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What is Import Substitution?

Photo: Hussain Haleem (FB)

Import Substitution is a trade and economic policy which advocates replacing foreign imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products.

It is a Government strategy that emphasizes replacement of some agricultural or industrial imports to encourage local production for local consumption, rather than producing for export markets. Import substitutes are meant to generate employment, reduce foreign exchange demand, stimulate innovation, and make the country self-reliant in critical areas such as food, defense, and advanced technology.

It was a popular development strategy in the 1950s and 1960s. Essentially, this strategy is just an application of the infant industry argument.

However, many of the countries that pursued these kinds of inward-looking strategies, most notably countries in Latin America and Africa, performed considerably less well economically than many countries in Asia.

The Asian countries - such as South Korea, Taiwan, Hong Kong, and Japan - pursued
what have been labeled "export-promotion" strategies instead.

Since many of these Southeast Asian countries performed so much better economically, it has lent some empirical evidence against the application of infant industry protection.

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