Import-Substitution and Industrialization is an economic policy that aims to promote the replacement of imports with locally produced goods, mainly industrialized goods. The main concept behind this policy is that a nation should try to minimize its reliance on foreign goods by domestically manufacturing industrialized goods. Usually, countries that tend to depend on importation of goods should start focusing on their production of goods that they previously imported. The goal is to not only make these nations less dependent on external goods but also to build their economy via industrialization.
The concept of import substitution and industrialization emerged in the Latin American region courtesy of the Second World War. Countries in this area sought to protect, grow and strengthen their domestic industries through various tactics such as subsidizing government loans, import quotas, and trade tariffs. Today, a great number of Latin American states have adopted import substitution and industrialization policy with the aim of becoming highly self-sufficient and less vulnerable to uncertain terms of trade. Since the implementation of this policy, these countries have successfully built production channels for each stage of their product development. This has helped these countries to protect themselves and avoid being vulnerable to external terms of trade, especially the negative terms.
The main idea is that countries are spending lots of income on commodities manufactured by overseas nations, which in the end sends money away from the domestic economy. Therefore, import substitution and industrialization is one way to prevent money from leaving the local economy because it links the domestic demand for commodities with the domestic suppliers of these products. Most products and services that businesses and individuals needs can be easily found from local suppliers; however, because of insufficient convenience or information, people often buy these things from the outside. This promotes the exit of capital from the economy. Hence, through substitution of demand for foreign goods with domestic things, a country may retain capital for use within the local system.
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