Import Substituting Industrialisation (ISI), Feb.

9th 2009 LDCs have had to import manufactured goods, thus valuable hard currency (convertible currencies: Dollar, Euro, Yen, CHF, etc) MDCs Thai baht is not convertible. Why? Not regarded as secure. Many LDC government decided to adopt ISI: they wanted to replace imported goods with domestically produced products. They knew consumers demanded fridges, motorbikes, etc, so they simply needed to replace foreign supply with domestic supply. Thus, govt gave subsidies for domestic firms to produce manufactured goods for the domestic market, e.g. tractors. In terms of encouraging industrialisation it worked. Percentage of GDP for manufacturing increased a lot. But GDP per capita did not improve significantly, because ISI simply satisfied the domestic market. Either domestic firms were too small to gain economies of scale (hence inefficient), or they were to small and they faced no competition resulting in socalled x-inefficiency. As a result prices rose affecting consumers and other manufacturers. Damage firms that were efficient by subsidising ONE firm. Economic liberals concluded that ISI failed because it went against free trade, against theory of comparative advantage, created white elephants (waste of money) that could only survive with government support (funding and/or protectionism). Consumers suffer through higher prices and inferior products. Trade balance didnt even improve. Imports of consumer goods were replaced by imports of parts (input goods) and machinery. Job creation was far less than expected and hoped, skilled jobs tended to be filled by foreign workers. The focus on ISI directed money and capital and labour away from the more efficient industries, which inevitably suffered, especially if these firms had to buy goods from ISI firms, e.g. tractors. Export led growth encourage to sell abroad, therefore not restricted to domestic market develop economies of scale. Why was export-led growth so successful? 1. Factor endowment: labour abundant, capital scarce, land scarce; production reflected the countrys factor endowment (Hecksher Ohlins Theory) it reflects comparative advantage 2. Efficiency: firms had to be efficient, otherwise would have died (no more subsidies, because no longer competitive, no more exports) BUT arguably export-led growth was simply an extension of ISI. Initially Japan and Korea protected their markets from imports, therefore giving infant firms the chance to grow and survive.

Difference: AIM of ISI is simply to produce domestically to satisfy domestic demand. The aim of export-led growth is to produce more than domestic Quantity Demanded and to export as much as possible. Comparative advantage isnt static; it is DYNAMIC!!! Changes. LDC exports: low-tech manufactured goods. E.g.: plastic goods, buckets, toys, balls, dolls, textiles and clothing. Over time, exports became higher tech, as innovation would be copied.