# Import Substitution Industrialization (ISI): Definition, History, and Examples

![Import Substitution Industrialization (ISI): An economic policy sometimes adopted by developing nations to decrease their dependence on developed countries.](https://www.investopedia.com/thmb/UV_pl-bpbs7AdtT4vTnbvMu68JU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Importsubstitutionindustrialization_fina-6e602d6aeb31439b996af6b00418c418.png)

*— Investopedia / Michela Buttignol*

## What Is Import Substitution Industrialization (ISI)?

Import substitution industrialization (ISI) is an economic strategy where developing nations focus on reducing dependence on developed countries by nurturing domestic industries. This policy, prominent during the 20th century, sought to develop self-sufficient economies. While initially effective, ISI faced challenges in later decades, leading to a shift towards market-driven policies.  

### Key Takeaways

*   Import substitution industrialization (ISI) is an economic policy where developing countries nurture domestic industries to become self-sufficient and competitive with imported goods.  
    
*   ISI strategies include the use of tariffs, import quotas, and government loans to protect and grow local industries.  
    
*   The ISI approach conflicts with the comparative advantage theory, which advocates for production specialization and international trade.  
    
*   ISI gained popularity in the 20th century, particularly in Latin America, but countries began to move away from it in the 1980s and 1990s due to economic challenges.  
    
*   Structuralist economics, which informed the ISI, emphasizes examining a country's unique political, social, and institutional structures in economic development.

## How Import Substitution Industrialization (ISI) Works

The primary goal of the implemented substitution industrialization theory is to protect, strengthen, and grow local industries. This is achieved using tactics like tariffs, import quotas, and government loans.

Countries implementing this theory attempt to shore up production channels for each stage of a product's development. 

> **Important**
>
> ISI runs directly counter to the comparative advantage concept that occurs when countries specialize in producing goods at a lower opportunity cost and export them.

## A Historical Overview of Import Substitution Industrialization (ISI)

While ISI was a 20th-century policy, its roots trace back to the 18th century.  
REASONING: The sentence was broken down for clarity, making it easier to follow. Economists like Alexander Hamilton and Friedrich List supported it.

Countries in Latin America, Africa, and parts of Asia first adopted ISI to build self-sufficiency by creating internal markets. Subsidizing key industries like power and agriculture, and promoting nationalization and protectionism, supported ISI's success.

Developing countries began rejecting ISI in the 1980s and 1990s due to global market liberalization and structural adjustments by the IMF and World Bank.

## Key Economic Theories Behind Import Substitution Industrialization (ISI)

The ISI theory relies on various developmental policies. The foundation is composed of the infant industry argument, the Singer-Prebisch thesis, and [Keynesian economics](https://www.investopedia.com/terms/k/keynesianeconomics.asp). A group of practices can be derived from these economic perspectives:

*   A working industrial policy that subsidizes and organizes the production of strategic [substitutes](https://www.investopedia.com/terms/s/substitute.asp)
*   Barriers to trade such as tariffs
*   An overvalued currency that aids manufacturers in importing goods
*   A lack of support for foreign direct investment

Related to and intertwined with ISI is the school of structuralist economics. Conceptualized in the works of idealistic economists and financial professionals such as Hans Singer, Celso Furtado, and Octavio Paz, this school emphasizes the importance of taking the structural features of a country or a society into account in economic analysis. This includes political, social, and other institutional factors.

A critical feature is the dependent relationship that [emerging countries](https://www.investopedia.com/terms/e/emergingmarketeconomy.asp) often have with developed nations. Structuralist economics theories further gained prominence through the United Nations Economic Commission for Latin America (ECLA or CEPAL, its acronym in Spanish). Latin American structuralism has become a synonym for the era of ISI that flourished in various Latin American countries from the 1950s to the 1980s.

## Case Studies: Successful Applications of Import Substitution Industrialization (ISI)

The ECLA was created in 1950 with Argentine central banker Raul Prebisch as its executive secretary. Prebisch outlined an interpretation of Latin America's burgeoning transition from primary export-led growth to internally oriented urban-industrial development in a report. That report became "[the founding document of Latin American structuralism](https://www.academia.edu/19963573/_The_Rise_and_Decline_of_Latin_American_Structuralism_and_Dependency_Theory_in_Jomo_K.S._and_E.S._Reinert_eds._The_Origins_of_Development_Economics_How_Schools_of_Economic_Thought_Have_Addressed_Development._London_Zed_Books_and_New_Delhi_Tulika_Books_2005_pp._128-145)," to quote one academic paper. It became a virtual manual for import substitution industrialization.

Inspired by Prebisch, many Latin American nations adopted some form of ISI in subsequent years. The sentence has been split and simplified for improved readability. Nations like Argentina, Brazil, and Mexico eventually produced advanced products like machinery, electronics, and aircraft domestically.

The implementation of ISI was successful in several ways, but it did lead to high [inflation](https://www.investopedia.com/terms/i/inflation.asp) and other economic problems. Many Latin American nations sought loans from the IMF and the World Bank when these problems were exacerbated by stagnation and foreign debt crises in the 1970s. These countries had to drop their ISI protectionist policies and open up their markets to free trade at the insistence of these institutions.

## How Does a Tariff Work?

A tariff works like a tax. It can be a flat rate charged on one item or a percentage of that item's value. Tariffs are normally found in international trade markets. They're commonly used as a way to protect domestic producers and the country's economy.

## What Are Some Examples of a Protectionist Trade Policy?

A protectionist trade policy is legislation that blocks or restricts international trade. Tariffs are an example of protectionist policy as are import quotas that limit how many products a country can import.

## What Are Keynesian Economics?

The concept of Keynesian Economics is credited to British economist John Maynard Keynes. Keynes' economics include the theory that individuals save more during a recession but this is a detriment to an ailing economy. Keynes also believed that lowering interest rates wouldn't increase demand for products. Perhaps most notably, he argued that more government spending would rescue an economy from tough economic times.

## The Bottom Line

Import Substitution Industrialization (ISI) is an economic policy that developing nations adopted to achieve self-sufficiency by nurturing domestic industries to compete with imported goods. Implemented through tariffs, import quotas, and subsidies, ISI aimed to reduce dependency on developed countries. However, nations began to reject ISI in the 1980s and 1990s due to the rise of market-driven liberalization and its association with economic issues like high inflation and stagnation. While it initially succeeded in building local industries, ISI ultimately faced challenges that led to its decline. Understanding the historical context and impact of ISI offers valuable lessons for countries navigating industrial and trade policies.

> **Article Sources**
>
> 1.  Saylor Academy. "[Import Substitution Industrialization](https://staff.saylor.org/mod/book/tool/print/index.php?id=67196)."
>     
> 2.  Cambridge University Press. "[Raul Prebisch and the Origins of the Doctrine of Unequal Exchange](https://www.cambridge.org/core/journals/latin-american-research-review/article/raul-prebisch-and-the-origins-of-the-doctrine-of-unequal-exchange/0ACFBB0B92F3FD4F79611C79CEB54291)."
>     
> 3.  CFI Education. "[Tariff](https://corporatefinanceinstitute.com/resources/economics/tariff/)."
>     
> 4.  Lumen Learning Macroeconomics. "[Protectionism](https://courses.lumenlearning.com/wm-macroeconomics/chapter/protectionism/)."
>     
> 5.  Economics Help.org. "[Keynesian Economics](https://www.economicshelp.org/blog/6801/economics/keynesian-economics/)."