Final answer:
Import substitution is a strategy where a country aims to reduce its reliance on imported goods by producing them locally, often accompanied by protective tariffs and trade barriers. It does not promote free trade or depend on lower cost production factors. Over time, the strategy fell out of favor due to its inefficiencies and negative impacts but some protectionist elements remain in global economics.
Step-by-step explanation:
In the context of economic development strategies, import substitution is characterized by a nation's efforts to reduce dependency on imported goods by producing those goods domestically. This approach is often accompanied by the establishment of high protective tariffs to safeguard burgeoning industries within a country. Import substitution is linked to the encouragement of manufacturing a wide range of goods on domestic soil and typically involves significant state intervention in the economy to bolster local industries. Contrary to fostering open markets, it frequently resorts to trade barriers to protect infant industries from international competition.
Import substitution does not support the concept of relying upon lower cost factors of production or promote free trade. Rather, it aims to develop and protect high-cost industries by limiting imported goods, fostering the demand for skilled labor and capital. Over time, various negative side effects of import substitution have emerged, including reduced competition, high prices, production inefficiencies, and sometimes even corruption within permit systems for necessary imports.
Historically, import substitution was a common strategy among developing countries, especially in Latin America, but by the 1990s, global finance organizations such as the International Monetary Fund began to discourage it. Still, various forms of protectionist policies continue to be practiced subtly by governments around the world to defend national interests, including business, jobs, and security.