Define
what import substitution industrialization (ISI) is. Explain, in detail, how
ISI may help economic development and give examples of ISI policies in
less-developed countries. Finally, discuss the main problems with ISI
strategies.
Import Substitution Industrialization is the
mode of industrializing that involves the “establishment of firms within the
domestic economy that produce for local consumption at least some of the
manufactured goods currently being imported” (Cypher 318). The typical model includes starting with
making things in-house that are simple non-durable consumer goods, anything
from making clothing to shoes and glassware and even some intermediate goods
like doors or cement (Cypher 319).
This lower-intensive model allows for easy
absorption of potential workers from the agricultural sector without needing
the capital or human capital build up that manufacturing more complex capital
goods entail. To have efficient ISI, one of the keys is having a well-organized
and well-planned state structure that will allow this transition. One part of
this is in financing the transition to ISI, through institutions like
development banks that will help fund firms who are willing to take the risks
(Cypher 320, 324). The other side is making sure that the firms that are
working have protection. Some ways to create the firms are infant industry
tariffs, which drive up the price of the substitute goods from abroad, or
quotas or even direct subsidies (Cypher 328-9).
Importantly, with infant industry tariffs, the
transition away from protection must be carefully considered and planned and
that plan must be stuck to, as protection creates interest groups within the
country that benefit from the protection, and they must be incentivized to keep
improving their own productivity so that they are competitive in their
manufactured goods compared to the world market and not just rent-takers
(Cypher 335-6). This is one of the big
concerns of the ISI strategy, in fact, where economists worry that the strategy
allows for powerful interests to capture the state, and the ISI is not the
first step to development, but it becomes pennant (Cypher 336-7).
There are numerous examples of these ISI
strategies that have been successful in the wild. Cypher notes that Japan and
Germany as “classic examples” (318) but doesn’t go into specifics like the
timing. He later notes that Japan’s industrialization dates to 1868 in the
Meiji restoration (321) but doesn’t note that the size of the Japanese
industrial base in 1939 which was largely wiped out in the next six years.
Other examples are the development banks of Brazil and Mexico (Cypher 330-1) to
India’s growth with the partial roll-back of the “License Raj” in the 1990s
(Cypher 338-41).
Define what export-oriented industrialization
(EOI) is. Explain, in detail, how EOI may help economic development and give
examples of EOI policies in less-developed countries. Finally, discuss the main
problems with EOI strategies.
Cypher notes that the ISI strategy has
diminishing returns (354), and as we saw earlier, one of the big problems with
ISI is that there is a sort of a trap in which if you set the import tariffs
and protect internal industries, it can easily become not a temporary policy,
but just how things are done. What a country needs instead is a solid
industrial policy so that once the diminishing returns kick in, there are next
steps that need to be addressed. There are a couple of different next steps.
The first would be doubling down on the ISI strategy so that instead of consumer
goods, moving into manufacturing of durable, intermediate and capital goods,
what Cypher calls “Difficult ISI” (364).
The other option is to turn your economy
outwards. Once the inward-looking easy ISI exists and has been successful, then
your nation’s companies should be ready to take those manufactured goods and
export them for sale one the world market. This “Export Substitution” is such
that the primary goods that had once been the bulk of your exports become less
important in your trade flows, and you are shielded from the declining terms of
trade that typify the Prebish-Singer Dilemma (Cypher 358). Expanding beyond
your shores is a good idea, especially if you are not the biggest country and
you have a limited domestic market. This expansion will allow for easier
attainment of economies of scale, and your national champions will become ever
more efficient (Cypher 359), figuring of course that they are competitive with
all other firms, or else they will die as their order book shrinks. Capitalism!
It is important to remember, that exporting,
just on its own, is no panacea. As Cypher notes “Exporting is not a new
phenomenon; the LDCs have always been exporters” (360). The importance is in
the staging of the outward looking orientation. You can’t just open your
markets and your exporters to the world stage, or else they will not have the
experience and expertise to compete. Also important is that growth in human
capital that is necessary to make the whole thing work (Cypher 361). It is not
just the firms, but the people in the firms that have the institutional
knowledge to make it all work. So, there is an overall investment need in
having the infrastructure build up from roads to ports to secondary schools and
universities. This has been successfully done in the East Asian economies of
Taiwan and Korea and Japan, as they went from nations of little national
endowment, and changed it from a liability and created comparative advantage in
their own technological and managerial know-how (Cypher 361). Their managerial
and process expertise grew so much that they overtook the developed western
nations and the business schools did what they could to capture and replicate
their secret sauce by reading books like “The Toyota Way””.
There are a couple of ways that this can fail, as noted in Cypher’s
work. The first is in Bangladesh, which he notes is stuck in the global race to
the bottom of the simplest manufactured goods and is notable for lax labor
standards. He says this is from low state capacity and little planning in terms
of industrial strategy (363). A different trap is institutional inertia. For
example, some nations are stuck in primary exporting roles because they have
the resources and can use those. If you can continue to export oil forever,
there is no incentive to stop exporting oil and develop your industrial base (Cypher
373), though we have seen some countries like Saudi Arabia recently realize
that the oil income won’t last forever and look at changing their industrial
strategy. Another is lack of state ability and corruptibility of the bureaucrats,
which allows for capture. One thing that is notable about countries that have
successfully made the export switch has been well-paid state workers. This has
allowed them to be efficient and less corruptible (Cypher 379).
Ultimately though, these are all broad strokes. Institutions
matter in making sure that your outward turn will be successful, but none of
the examples in a positive or negative light can be fully recommended. There
are economic outlines that are available, but there are huge political issues
that must be dealt with. One of the key components of this is time – if your
ISI plan is going to take ten years to fully implement, your government or
successive governments must have bought in. Perhaps therefore we have seen that
states with one party rule for long times have been successful, from China to
Singapore. But that is no guarantee, as long-tenured autocrats have also
successfully pillaged the state coffers without ever growing state capacity.
Discuss whether China's development model
resembles ISI or EOI
In reading the
chapters for this week, I read first from the handbook of development economics
chapters. What was striking in these readings is that China is not really
mentioned. I think Balassa mentions China only once. It was so striking, in
fact, that I had to look at the date. The Handbook has a date on it of 1989,
and the references are all mid-eighties or before (typical of academic
publications it seems – by the time the handbook comes out the data is a decade
old). What it means is that though China is an afterthought for Balassa and
Brutton, the rise of China as an industrial power has happened in my lifetime.
And in that
lifetime, I have seen China go from repressive government in 1989 to member of
the WTO in 2000 to potential superpower who needs to be countered at all costs
by our God-King president (even though the Chinese GDP per capita at PPP is
still a quarter of the US’s and the military spending is less than 200 billion
a year as we go to 800 billion a year – but I digress).
What I know of
the Chinese economy is that it has been more export oriented. We in America
lament the industrialization that went along with the rise of our economy in
the post war years, but China was the replacement for those workshops that
allowed America access to cheap consumer goods at Walmart and we didn’t have to
think of the labor abuses and the sludge draining off in the Yangtze river
because it happened over there. But as China rose, they were able to grow huge
cities (over a hundred cities with at least a million people) and industrialize
those cities, even with a weird Hukou household registration system that meant
that people who moved in from the countryside don’t really count as residents
of that city and aren’t eligible for the cities services. There was hand
wringing in the business press as China was producing too much for the foreign
market but not enough for consumption at home. This meant that there was high
savings rates and that savings had to be put to use – buying dollars or the
building of ghost cities and subway stops to nowhere (this all the result of
policy choices that limited traditional safety nets like large families in the
one child policy and the limited safety net so you needed to save as much as
possible).
China has been
turning more towards a consumptive policy, but even then, there are still
hundreds of millions of poor people who have been left out of the rise of the
nation, often being the non-ethnically Han people.
An important side
note is that it has been controlled by the communist party for the whole of
this rise. So, it isn’t a traditionally thought of exporter. We
went from making horrible steel in the back yard to building over capacity
through state firms or through inviting in foreign multinationals and giving
them stilted choices where they can have access to the Chinese market and
employment force, but you must share the technology you have with us. Cypher
notes that the transitions of all nations except for the first to industrialize
take place in context of nations that are already built, so there’s not real
menu of policy choices you can take off the shelf of other countries and hope
to fully replicate that success (383).
Works
Cited
Balassa,
B. (1989), “Outward Orientation” Chapter 31 in Handbook of Development
Economics, II.
Brutton,
H. (1989), “Import Substitution” Chapter 30 in Handbook of Development
Economics, II.
Cypher,
J. M. (2014). The process of economic development. London: Routledge, Taylor
& Francis Group.
