Import Substitution as an Economic Strategy

Abstract

Inward orientation, or import substitution as it is often called, is an economic strategy that aims to accelerate economic growth and industrialization by substituting domestic production for existing imports and by forestalling future imports as demand grows. In most countries, inward orientation has been an interventionist strategy that shifted incentives away from agriculture and toward industry. It can be achieved through altering relative prices, for example, by levying tariffs or imposing quotas to restrict external sources of industrial goods. Either form of intervention causes domestic prices of industrial goods to rise and creates additional incentives for domestic investment in manufacturing plant, equipment, and other inputs. Alternatively, inward orientation can be achieved through intervention in the domestic economy to reduce the prices received for agricultural produce and/or to subsidize production of industrial output.