Import Substitution

In: Business and Management

Submitted By goodmorning
Words 565
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Question (1a)
Import Substitution Industrialization is an economic policy that emphasises the replacement of imports with domestic production. Many Latin American Countries adopted this policy in a bid to achieve self-sufficiency by reducing its dependence on foreign imports. By using this policy, the Government will either nationalise or heavily subsidise certain industries and even employ protectionist measures on infant industries. Heavy taxes will be placed on imports and exports to discourage local merchants from exporting and in turn, reducing the amount of goods for their local customers.
There are many disadvantages in promoting import substitution strategies that will ultimately lead to lower growth rates and possible future recession for the country.
Firstly, local industries will become more inefficient over time. Local industries that have long enjoyed the heavy subsidies and protectionist measures from the government will have no incentive to improve themselves. As they only cater to the domestic market, if demand remains constant, an increase in production will only drive down prices. Hence, these industries will not push for increased production, resulting in continued inefficiency.
Furthermore, with the high taxes imposed on exports, local companies will not sell their goods overseas. By only selling to the domestic market, they do not enjoy economies of scale. Certain industries need to sell to a large market in order to be profitable, and a domestic market will be too small. A lone automotive maker in Peru would enjoy natural monopoly, but even that would not ensure profits for the company.
Lower growth rates
Countries which adopt Import Substitution strategies will have a problem with a Balance of Payments Deficit (Bizcovering, 2010). With the production of consumption goods, manufacturers will face difficulty sourcing the primary goods, in…...

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