Local Content Requirements – Background of Local Content Policies

local content requirements

Local content requirements were not an objective in itself.  It was however a means to improve industrial policy. This was the case during their rigorous implementation as productive development policies (PDPs) during and more so after the Second World War.

From a general economic strategy, local content policies were referred to as import substitution policies/Industrialization (ISP/I). This meant encouraging the development of domestic industry and elimination of foreign goods and services.

It is done through exchange control barriers such as tariffs and quota. In addition, it includes exchange rate policies as well as fiscal and credit policies.

Evolution of Local Content Requirements – Start of Industrialization

No doubt that the initial design of ISP was actually at the beginning of industrialization of Europe in the 1750. You should know that this had its origins in the writings of List (1841), which outlined the ‘Infant Industry Argument’.

As the basis for formulation of local content policies is the idea of bringing about industrialisation. In this regard, it is essential that domestic circuits be built in the economy. This can only be achieved by protecting the domestic economy from the world economy.

However, the major facilitation and actual inducement of these policies was as a result of World War I, the Great Depression of the Thirties and more so the  World War II in larger Latin American, Asia and some African countries.

Import substitution policies have distinct objectives in the different countries where they are or have been adopted. There are historical reasons why some of  the countries of Africa, Asia and Latin America did not undergo ISI at the time of, or right after, the European ISI’s but only at a later stage in the 19th Century.

Local Content Requirements – Economic Strategies

The idea of ISP gained further prominence as government interventions increased. In particular, this is towards inward looking strategies which are an attempt by economically less-developed countries to break out of the world division of labour.

In Latin Americas for example, a catalyst to that effect was the United Nations Economic Commission (UNEC) that advocated vehemently for Latin American countries to be self-sufficient in petroleum products and avoid over dependency on exports.

Under this division, Latin America as well as most areas of Asia and Africa specialized in natural resources and the export of food and raw materials. However, they are importing manufactured goods from Europe and the United States.

If anything, throughout most of the fifties and sixties many Latin American as well as Asian governments adopted ISP. This was as the principal method to achieve domestic economic growth and socio-economic modernization.

Conclusion

In conclusion, Latin American countries grew predominantly on the basis of their  natural resource base. On the other hand, the Asian market grew exponentially as labour-intensive sectors which were facilitated by high level of education.

As a result the concept of protectionism came about and the use of complex system of policies like LCPs was geared to promoting these sectors.

We continue to read and learn more about local content policies evolution.