IMPORT SUBSTITUTION MODEL: CHARACTERISTICS, ADVANTAGES - ECONOMY - 2025

The import substitution model is the government strategy that seeks to replace some imports by stimulating local production for domestic consumption, instead of producing for export markets. Exports and imports are essential economic tools for growth.

However, an imbalance due to excessive dependence on imports is detrimental to a country's economy. Import substitution is meant to create jobs, reduce demand for foreign exchange, foster innovation, and make the country self-sufficient in critical areas such as food, defense, and high-tech.

The import substitution model became popular in the 1950s and 1960s as a strategy to promote economic independence and development in countries with emerging economies.

This initial effort failed due in large part to the relative inefficiency of third world production facilities and as a result of their inability to compete in a globalized market. Therefore, the export promotion-oriented approach has become the norm.

characteristics

- The import substitution model refers to a country taking various measures to restrict the importation of certain foreign industrial products, favoring locally produced articles over foreign products, seeking to promote national industrialization.

- It implies that a country depends on its national production. In this case, exports tend to be larger than imports, minimizing imports to restrict this competition with local products.

- This model has been implemented mainly by emerging economies, which for long periods of time have depended on developed economies.

- It is also known as the import substitution industrialization model. It is the product of an inward-oriented economic development strategy.

- Generally, countries grant preferential treatment to taxation, investment and sales. Thus, foreign capital is encouraged to create companies associated with local capitals or to cooperate with national companies, either through the supply of materials or technology transfer to improve the level of national industrialization.

- To develop the local industry, different means are used, such as increasing tariffs, increasing the amount of restrictions and controlling foreign exchange to limit imports of products, so that the import competition has less competitive conditions or cannot compete in the national industry.

Advantage

Promotes the creation and growth of local industries

The restriction of imports creates a greater demand for domestic products. In turn, this creates a hole in the economy that requires investments to be made within the internal limits of the country.

Therefore, local resources are focused on the production of such services and products that will lead to the formation of new industries.

In addition, the benefits derived from these investments will be transferred in a higher rate of saving, investment and capital formation.

Protect new industries

A new company will not have to compete with well established international companies and markets.

This competition would lead to the closure of such industries because international companies have a great competitive advantage over local industries, both in terms of prices and supply.

The import substitution model serves to prepare industries for their evolution and growth; also to have the ability to increase their presence in international markets.

Therefore, it helps local economies grow, makes them self-sufficient and reduces the collapse of new companies.

Employment generation

Due to local industrialization, the import substitution model improves the requirement of labor-intensive industries, creating employment opportunities. In turn, this reduces the unemployment rate in the economy.

In addition, the quality of life of its workers is improved, which will reduce the percentage of people living in poverty. On the other hand, the economy becomes more resistant to global economic shocks, thus cementing economic stability and sustainability.

Reduces the cost of transportation

Products will no longer come from long distances, but will be produced within local limits. The focus is on home product development and reduced transportation costs for investing in industries.

Furthermore, the import substitution model does not limit the import of equipment and machinery necessary for industrialization.

Facilitates urbanization

With the expansion of industries, new urban planning can be developed to house the workers of these new companies. This is how the construction industry is promoted collaterally.

Disadvantages

Lack of external competition

This affects the efficiency of new local industries. Therefore, this is going to negatively affect your growth.

Additionally, restrictions such as import licenses, security deposits, and tariff barriers hamper trade between countries. This inefficiency will reduce total production, leading to a reduced growth rate.

Demand dissatisfaction

The failure of new growing national industries to meet consumer demand can lead to the development of "black markets."

Financial leaks will have the effect of reducing government revenue and the economy's overall capital base.

Trade protection

The trade protection caused by the import substitution model can generate overvalued exchange rates that cause an increase in local prices.

In addition, it forces governments to spend more to subsidize industrial investment. Inflation occurs and exports are less competitive. In addition, it causes high budget deficits.

Economy of scale

The small size of local markets cannot exploit the economies of scale of local production. In such a case, this hinders production and growth, bringing the collapse of the same industries.

An example is the Brazilian economy. Brazil abandoned the use of the import substitution model for computers in the 1990s. The model proved a failure.

Polarized income distribution

In these contexts there is the presence of a polarized distribution of internal income. Ownership of the means of production will be monopolistic, creating a large gap between rich and poor. This results in high inequalities within a country.

References

1. Business Dictionary (2018). Import substitution. Taken from: businessdictionary.com.
2. Calvin Fok (2015). What is import substitution? Has it ever worked? Is it generally accepted that export substitution is the superior economic theory for developing nations? Quora. Taken from: quora.com.
3. Essay Basics (2018). Advantages and disadvantages of import substitution (essay sample). Taken from: essaybasics.com.
4. Anushree (2018). Import Substitution and Export Promotion. Economics Discussion. Taken from: economicsdiscussion.net.
5. Investopedia (2018). Import Substitution Industrialization (ISI). Taken from: investopedia.com.