The Import Substitution Industrialization (ISI) Model
- Latam Sin Filtro
- Dec 6, 2024
- 3 min read
Updated: Mar 2
The import substitution industrialization (ISI) model is an economic policy that was adopted by many developing countries after the Great Depression. This model was applied in Latin American countries mainly in the 1950s and 1960s. This strategy was born from the work of ECLAC (UN Economic Commission for Latin America) and from the works of the Argentinean economist Raul Prebisch, then director of ECLAC.
From the First World War until 1945, the United States reduced its political involvement in the subcontinent and began to relocate production in the national territory to meet the demand of its domestic market which resulted in less investment in Latin America. Latin American economies suffered from the drastic reduction of trade and capital exchanges with the U.S. Intellectuals such as Raul Prebisch took advantage of the creation of the UN and ECLAC to think of a new economic model to drive the development of Latin American countries = the ISI model.
The idea is that it exists an asymmetry between manufacturing activities and the production of raw materials. Latin America produces and exports mainly raw materials, which are low value-added goods, and produces very few manufactured goods with higher value added. It creates a trade deficit with the U.S. as Latin America have to import these finished products.
Latin American countries had to respond to domestic demand by replacing imported products with the development of local production. ECLAC's theorizing seeks to extend this policy to all industrial sectors until it creates a real “disconnection” from what Raul Prebisch calls the center[1]. In other words, it is a protectionist policy to reduce the region's dependence on the United States.
Raúl Prebisch, credit : ECLAC
The ISI model is based on 3 pillars:
Protectionist policy in the first place to limit imports of manufactured goods and allow the creation of a local industry. Local industry is protected from foreign competition to allow it to develop first and when it’s competitive, a more liberal tariff policy can be adopted.
Central role of the State in the implementation of this policy with four specific functions:
- Financing of private industrial activity.
- Redistribution of income through social policies in education, housing and health.
- State investment in sectors such as communications, transportation and energy in order to develop them: State participation in the development of patents and the improvement of productivity.
- Creation of state-owned companies in public services
Progressive graduation of industrial products: to go from first industrial revolution products to manufactured products, creating a complete ecosystem in each industry.
The macroeconomic results of the ISI model were very limited. Companies were not much more productive nor competitive. On top of that, the State did not invest enough in professional training and higher education to have better working capital and skilled workers. Also, the semi-public companies created clientelism since the companies needed financing from the State. However, the ISI model allowed most countries in the region to be self-sufficient in energy.
[1] Raul Prebisch's center-periphery theory assumes that the periphery specializes entirely in the production of raw materials, which are exported to the center in exchange for manufactured goods. The profits of the final, retail and wholesale sectors are earned and spent in the center. Profits from the production of raw materials are earned in the periphery and spent in the center (transferred to the center). Consequently, firms in the center serve a demand that originates in both the center and the periphery. Latin America is part of the periphery. Raúl Prebisch y la dinámica económica: crecimiento cíclico e interacción entre el centro y la periferia | CEPAL
Bibliography
El modelo de industrialización por sustitución de importaciones, motor de la modernización político-social en América Latina y del surgimiento de una identidad nacional (hal.science)
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