Teaching Comparative Government and Politics

Wednesday, November 02, 2011

Antique economics

In these times of globalization and the World Trade Organization, we, in the West, don't hear much about import substitution. After all, the policy got such a bad name after the 17th century when it was called mercantilism. Of course, when the newly independent USA followed Hamilton's version of mercantilism, it seemed more palatable to Americans than the British version had been.

After the Second World War, many African, Asian, and Latin American countries followed some version of import substitution to build up their economies. The simplistic logic seemed unassailable. Protect infant domestic industries with tax and trade policies, keep investment, consumer spending, and jobs within the national borders. However, when protected industries began inefficiently producing shoddy merchandise at high prices, many people began to question that simplistic logic.

In the '70s, the "Asian tigers" began implementing a new version of import substitution that focused on producing for export. This forced protected industries to compete on global markets and worked so well that China adopted its own version.

Former economics teacher Bisi Daniels, writing in This Day, offers his thoughts on import substitution for Nigeria.

The Case for Import Substitution in Nigeria

I was one of the many Nigerians who rejoiced over the Federal Government’s decision to commit itself to an import substitution programme and to do everything to promote local industry.

As a believer in Domestic Direct Investment, I am also excited by government’s reasoning that patronizing locally-made goods is a way to “reward those who demonstrated the confidence to invest in the Nigerian economy.”…

I must also say upfront that the history of Import-substituting Industrialization (called ISI) calls for a cautious approach. Not everything must be produced locally…

ISI [import substitution industrialization] is a government strategy that replaces some agricultural or industrial imports to encourage local production for local consumption, and in some carefully planned cases, for exports. Import substitutes are traditionally meant to generate employment, reduce foreign exchange demand, stimulate innovation, and promote self-reliance in some critical sectors.

With increasing globalization and the breaking of international trade walls, ISI sounds like an old school model, but there is a robust case for its suitability in Nigeria, at least for now…

ISI was most successful in countries with large populations and income levels which allowed for the consumption of locally produced products…

Ultimately, when the popularity of ISI waned in the late 20th century, it was on account of its disadvantages and the dramatic growth effects of economic liberalization and reforms.

The disadvantages includes the fact that industries under ISI become complacent under the protection they enjoy and end up as inefficient and obsolete, producing poor quality goods. Inefficiency and low output reduce cost effectiveness. Above all, there is a build-up of unnecessary bureaucracy that breeds corruption. Nigeria has had more than a good share of this wastefulness…

A successful ISI in Nigeria will require the creation of a fertile environment for industry to thrive at minimal cost. And of course, we should be considerate of industries with clear linkages with the country’s agricultural and petroleum wealth for immediate impact...