Import substitution industrialization or "Import-substituting Industrialization" (called ISI) is a trade and economic policy based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. The term primarily refers to 20th century development economics policies, though it was advocated since the 18th century.
Adopted in many Latin American countries from the 1930s until around the 1980s, and in some Asian and African countries from the 1950s on, ISI was theoretically organized in the works of Raúl Prebisch, Hans Singer, Celso Furtado and other structural economic thinkers, and gained prominence with the creation of the United Nations Economic Commission for Latin America and the Caribbean (UNECLAC or CEPAL). Insofar as its suggestion of state-induced industrialization through governmental spending, it is largely influenced by Keynesian thinking, as well as the infant industry arguments adopted by some highly industrialized countries, such as the United States, until the 1940s. ISI is often associated with dependency theory, though the latter adopts a much broader sociological outlook which also addresses cultural elements thought to be linked with underdevelopment.
Even though ISI is a development theory, its political implementation and theoretical rationale are rooted in trade theory – it has been argued that all or virtually all nations that have industrialized have followed ISI.
Mercantilist economic theory and practices of the 16th, 17th, and 18th century frequently advocated building up domestic manufacturing and import substitution. In the early United States, the Hamiltonian economic program, specifically the third report and magnum opus of Alexander Hamilton, the Report on Manufactures, advocated that the US become self-sufficient in manufactured goods. This formed the basis of the American School, which was an influential force during the United States's 19th century industrialization.
Indeed, Baer contends that all countries which have industrialized after the United Kingdom went through a stage of ISI in which the large part of investment in industry was directed to replace imports (Baer, pp.95-96). Going further, in his book Kicking away the ladder, Korean economist Ha-Joon Chang also argues, based on economic history, that all major developed countries – including the United Kingdom – used interventionist economic policies to promote industrialization and protected national companies until they had reached a level of development in which they were able to compete in the global market, after which those countries adopted free market discourses directed at other countries in order to obtain two objectives: to open their markets to local products and to prevent them from adopting the same development strategies which led to the developed nations' industrialization.
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