19 March 2008

Import Substitution

Import substitution is a policy for stimulating economic development in which the immediate object is to stimulate the domestic production of items the country usually imports. An example would be an African nation whose authorities try to replace imports of furniture with local production of furniture.

The purpose of import substitution is manifold. First, a country may well be stuck exporting only items with a low value-added content, such as raw lumber. Such a country might have a ruling elite (indeed, it almost certainly would) for whom a large volume of foreign luxuries are imported, such as cell phones and motorcars. Such a country would suffer from chronic unemployment (with no industries) and current account deficits. The local currency would be worth so little that one could, for example, buy an immense amount of land with euros and expel the subsistence farmers living there, perhaps for use as a game preserve; or one could build a large, extremely polluting factory, contaminating vast amounts of the local groundwater. This was a common thing in the late 1950's, and naturally motivated a lot of independence struggles. But with foreigners or agents of foreigners owning virtually everything, independence was meaningless unless there was some way the local population could get out of debt to the foreigners. Hence, both development economists (in rich countries) and nationalists (in poor ones) favored import substitution because it incorporated a plan to pay the bills.

Another purpose of import substitution, mainly of interest to nationalists, was the development of a middle class. Underdeveloped countries suffer from a weak or nonexistent manufacturing sector, which means any middle class (urban professionals, middle managers, and small entrepreneurs) will be both small and wholly dependent on the government. Such a county will have no constituency for any public investment, no sense of national solidarity, and no civil society. The economy will consist solely of getting raw materials out of the country with as little obstruction as possible from anyone who happens to live there. As it happens, this is a problem endemic to underdeveloped nations and tends to be self-perpetuating.

There are two alternative concepts to IS:
  1. A generalized rejection of modern industry or economic growth; this usually takes the form of a decentralized insurgency;
  2. A neoliberal policy of export stimulation, in which the country's authorities foster existing industries as a comparative advantage."
Alternative one is usually an ad hoc reaction to colonial/neocolonial degradation or social collapse; I am not aware of any state actually adopting this as a policy (because states are inherently expensive and need development to exist); it's a philosophy adopted by conservative insurgents, such as Deobandis or Salafists.1 Alternative two is usually based on the doctrinaire application of abstract economic doctrines to policymaking, while disregarding plausible market conditions. It assumes that the demand for any good can expand indefinitely, provided its production becomes more efficient.

Kindred Concepts: The Developmental State

The policy recommendations for the expansion of a nation's economy take two general forms. One is based on the minimalist state, and is regarded as economically orthodox. It assumes that any nation has a comparative advantage in certain goods, and therefore will benefit by specializing in producing those things for which it is already strong. Accordingly, a country which already exports mainly raw lumber needs to focus on becoming better at exporting raw lumber. This may involve a favorable tax structure favoring investment in logging and barge loading, gutting of environmental regulations, and minimal government services. Economists usually advocate such policies regardless of a country's state of development.

The other policy recommendation is for a developmental state in which state revenues are channeled into some strategic program for economic growth. Developmental states usually include import substitution because a current account deficit or poor terms of trade pose the greatest threat to the less-developed economy.

The Decline of Import Substitution

Import substitution flourished during the 1950's through the 1970's. In regions where it was attempted, results could be categorized three ways.
  1. In countries with a ruling military establishment, such as Brazil (1964-1985), Thailand (1936-present, with interruptions), and Indonesia (1965-1999), import substitution mainly targeted strategic items such as weapons, metallurgy, chemicals, and specialized machinery. Some consumer goods were protected and pressure was applied to foreign companies to add some value domestically. This would be a source of illicit revenue for the ruling elites.
  2. In countries with a civilian political establishment, or those sharing power with the military, IS tended to target consumer goods, such as furniture and some electronic components (e.g., TV sets). The motivation was logical, i.e., it served the general economic needs of the nation rather than the narrow needs of the ruling elite. Over time, these industries stabilized and became competitive. When protection was withdrawn, the substitute industries survived.
  3. In countries with a very weak, precarious political establishment, such as many African nations, IS was determined mainly by urgent conditions; for example, where unemployment was a serious problem, IS targeted labor intensive industries like textiles. The preservation of local jobs was a form of patronage that became more valuable as the jobs themselves became more vulnerable. At a certain point, the regime was compelled to withdraw protection, and the substitute industries collapsed (e.g., textiles in Zambia).
These three distinct patterns have strongly reinforced older distinctions between LDCs. The contrast between regions with rising levels of wealth (China, India) and those with stagnating levels (much of Africa, Latin America) has become more pronounced largely as a result of IS being withdrawn as a viable policy option.

1 Salafism is usually referred to as "Wahhabism," after its founder; it is the state religion of Saudi Arabia. See "Salafism," Hobson's Choice. The Deoband movement that has come to dominate in Pakistan’s seminaries can itself be traced to the reformist Deoband movement established in 1867 in Deoband in Northern India. See Prof. Barbara D. Metcalf, "Traditionalist" Islamic Activism: Deoband, Tablighis, and Talibs," Social Science Research Council (2002?)

Deobandism and Salafism are closely identified with the Taliban of Afghanistan, Lashkar-e-Toiba, and al-Qaeda. Unlike other forms of radical Islam, the Deobandi and Salafism represent hard right movements in their respective societies: movements generally favorable to the established economic elites, if not their current political lackeys. They are also obscurantist and violently oppose developmentalist policies. It is my view that terrorist groups such as Lashkar-e-Toiba, et. al., are motivated chiefly by anti-developmentalism, obscurantism, and dread of a strong nation-state; and Islam is co-opted so that such ideologies can compete ideologically with earlier reformist movements such as al-Ikhwan Muslimun (Muslim Brotherhood).

Bruce G. Carruthers & Sarah L. Babb, Economy/society: Markets, Meanings, and Social Structure, Pine Forge Press (1999)

Susan Margaret Collins & Jeffrey Sachs, Developing Country Debt and Economic Performance: Country Studies--Indonesia, Korea, Philippines, Turkey, University of Chicago Press (1989)

Interesting subtopic:
A.C.M. Jansen, "The economics of cannabis-cultivation in Europe," 2nd European Conference on Drug Trafficking and Law Enforcement, Paris, (Sep 2002)

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