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Import substitution as economic development

by Avik Basu <>
last updated: Friday, April 15, 2005 10:17 AM

Growth and development are often uttered in the same breath and yet the goals of each are actually quite different. Growth can be thought of as expanding the size of the community through the use of land and other natural resources. Development, on the other hand, can be thought of as improving livability through, among other things, jobs, education, cultural preservation, public safety, and sense of community. But this distinction is not often made resulting in growth being seen as a solution to the problems that local communities face. Growth advocates are insistent that their projects will improve the local economy. In a time when many communities face financial crises, this is an appealing but misguided proposition, since the existence of rundown urban areas shows that growth does not necessarily lead to development. Fortunately, there exist ways for communities to develop without growing. One of those ways is through import substitution.

What is import substitution?

The import substitution approach substitutes externally produced goods and services, especially basic necessities such as energy, food, and water, with locally produced ones. By doing so, local communities can put their (hard-earned) money to work within their boundaries.

The history of import substitution

The notion of import substitution was popularized in the 1950s and 1960s as a strategy to promote economic independence and development in developing countries (Bruton 1998). This initial effort failed due in large part to the relative inefficiency of 3rd world production facilities and as a result their inability to compete in a globalizing marketplace. Since then, those countries and the rest of the world rely a great deal on foreign-produced products and, as globalization trends suggest, an export oriented approach has became the norm. Despite this, in the 1970s, import substitution came into the U.S. consciousness as a means to promote national (Buy American campaigns) and regional development and the debate continues as to its effectiveness (

Understanding a local economy

To understand the rationale for import substitution, one must first understand the basic forces at work in a local economy. Local economies are often described by a “leaky bucket” model in which the bucket represents the local region and money can both circulate within the bucket and flow in and out. Money circulates within the region when money that is earned locally is also spent locally. This requires that some money exists in the bucket to begin with—one way this happens is when local goods and services are purchased by consumers outside the region. Another source of inflow comes from businesses which decide to set up shop locally and generate jobs that pay local workers. The “leak” in the bucket that allows money to escape from the community is created when goods and services from outside the region are purchased with local money. It is typically assumed that a robust economy requires both the availability of capital and its circulation within a region.

The traditional view on local economic development

Local economic development often focuses on attracting businesses under the assumption that the jobs generated by those businesses will generate local income and, in turn, local spending of such income. In terms of the leaky bucket, it focuses on ensuring that money continually flows into the local region so that there will be at least some available for circulation. But continuously filling the bucket is not the only option—one can also keep more money circulating within the local economy by plugging the leakage of capital from the system. Import substitution constitutes one approach to plugging these leaks.

Plugging the leaks: Connecting local supply with local demand

One way to prevent money from leaving the local economy is to connect local demand for goods and services with the local suppliers of those goods and services. Many of the things that individuals or businesses need can be found from suppliers within the area but, due perhaps to lack of adequate information or convenience, those things are often purchased from the outside. This represents another flow of capital leaving the system. By substituting demand for externally produced things with locally produced things, communities can retain capital for use within the community.

Oregon Marketplace

In the 1980s, without the communication efficiencies of the internet, Alana Probst of Eugene, OR asked 10 local businesses to list 40 items which they purchased from out of state. Armed with this list of 400 items, she went to local businesses in search of potential bidders. In its first year, Oregon Marketplace ( generated over 100 new jobs as well as 2.5 million dollars in contracts. One example of its use involved an airline company which used to purchase chicken for its meals from Arkansas despite several growers just outside Eugene. In 1987, once computers were brought into the system, the program was implemented statewide to similar success (

Community Supported Agriculture

In the U.S., almost 85% of the food bought within a state comes from some place else. In Massachusetts, this amounts to a 4 billion dollar leakage of capital every year. Clearly, there is a great opportunity here to reduce capital outflow. Community Supported Agriculture (CSA) programs provide a way for food producers to sell their goods locally. Typically, a group of CSA consumers split the cost for the operation of the farm and in exchange get fresh locally produced food directly from CSA farms. For example, if a farm’s operating costs for a year were $20,000 and there were 200 members in the CSA consumer group, then each consumer would pay $100 per year for their “share” of the farm. Instead of purchasing at a grocery store chain, the money that the consumer pays as part of the CSA stays local in that it goes to the farmer who then uses it to pay for seeds, fertilizers, water, etc. (which could also be locally available). And since locally produced food does not have to travel as far, money that would otherwise have been spent on transportation—on average, food travels 1,300 miles from farm to supermarket—is available for local spending.

Plugging the leaks: Energy efficiency

Energy efficiency provides perhaps a non-intuitive approach to plugging capital leakage. Many communities get their energy by purchasing from providers outside their region.

Those communities however are unlikely to be able to produce such energy for themselves so one cannot hope to substitute externally produced energy for locally produced energy. Amory Lovins of the Rocky Mountain Institute estimates that 20% of a community’s gross income is spent on energy and 80% of that spending leaves the local area. Instead, communities can simply require less externally produced energy by becoming more energy efficient—it is frugality under the guise of import substitution. The money that is saved through the energy efficiency programs is effectively new money—money that would otherwise not have been available—and, though not guaranteed, it is available to be spent locally.

Osage, Iowa

The community of Osage, Iowa with a population of merely 3,800 people tried out this idea with great success. Its energy saving initiatives involved weatherization techniques, use of efficient electric motors, appliance replacement rebates, etc. and received support from businesses and residents alike. Between 1974 and 1991, they saved 7.8 million dollars and at least some of that money filtered its way back to the local economy. And besides retaining money for local circulation, Osage residents’ energy bills as of 1995 were 50% lower than the state average (

Southern California Edison

Energy efficiency success stories need not be restricted to small towns in Iowa. Southern California Edison, by utilizing similar methods as Osage but on a much larger scale, developed an energy efficiency program which saved over 3 billion dollars a year. In this case, the corporation instead of community leadership took much of the initiative. It made sense financially since the cost of implementing the efficiency programs was 1% of the cost of the power plant that would been required without the measures (Kinsley 1997).

Discussion and Conclusion

For all its benefits, import substition is not free of drawbacks. For one thing, its benefits can be difficult to measure since import substitution strategies are often lumped with other strategies and its effects are difficult to tease apart. As in many economic development scenarios, the counterfactual provides fodder for criticism--it is often quite difficult to say whether import subsitutition strategies led to better economic performance or whether that performance would have come to fruition regardless of the strategies. Also, local industries often cannot take advantage of economies of scale in manufacturing their products. For example, a manufacturer who mass produces shoes with streamlined processes and exports them all over the world may be able to sell shoes at a lower price than a local shoemaker and as result the local shoemaker may not be able to compete.

Despite these drawbacks, if we assume that the import substitution strategies described earlier are able to plug the leaks of capital from the local economy and provide more dollars that could potentially be spent locally, can we know for sure whether that money actually will be spent locally? Certainly, programs such as the Oregon Marketplace make it easier for businesses to do so, but can we expect, for example, customers of Southern California Edison to use the money they save in their electric bills to spend locally? This remains an unanswered question, but it seems reasonable to assume that we cannot rely solely on people’s good will to purchase locally especially when many locally produced goods are far more expensive than alternatives. Instead, consumers must both have an understanding of the impacts of their purchases on the local economy and also find real value in the goods that are locally available. And this is often the case with many CSA customers who find that fresh produce from the farm is better in quality than what can be bought at supermarket chains. Which gives good reason to be hopeful that import substitution can provide local communities a path to economic prosperity.


Document References

Kinsley, M. (1997). Economic Renewal Guide. Snowmass, CO, Rocky Mountain Institute.
Bruton, H. (1998). A Reconsideration of Import Substitution. Journal of Economic Literature. 36(2):903-936.

Link References

Economic Renewal:
Case studies:
Community Energy Opportunity Finder:

Image References

Leaky Bucket:
Community Supported Agriculture:
Efficient Light Bulb: