Rationale for an import substitution industrialization strategy:

In order to understand  the rationale for Import Substitution  Industrialisation strategy,  it is important to know why this kind of industrialisation  strategy  is needed? What  were the appropriate  tools  used  for  this  strategy. But let us first learn why developing countries needed industrialisation  at first place.

Why Industrialisation?

Economists  trying to  devise a strategy for development at the end of the Second World War  took account of the dependence of almost all developing countries on exports of primary products. Prebisch, arnQng  others, argued that expansion of primary production and exports would not lead to development. Due  to  low income  and  price elasticities of demand for such products, expansion of export volumes would not result in a corresponding increase in export earnings as  prices will decline. Irnport payments, on the other hand, would increase with rising imports of capital goods as investments increased in  the  attempt  to  raise  growth, because these countries did not have a significant production of capital goods. So countries would  face worsening terms  of  trade  apd  balance of  payments (BOP) crisis when  they tried to accelerate  their growth. The BOP deficits would force a cutback  in investment plans id  slow down growth. Since development could not be based on growth of primary output it was necessary  to base development on industrialisation.

A  further  argument as given by Rosenstein-Rodan  in favour  of  industrialisation in over-populated countries was  that  land  pressure in  these countries bad resulted in very low labour productivity and prospects for agricultural growth were very limited. lndustrialisation was  the only way  to absorb  the surplus labour force in agriculture and grow.