A major setback encountered by developing economies that adopted early Import Substitution Industrialization (ISI) policies was that, rather than easing foreign exchange strain, the strategy often intensified dependency on foreign exchange. Which of the following factors primarily accounts for this unintended outcome?
- The continuous need to import machinery, capital equipment, and spare parts to maintain domestic manufacturing plantsAnswer
- BThe immediate appreciation of local currency resulting from a sudden surge in agricultural commodity exports
- CThe removal of protective tariffs and quotas on imported finished consumer goods
- DThe overproduction of non-traditional manufactured goods intended specifically for competitive global markets
Answer
The continuous need to import machinery, capital equipment, and spare parts to maintain domestic manufacturing plants
Import Substitution Industrialization primarily targets light consumer goods production. However, because developing economies lack domestic heavy industry, local assembly plants require imported machinery, replacement parts, and processed raw materials. Consequently, demand for foreign currency shifts from finished products to industrial capital inputs, sustaining foreign exchange pressure.
Step-by-Step Solution
Key Concept
Structural dependency on imported capital goods under Import Substitution Industrialization (ISI)
Estimated Time:1m 0s