Import Substitute industrialization strategy (4)

In the words of Albert Hirschman, through market relations, “the power of any country A to disrupt the economic and financial structure of country B is the source of the influence and influence that country A will gain over country B.”

In response to this situation, states try to increase their economic independence. Import substitution industrialization strategy is one of the most effective ways to reduce economic dependency. It is the process of a state trying to achieve economic growth by increasing protective tariffs to prevent imports and replacing them with domestically produced goods. Industrialization is aimed through the domestic production (substitution) of products imported from abroad. It is the national goal of most underdeveloped countries to replace imports and thus avoid foreign dependency and become a self-sufficient economy (autarchy). Since import dependency can hinder the political independence of that country, an import substitution industry strategy is followed in order to overcome this.

The fact that the main target of production is domestic markets and the public sector's increasing and elaborate interventions in economic life are the characteristic features of the strategy in question. In this way, foreign exchange savings are achieved through production, and dependence on imported goods is reduced. The external deficit is minimized. Foreign exchange is spent on the import of intermediate and investment goods that cannot be produced domestically.

In the historical process, this strategy has been successfully applied. The USA, taking into account Hamilton's 1791 report On the Manufacturing Industry, placed an embargo on British goods in 1807, so the American manufacturing industry developed. All the important powers of Europe, including Russia, and Japan, seeing that military power depended on industrialization, applied protectionism to develop their manufacturing industries.

Main tools of the Import Substitute Industrialization Strategy

1. Exchange rate policies:

It reduces imports with an overvalued exchange rate policy. Domestic production becomes attractive and protectionist policies are followed.

2. Customs duties:

Customs taxes are kept high in order to protect domestic producers producing above world prices from the competition of imported goods.

3. Quotas:

They are applications that limit imports in terms of quantity/value. Domestic production is protected by keeping the prices of domestic imported goods high.

4. Export subsidies:

The state supports the industrialists with low-interest loans, cheap energy and raw materials, investment incentives and tax exemptions.

Stages of the Import Substitute Industrialization Strategy

1. Industries producing consumer goods are established. The domestic market expands. Production is made to replace imported goods, domestic production increases. Over time, production is directed to export.

2. Intermediate and investment goods are also produced domestically. Emphasis is placed on capital-intensive industries such as petrochemicals and steel products.

3. Factories producing capital goods (machines) are established to invest in the industrial sector. If machinery production is also carried out domestically, it becomes relatively easy to manage the currency bottleneck problem.

Among the main criticisms directed at the import substitution industrialization strategy are the deterioration in resource distribution, foreign dependence (in terms of input imports), the prevention of foreign opening due to protectionism, worsening in the balance of payments (transfer of the needed capital and technology from developed countries at high prices), decrease in tax revenues, increase in monopoly, etc. countable. Countries that implement the import substitution industrialization strategy use government intervention tools.

The state bureaucracy can use public intervention tools to lead the bureaucracy, rather than the government, to be a powerful playmaker. In authoritarian regimes, on the other hand, the dictator or oligarchic ruling elite gains political power either by direct taxation of the resources of the economy or by pouring money into the appropriate sectors, albeit at the expense of other sectors. However, it should also be taken into account that any state that prioritizes an import substitution strategy has justifications to protect and support sectors that it considers to be profitable and of strategic importance in international competition.

In our next article, we will discuss the "export-based industrialization strategy".

Some References that We Used In This Article

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