Article: "Turning Inward," The Economist, November 7, 2020
We all know COVID-19 has disrupted supply chains. So has rising suspicion of China in the West. The global economy is decoupling, according to The Economist, as it has been since the financial crisis of 2008. Given the major supply chain shocks that are causing the industrialized world to look increasingly inward, an old idea is becoming popular once again in emerging markets: import-substituting industrialization. The article defines this practice as, "a strategy that seeks to develop industrial capacity by shielding domestic producers from foreign competition." Practices associated with ISI are tariffs, subsidies, and government protection of key industries (sound familiar?). However, the goal in ISI is not to protect jobs or workers, but to develop a mature, industrial economy.
The article points out ISI's flaws, which I agree with: despite its promise, ISI will not deliver long term growth to most emerging markets. First, most emerging economies are not highly effective autocracies run by technocrats (read: they are not China). This means that firms will likely be protected not for economic reasons, but political ones. Further, even firms that are protected for their economic potential will, when shielded from foreign competition, have no incentive to become more efficient or to be responsive to consumer demand. Finally, although this is not mentioned by the article, I think the global economy will, in the long run, return to the enthusiasm for globalization present before the financial crisis. When this happens, emerging markets will need to be able to compete in a world where developed nations will (albeit a little hypocritically) insist upon the principles of free trade being adhered to.
What do you think? Are there any countries or circumstances in which ISI might be beneficial?
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