Question

What problems did quotas bring to Latin America during Import Substitution Industrialization (ISI)?

Answer 1

Import substitution industrialization refers to the theory of economics followed by developing countries or emerging-market nations that focus to decrease their dependence on developed countries. This theory targets the newly formed domestic industries in terms of the protection and incubation of sectors so that the goods produced are competitive with imported goods. This theory brings self sufficiency in local economies and their nations.

The primary motive of implementing the substitution industrialization theory is to protect, provide strength and help in growing local industries using a variety of tactics, including tariffs, import quotas, and subsidized government loans. The countries which are implementing this theory attempt to increase production channels for the development of a product's at each stage.

Despite some apparent gains, import substitution produced high economic and social costs and was unsustainable over time." It relied upon the growth of a market that was limited in size. In most cases, the innovation and efficiency was reduced due to lack of experience in manufacturing and the lack of competition, which restrained the quality of Latin American produced goods, and the prices were kept high by protectionist policies. In addition, power was concentrated in the hands of a few, which decreased the incentive for entrepreneurial development.

Contrary to its intent, import substitution exacerbated inequality in Latin America. With a poverty rate higher than 30%, the internal demand that import substitution relied upon was not available. Protective policies and state ownership reduced the incentives for business risk, which resulted in decreased efficiency. The large deficits and debts resulting from import substitution policies are largely credited for the resulting Latin American crisis of the 1980s.

Critics of economics, however, insist on arguing that the elimination of tariffs in nations with immature tax systems reduces the government revenues that are required to service public debt.