Traditionally, there are two alternative industrialisation strategies viz export promotion and import substitution industrialisation strategies.
The policy implication of this dichotomous approach is that developing countries have a choice on what industrialisation path to follow to enhance development.
They may decide to follow Export Promotion or Import Substitution Industrialisation Adoption or pursuance of either of the two industrialisation options, which entail different policy packages.
Many Sub-Saharan countries pursued import substitution industrialisation in preference to export promotion. What then are the arguments that are used to justify the adoption of import substitution industrialization. Several arguments exist as to why import substitution strategy has been pursued in developing countries.
Firstly, among late starters in the industrialisation process import substitution, strategy appears to be a natural starting point. As countries begin to industrialise, it is natural they will start by replacing the products they previously imported.
Previously imported products are well known within the market and the population is already familiar with such imports. These products, therefore, provide a natural starting point for any industrialisation strategy.
After independence, the majority of Sub-Saharan countries lacked any substantial manufacturing base. One of the major tenets of colonial industrial policy was to ensure no any significant manufacturing base develops in the colonial territories. As a consequence, the colonised countries were basically reserved as markets for the imperial companies. Colonial countries, therefore, attained independence without any manufacturing base.
These countries relied exclusively on imports for their manufactured goods. Within this context, therefore, it was only rational that these countries started by producing at home the goods and services they previously imported. The conditions that existed at independence dictated the adoption of import substitution industrialisation.
Following the above position, it is argued that investment in import substitution industries in developing countries is fairly easy. It eliminates the complex procedures of market research to determine whether the products to be substituted will have a market or not. The very existence of imports indicates there is a demand for the products. If there was no demand for the products, there would be no imports in the first place.
Imports, therefore, indicate the existence of profitable investment opportunities for local substituting investors. This is so especially that domestic substituting investors would be protected from external competition by government policy, designed to enhance import substitution, for domestic investors import substitution, which provides a guaranteed market for their products. Domestic investors have security and certainty that they will continue in production – and this provides incentives for investment.
As earlier stated, industries that operate on the international market face strong competition, and their continued operation is not guaranteed. Given the economic characteristics of most developing countries, such as a weak technological base, import substitution provides the only alternative to ensure existence of local industries.
A collorary argument to the one above is sometimes referred to as the “infant Industry” thesis. The major theme of this argument is that industries in developing countries are still in their infancy stage. According these industries, they will tend to have higher operational costs, weak technologies, insufficient skills, etc. The products from these industries will tend to be inferior, compared to those produced by industries from developed countries.
On the other hand, industries in developed countries have been established over a long period (sometimes spurring centuries), and have relatively more advanced technologies and skills – and consequently produce more superior products.
Given the contrasting characteristics of industries in developing countries and those from developed countries, it is argued that allowing competition between the two would be disadvantageous to industries in developing countries. Industries in developing countries would fold up due to this competition.
Industries in developing countries therefore need to be protected in the growing period until such a time that they are able to compete effectively with industries from the developed countries. Import substitution in developing countries should therefore be seen as a way of protecting and ensuring growth of domestic industries.
According to the Namibian Statistics Agency’s Bulletin for June, Namibia’s imports stood at N$10.5 billion, reflecting a decrease of 15.9% month-on-month and a 24.8% increase year-on-year. Namibia imported cutlery products, valued at N$7.2 million, mostly sourced from South African and China. Following these developments in both flows.
Namibia’s total merchandise trade (exports plus imports) decreased by 17% from its May 2022 level of N$18.8 billion to N$18.4 billion recorded in June 2022. Namibian consumers have imported N$3.7 billion worth of goods, which resulted in a trade deficit of N$2.5 billion. This is 59.4% lower than the N$6.1 billion recorded in May 2022. The cumulative trade activities continued to increase.
Furthermore, import substitution, especially in the late phases guarantees a steady supply of vital inputs. Import substitution is an attempt at guaranteeing a steady supply of inputs that are so vital to the whole process of production. Import substitution lessens external vulnerability in developing countries. It has also been argued that import substitution saves foreign exchange in importing various commodities.
Foreign exchange is a scarce resource in developing countries, which require rationalisation in its use. Foreign exchange should be spent on products that a country has no capacity to produce. Import substitution is meant to start producing at home those products that the country has potential to produce.
This implies that the scarce foreign exchange can be spent on importing products that are vital to the development process that the country cannot produce. There is little sense for the country to spent scarce foreign exchange on importing sweets when domestic produces can do so. This diminishes the resources that should be spent on more important imports.
The conclusion that can be drawn from this article is that import substitution in developing countries is a result of objective conditions and rational reasoning. However, there is a genuine observation that import substitution industrialisation in developing countries has not performed to expectations. The strategy has led to the establishment of gigantic white elephants that are so costly to operate.
Over time, these import substitution industries have been maintained through huge subsidies that have dwindled public resources. The industries have acquired huge debts that have contributed to the current debt crisis in developing countries.
Their services and products have been shoddy and expensive. The majority of the population have not enjoyed any substantial benefits from import substitution industries. After three decades of the import substitution industrialisation strategy, time has come to re-examine this strategy to come up to grips with reason for its dismal performance and devise new strategies on how to move forwards.