WELL COME 2

OUR PRESENTATION

Group H

Group member

Kazi Tanvirul Islam

S.M. Zayed Siraj

Jannatul Ferdows

Umme Kulsum

I D

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Jahanoor Haider

Our topics isImport Substitution Industrialization

Import

Import Substitution Industrialization• Import substitution industrialization or "Import-substituting Industrialization" (called ISI) is a

trade and economic policy that advocates replacing 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. The term primarily refers to 20th century development economics policies, though it was advocated since the 18th century.

• Government intervention and protection of industries that would be serviced by imports in a free market environment.– Included: licensing, tariffs, and government investment in local industry (built plants,

etc.)

Reasons for ISI• It is dangerous to rely on one primary commodity export industry.• Deteriorating terms of trade for necessitate intervention.• Labor intensive exports trap workers in low wage industries.• Helps “infant industries” grow.• Cut imports rather than encourage exports.

Externally: ISI Distorts BoP• Imports are blocked = less currency in international market = inflated exchange

rate.• This contributes to less competitive export industries = reduced tax revenue from

abroad. High FER = negative Bop = budget deficit

Domestic Effects of ISI• At the same time, ISI necessitates government investment in modernization at

expense of traditional industries.• Demands for skilled workers.• Low interest rates cause low savings rate and investment in heavy industry.• Inflation due to high cost of goods manufactured domestically.

Including Thoughts• ISI served a purpose.• It was a step in the process of industrialization.• Government can stimulate free market forces, but not replace them.• ISI needed an exit (transition) strategy from the start.

Major Criticisms of ISI• Chronic problems with the balance of trade and payments• Deep recessions• ISI countries tended to run substantial budget deficits and inflation• Negative impact on income distribution• Incentive for capitalists to resist state planning

Goodbye ISI – Hello Trade Reform• Strong labor unions wanted, government could grow fast enough, and

class tension erupted.• Crawling peg Fx rate = inflation.• Export subsidies = government borrowing = more deficit & more imports.

• The Great Depression caused a drop in commodity prices, foreign exchange reserves dried up, and countries could not buy necessary imports.

• Lots of exports and nothing to import.

The Rise of ISI

Implementation of ISI• Economy-wide strategy designed to establish new industries.• Included: licensing, tariffs, overvalued Fx, and government investment in

local industry (built plants, etc.)• Easy access to credit / low interest rates.

Thank you all