with that time of the world markets, and this directly affected the capital and capital outflows increased. The ISI policies only protected the creamy layer- privileged bourgeoisie in alliance with international capital. This garnered positive attention from the world capital markets but caused national disharmony and disintegration as the underlying purpose to protect the struggling domestic enterprises was defeated. Even if this looks like a Marxist outlook or anyway, rather colored, studies show that this had happened and the outcome would have not been different.
The policy generated did not place a reliance on market forces but on just on forcefully controlling the enterprises who wished to import or entrepot. The imports were scrutinized heavily with no emphasis on market demand and supply abilities.
Although the criticisms seem to flow from various perspectives, the critics collectively disregard the ISI and find it to be in asymmetry with any successful economic policy.
ISI in India
Post the second world war, many Asian countries resorted to ISI to inject protectionism values in the economy and to establish self-sustenance in their economy. However, many countries like Singapore, Taiwan, and South Korea disengaged themselves with this policy and moved towards a more successful policy: Export Orientation. Their growth rates saw a tremendous hike.
India adopted this plan in the fifties but by this plan, we mean ISI. The motive behind this was to build a self-reliant economy. This model of growth was based on the principles propounded by Mahalanobis. The colonial economic blunders were to be set right by adopting ISI, at least that is what the state believed. The rationale behind this was that the investment goods-producing enterprises were absent which could now restrain high rates of investment. It insists on the ‘basic industries’ for growth and prolonged growth could be brought into the economy by utilizing products made by these industries. Simultaneously, the saving and consumption rates were also to be catalyzed if this model had to work. The state overlooked all this and implemented the ‘layer seen to the naked eye’ philosophies of the ISI policies.
India, falling on the other side of the spectrum of the South Asian countries’ economic philosophies, it was stuck on the ISI policies and oversaw the sudden fall in imports of 10% (1950s) to a never seen before low of 4% in the 1960s. The domestic availability hindrance prevented our producers from accessing the world markets even for raw materials which made them resort to the domestically available resources, however poor they were in quality.
Since the quality of the products downgraded, the Indian products failed to compete in the international market with the big shots or even struggled to compete with the developing economies. As foreign exchange rates fell, imports were further controlled, ultimately leading to no growth in per capita income. This proves the massive failure that the ISI actually was. It was nowhere near the goal of self-reliance and only treaded the path to self-destruction.
How were these measures countered? The only way to counter this was to let the rupee value depreciate to a low and do away with import controls. This further incentivized the exporters and producers who competed with the import goods. As better products came into the economy, the consumers became fully aware of the choices they were provided with and actively discriminated between good and bad goods. This made the competition stricter and the local producers were to work twice as much as before to become at par with the international traders.
This change was very hard to move towards as it was slow and the hasty economists and policymakers were ready to give up. However, when proven efficient, not once did they regret it as the imports and exports grew alongside to provide an export surplus. The ISI although proved to be a nightmare, taught us one of the most significant lessons to the economists: Self Reliance cannot be achieved when the global doors of entry are shut.
Conclusion
The Import Substitution Industrialization measures were definitely an introspective goal to help in self-reliance. But the proponents of this policy failed to see that the growth and the globe go hand-in-hand and in the process of becoming self-reliant one should not drastically drift away from its roots. It is indeed an economic fallacy to believe that the nationalization of the economy and imposing import controls would lead to a self-sufficient economy. Poor economic planning such as this would only lead to the bankruptcy of several nationalized industries. Therefore, in my capacity, I find it hard to defend protectionist policies such as these. Unaware if the goal of self-reliance, but temporary sabotaging of the economy, definitely done.
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