Chapter 10: Dilemmas of Development


Import-Substituting Industrialization
ISI is a national development strategy that avoids industrialized international economic linkages in order to focus on domestic production. This approach uses high tariffs, subsidies, and other protectionist measures to forego imported goods and services in favor of developing 'national champion' firms. National champion firms are firms that the government believes could do the best job of producing the substitutable industrial goods.


While your economy is already largely regulated, you have decided to further protect your state-run national champion firms with high tariffs and subsidies. Your national champion firms will survive and not be run out of business by international competition. That being said, the high tariff walls mean your firms have little incentive to innovate and compete with international standards.

Next, you must determine your stance on international finance. There are two types of international flows of capital: private and official. Foreign capital can be an important tool for development, but international financial flows all have their drawbacks, as well. Which path of international financial flows will you choose?

What do you do now?

Private Financial FlowsThese are financial flows that originate with non-governmental entities, such as individuals, charities, and private firms. In decreasing order of magnitude, there are four private financial flows: foreign direct investment, international bank loans, international portfolio investments, and international bonds.
Official Financial FlowsOfficial financial flows originate with government entities, including individual governments and inter-governmental organizations. There are two basic kinds of official financial flows to developing countries: official development assistance (ODA) and multilateral organizations' loans. This approach would require you to join the World Bank, Asian Development Bank, and International Monetary Fund.
All International Financial FlowsKashmir would open up to both private and official financial flows.
No International Financial FlowsKashmir would remain closed to foreign capital flows.