Discuss the economic rationale behind the use of import substituting industrialization in many developing countries in the 1960s and 1970s

'Import Substitution' (IS) generally refers to policy that eliminates the importation of the commodity and allows for the production in the domestic market. The objective of this policy is to bring about structural changes in the economy. The structural change is brought about by creating gaps in the process of eliminating imports and thus making investment possible in the non-traditional sectors.

The policy of import substitution is achieved through discrimination of capita] goods against consumer goods by tariffs, quotas, exchange control barriers, exchange rate policies and fiscal and credit policies.

Eg: In Argentina, import substitution of the 50s was mainly in oil, steel, chemicals and motor vehicles, special incentives were designed to encourage particular industries or regions. Credit incentives which included subsidies were Hven through the manipulation of the reserve requirement, which allowed the banking system to finance import substitution industries at low interest rates.

In Columbia, multiple exchange rates were adopted, and exporters of non-traditional products were allowed to sell their foreign exchange at the floating free rate. In Pakistan7 tariffs were relatively high on consumer items. Moreover, the duties of raw materials and capital goods were relatively low than if the total value of foreign exchange had been auctioned freely.

In Korea and Taiwan, multiple tariff rates existed during the 50s. Tariffs were high on finished consumer goods for which dose substitutes were domestically produced, lower on products for which there were no substitutes.

The Indian ISI experience was in no way different from the experience of the rest of BRICS group of countries. The adoption of ISI in India dated back to 1920s, albeit with a great undertone of colonial influence that engendered some degree of liberalisation. The period prior to the political independence of India in 1947 was characterised by domestic antipathy towards the colonial (British) business interests in the country. The peak of this aversion was the orchestration of the doctrine of swadeshi (self-sufficiency) movement, which was meant to promote the nationalist ideology in the country by patronising only products made in India. It must be pointed out, however, that while the mercantile community, the peasant traders and the shroffs (bankers or moneychangers) canvassed for and endorsed swadeshi's proclamation and its first cousin, the nationalism movement, the larger Indian businessmen were controverts, which were epitomes of ISI. An understanding of the Indian economic policy development can best be categorised into four periods, namely the period between 1947–1956, 1957 to 1960, 1961 to 1965 and 1966 until date. The first two periods were characterised by the usual post-independence uncertainties and policy vicissitudes. Although, the pre-independence revulsion of the British business hegemony in the country influenced the policy directions, the lack of support from the domestic moguls as well as the finical/economic crises that the country experienced during this period further constituted a peculiar challenge.

Having looked at the ISI policy instrumentation in India, we now proceed to an overview of this policy stance in China. In recent past, China boasts a rapidly developing economy with unprecedented levels of industrialisation and poverty alleviation. According to Li and Vinten (1997:183) “Over the next two decades and next century, the world major economy will move from traditional European and US to the big emerging markets – Asian countries, especially the Chinese economic area which is expanding rapidly in this decade”. These authors further suggest that the Chinese economy grew by more than four times in 1994 compared to its productivity capacity in 1987. In spite of the global financial and economic uneasiness in 2012, the Chinese economy remains the largest recipient of foreign capital inflow (especially, FDI) at US $124 billion of which capital flow into the service sector surpassed that of the manufacturing sector (UNCTAD, 2013: xvi). Evidence suggests that the current economic prowess of China is premised on the country's unique macroeconomic policy initiative that was adopted between 1950 and 1995. These policies were primed on a balanced juxtaposition of two development models - Mao's closed economy (ISI) and Deng Xiao Ping's economic liberalisation approach (Export-Oriented Industrialisation – EOI).