A Reconsideration of Import Substitution

Abstract

This paper studies the origins of an import substitution strategy of development, summarizes the consequences of that strategy, and reviews the problems that led to its failure. The fundamental difficulty was its discouragement of the indigenous social learning necessary for sustained, independent development. The emergence of an outward-oriented, minimal-government strategy is due to the success of Korea and Taiwan. This strategy fails to recognize that social learning requires a strong role for national agents and that this role can be penalized by undue openness. An effective strategy must protect and induce domestic learning without penalizing exporting.