IMPORT

1
IMPORT SUBSITUTION INDUSTRIALIZATION (ISI)
2
OUTLINE

• RATIONALES
• POLICIES
• RESULTS

3
1st RATIONALE

• Dependency Theory

Underdevelopment arises from dependency Therefore,
the solution is independence.
We know that there is a demand for imports
Produce the imports at home
4
2nd RATIONALE

• DECLINING TERMS OF TRADE (TOT)

PX PM
TOT
Where PX AVERAGE PRICE INCREASE OF EXPORTS
PM AVERAGE PRICE INCREASE OF IMPORTS
5
2nd RATIONALE

• PROBLEM WITH DECLINING TOT
• Pay for imports by earning foreign exchange
  through exporting.
• If the prices of imports are rising faster than
  the prices of exports, it becomes necessary to
  export more and more to buy an import.

6
2nd RATIONALE

• EXPLAIN DECLINING TERMS OF TRADE
• Relatively Low Income Elasticity Of Demand For
  Primary Products.

CHANGE IN QUANTITY DEMANDED
?Y
CHANGE IN INCOME
7
3rd RATIONALE
INFANT INDUSTRY
Comparative Cost Advantage
If every nation specializes in products for
which they have a comparative cost advantage,
all nations prosper.
Temporary Protection for Development of CCA
8
1st POLICY

• PROTECT DOMESTIC INDUSTRY
• Tariffs (Franco 59)
• Quotas,
• Import Licenses.
• Limit Foreign Investment (Franco 63-64)

9
2nd POLICY

• LARGE GOVERNMENT
• Public Enterprises (Franco Table 3.1)

• Subsidize Private Enterprises
• Infrastructure
• Low Investment
• Subsidies
• Wage Controls

10
3rd POLICY

• Loose monetary policy
• Authoritarian governments
• Rules were changed to decrease the autonomy of
  central banks, forcing them to accommodate fiscal
  spending programs.
• Lack of data meant that decisions were made by
  guesswork and intuition.

11
1st RESULT

• Growth 1950-1980
• Average annual growth rate of 5.5
• The production of basic consumption goods
• Some countries initiated heavy machine goods
  industries
• Franko, 64

12
2nd RESULT

• INDUSTRIALIZATION
• Sebastian Edwards Trade Barriers A Negative
  Influence On Growth For 30 Countries.
• (Lindert 259)

13
2nd RESULT
AVERAGE ANNUAL GROWTH IN REAL GDP
1980-92
Trade Policy
1963-73
1973-85
Lindert 258
14
Growth History

• Franco, Table 3.3, page 65

15
RESULTS EXPLAINED

• Limited Industrialization
• Inefficiency.
• Final Touches Of Consumer Goods.

Unemployment From Capital Intensive Investments.
16
RESULTS EXPLAINED
SATURATED MARKETS
Poverty Inequality cause Lower Demand
17
RESULTS EXPLAINED

• INFLATION
• Fiscal Deficits lead to money creation

Reduced exports led To foreign exchange
shortages.
18
RESULTS EXPLAINED
EFFECT OF OVERVALUATION
1 1 PESO 2 1 PESO
Agriculture hurt
Reduced exports led To foreign exchange
shortages.
Need foreign exchange to import and produce
19
RESULTS EXPLAINED

• REDUCED SAVINGS INVESTMENT

i
S
i1
D
QMONEY
qd
qs
20
Policy Discussion

• Lall revisited
• Is the problem dependence?
• Is the solution independence?
• Adjust the ISI approach?