We explain what the import substitution model is, its objectives, advantages, disadvantages and other characteristics.

Import substitution model
The import substitution model, also called import substitution industrialization (ISI), is the economic development model adopted by numerous countries in Latin America and other regions of the so-called Third World during the beginning of the 20th century, especially in the post-war of the two World Wars (since 1918 and since 1945).
As its name indicates, this model consists of the substitution of imports with domestically produced products. For this, the construction of an independent economy is necessary.
This was especially necessary at times of drastic decrease in products manufactured in the European industrial hub, a consequence of both the Great Depression of 1929 and the devastation of the World Wars.
To achieve industrialization by import substitution, it was essential to have a strong and protectionist State in Latin America, which would carry out important interventions to the national trade balance.
The measures taken included the application of import tariffs, high exchange rates, subsidies and support for local producers. A whole series of measures that aspired to strengthen national industries and make local consumption independent of the industries of international powers.
Origin of the ISI model
Import substitution has early antecedents in the mercantilism of 17th-century colonial Europe, especially in the customs tariffs of Louis XIV's minister to France, Jean Baptiste Colbert. The idea was to achieve a favorable trade balance, allowing the accumulation of monetary reserves.
But the contemporary idea of the ISI It arises in a historical context of great economic depression in Europe. This crisis had a severe impact on the economy of peripheral nations, characterized by their great dependence since postcolonial times.
Seeing your economy in crisis, European nations decided to minimize the purchase of imported goods or charge them with high tariffs. In this way they tried to protect their own consumption and alleviate the effect of the collapse of their currencies.
Logically, this caused a significant drop in the currencies of Third World countries mostly suppliers of raw materials, but importers of everything else. To maintain your consumption, opted for this model as a response mechanism to the global crisis, proposing to industrialize their nations on their own.
Objectives of the ISI model
The fundamental objective of the ISI has to do with the development and growth of the local productive apparatus of the nations of the so-called Third World. For this, those traditionally imported goods begin to be produced gradually.
The trade balance of countries depends on what is exported (which generates foreign currency) and what is imported (which consumes it), so a healthy trade balance implies greater exports. The idea was abandon the dependent economic model which imported a large part of its consumer goods, being particularly susceptible to foreign influences.
Features of the ISI model

To achieve the ISI, it was essential that the State offer local economic benefits and incentives, as well as a system of protection for national products, to artificially construct certain economic conditions which will be favorable to the nascent local industry.
In that sense, it was a developmental growth model, focused on indoor growth. Hence, the main measures and strategies of import substitution were:
- Large subsidies to local producers especially to the industry.
- Imposition of taxes tariffs and barriers (limitations) to imports.
- Avoid or hinder foreign investments direct in the country.
- Promote the consumption of local products instead of foreign ones, as well as allow and promote export.
- Overvalue the currency local, to lower the costs of purchasing supplies and machinery abroad, and at the same time make the local product more expensive.
- Bureaucratically facilitate the access to credit for local growth.
Stages of the ISI model
The ISI was planned based on two recognizable stages:
- First stage Blocking and rejecting the importation of products manufactured abroad, through tariff schemes and other barriers, while applying economic stimuli and other protection measures to the local manufacturing industry.
- Second stage Progress in the substitution of consumer goods towards the intermediate and durable consumer sectors, investing in this the set of capital saved during the first stage, that is, a stocks of national currencies.
Advantages and disadvantages of the ISI model
Like any other economic model, import substitution had advantages and disadvantages. Among the advantages are found:
- Increase in employment local short term.
- Rise in the welfare state and better social guarantees for the worker.
- Less dependency local of international markets and their fluctuations.
- flowering of small and medium industries throughout the country.
- Transportation cost reduction local, which in turn decreased the final costs of the product, making the merchandise cheaper and encouraging consumption.
- Increase of local consumption and improvement in quality of life.
On the other hand, import substitution brought with it the following drawbacks:
- Paulatino general price increase the result of the unexpected rise in consumption.
- Appearance of state monopolies and oligopolies depending on who accessed the incentives and benefits.
- State intervention weakened the natural mechanisms of market self-regulation.
- In the medium and long term, a tendency towards stagnation and obsolescence in local industries given that they lacked competition and therefore technological updating.
Application in Mexico
The Mexican case is notable on the continent, along with Argentina. We must consider that the end of the Mexican Revolution in 1920 facilitated the improvement of the quality of life of peasant and indigenous groups, who had participated significantly in the popular revolts and were now key recipients of State attention.
The governments of the time nationalized oil and mining industries, as well as railroads and other transportation that were in foreign hands. So, when Lázaro Cárdenas assumed the presidency Mexico had faced the Great Depression.
It was then that ISI was started promoting growth “inwards”: the increase in the road network, the boost to the agricultural sector and the reduction of foreign control on the local economy. All of this required the State to play a leading role in the economic order of the nation.
Thus, when the decade of 1940, the Mexican manufacturing sector was one of the most dynamic in the region. It was able to take advantage of public investment in the form of subsidies and tariff exemptions, as well as growth in exports to other Latin American countries.
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References
- “Import Substitution Industrialization” on Wikipedia.
- “Industrialization by import substitution” in Economipedia.
- “Import substitution industrialization model” (video) on Canal Encuentro (Argentina).
- “Review of the import substitution model: validity and some reconsiderations” in ScienceDirect.
- “Analysis of the import substitution industrialization model in Latin America and Argentina. A look at the current industrial reality in Argentina” by Fernando Ariel Bonfanti at Universidad Nacional del Nordeste.