Import substitution strategy is more appropriate-able for developing countries, but at the the same time it should be supported by export promotion strategy because they are complementary strategies

Dear Frank,

Some developed countries that used import substitution were hurt because they relied on some imports to maintain their economic base but failed to obtain them. Think of some of countries that relied on machinery to run their import substitution industry such as sugar and rice. Manufacturers from abroad retaliated by not sending repair parts to those countries that nationalized their business is such area. In some countries those industries became severely distressed.

So, it seem that import-substitution countries should be specialize in areas where the countries have procured machinery from many source or local FTA area before they make the switch.

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Import-substitution (ISI) was "the" way to development in the 1950s and 1960s, and remained so in the 1970s, even if some Asian developing countries were implementing Export-led growth. Even the World Bank was convinced: I remember analysing development projects financed by them in the early 1980s, and one of the criteria was the amount of hard currency saved by substituting imports.

Most ISI policies failed for a series of unexpected (even if expectable) reasons. Mainly for the poor quality of the products, the difficulty of producing complex investment goods and the rent seeking attached to protected monopolies.

Export-promotion reduces many (most?) of these bias as long as exports are not systematically subsidised by the State, because the products have to compete for price and quality on the international market without being protected from competition. This greatly reduces the risk of rampant X-inefficiencies, which characterised most ISI industries in the 1970s and 1980s.

This said, ISI policies have the nice political economy property of being easier to implement and very popular with local stake-holders (bureaucracy, capitalists, trade unions...). Except perhaps for the voice-less consumers, but (in the past at least) they used to realise too late that they were on the losing side of the deal. Things may have changed today, because consumers are much more globalised (TV, Internet, mobile phones), know from Amazon how much it costs in other countries to buy a shirt or a washing machine and are less willing today to be forced to buy low quality/high price obsolete products. The days of the Trabant are gone...

Agriculture is certainly an exception to this sad story. In the past, most ISI policies squeezed agricultural prices (for example, imposing low regulated prices for food and banning exports) in order to favour urban workers. Today, at the contrary, even trade-oriented policies try to protect their agricultural basis for food security, social or ecological reasons.

To conclude: there are many books written on the pro and cons of ISI. Many of them use the Latin American example. Latin American economists formalised the economics of ISI in the 1950s and 1960s (Prebish, Furtado, etc.) and most (all?) LA countries followed ISI policies as long as they could (id est,up to the Balance of Payment crisis of 1982). So, they accumulated very interesting experience on how it works and why it fails (many of the books are in Spanish or Portuguese, but I think it should not be difficult to find translations). And, obviously, there is the famous paper by Anne Krueger: The Political Economy of the Rent-Seeking Society (The American Economic ReviewVol. 64, No. 3 June, 1974)

good work