378 Economies in Development and Transition
for just such a policy in his famous Report on Manufactures, which he presented
to the House of Representatives in 1791.
Starting in the 1930s with the collapse of the international economy in the
Great Depression, many so-called developing countries began de facto strategies
of import-substituting industrialization (ISI) in order to increase domestic
production to fill the gap created by the decrease in foreign trade. After World
War II, especially in Latin America but elsewhere as well, this de facto strategy
was institutionalized de jure in high tariffs and explicit governmental policies
of industrial promotion. Behind protective walls, countries sought to substitute
domestic manufactures for foreign imports, first in light manufactures, such as
textiles, apparel, and food processing, and later in intermediate and capital goods
production.
Beginning in the 1960s, however, ISI started to come under increasing criticism.
Government incentives for manufacturing benefited industry at the expense of
agriculture—increasing rural-to-urban migration and often worsening income
distribution—and produced many distortions and inefficiencies in the economy.
The later stages of ISI, which focused on intermediate and capital goods production
and were often more dependent on technology and economies of scale in
production, also had the paradoxical effect of increasing national dependence
on foreign firms and capital. Yet despite these criticisms, virtually all countries
that have industrialized successfully have also adopted ISI for at least a brief
period. While many economists argue that success occurs in spite of trade
protection and government policies of industrial promotion, historical experience
suggests that some degree of import substitution may be a necessary prerequisite
for economic development.
In the 1980s, ISI generally gave way to policies of export-led growth. Many
developing countries came to recognize the economic inefficiencies introduced
by protectionist policies. The debt crisis of the early 1980s and the subsequent
decline in new foreign lending increased the importance of exports as a means of
earning foreign exchange. Rapid technological changes made “self-reliance” less
attractive. There were also important political pressures to abandon ISI. The World
Bank and International Monetary Fund (IMF), important sources of capital for
developing countries, pressed vigorously for more liberal international economic
policies. Proclaiming the “magic of the marketplace,” the United States also pushed
for more liberal economic policies in the developing world.
Particularly important in reorienting development policy was the success of
the newly industrializing countries (NICs) of East Asia: South Korea, Taiwan,
Hong Kong, and Singapore. All these states achieved impressive rates of economic
growth and industrialization through strategies of aggressive export promotion.
While they all adopted ISI during their initial stages of development, the NICs
generally sought to work with, rather than against, international market forces.
With well-educated labor forces but limited raw materials, the NICs exploited
their comparative advantage in light manufactures and, over time, diversified into
more capital-intensive production. Today, the NICs are among the most rapidly
growing countries in the world, and they have achieved this result with relatively
egalitarian income distributions.