5.4 Policies and Economic Liberalization

Import substitution industrialization (ISI) is a strategy of building domestic industry by blocking imports with high tariffs and supporting local producers. Mexico followed ISI from the 1940s to the 1970s and grew fast for decades. Nigeria used “indigenization” decrees in the 1970s requiring Nigerian ownership of many businesses.

ISI often led to inefficient, protected industries, heavy borrowing and dependence on a few exports. When oil prices fell and interest rates rose in the early 1980s, Mexico defaulted on its debt in 1982, and Nigeria's oil-dependent economy went into crisis.

Both countries adopted structural adjustment programs, the standard package of conditions attached to IMF and World Bank lending: cutting spending and subsidies, devaluing the currency, lowering tariffs and privatizing state firms. Mexico's came with IMF and World Bank loans; Nigeria turned down an IMF loan and designed its own program in 1986, which followed the same recipe and drew World Bank support. Mexico joined the global trade agreement GATT in 1986, sold hundreds of state companies and joined NAFTA in 1994.

Other paths to liberalization: the UK under Margaret Thatcher privatized major firms and deregulated finance in the 1980s; Russia used “shock therapy” in 1992, freeing prices overnight, and inflation topped 2,000% that year; China liberalized gradually from 1978 while keeping the party in charge.

In 2023 Nigeria ended its long-standing fuel subsidy, which had kept gasoline cheap but cost the government huge sums, and let the naira's exchange rate float. Supporters said the subsidy drained the budget and mainly helped smuggling and wealthier consumers. The immediate effects were sharp price rises, with inflation above 30% in 2024, and labor unions organized strikes and protests. The government responded with wage increases and cash transfers to poor households.

Regimes of every type liberalize to fix problems at home, like rising unemployment and weak productivity, or abroad, like trade deficits and falling demand for their oil, gas or minerals. Whether liberalization works politically often depends on how the costs are shared and whether the government can cushion them. China's gradual approach, letting markets grow around a large state sector, avoided the collapse Russia suffered in the 1990s, though it brought rising inequality and heavy debt in some state firms.

Liberalization can also shift power between parties. The economic pain of Mexico's 1980s debt crisis and 1994–95 peso crisis weakened the PRI, while China's growth strengthened the Communist Party's claim to rule. Growth driven by liberalization has also brought pollution, urban sprawl and uneven development (see 5.7).