Import Substitution Industrialization (ISI): Looking inward as a source of growth

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Import Substitution Industrialization (ISI)
Looking inward as a source of growth

• Lecture 9
• Week 4

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Structure of this class

• Recap from last classes on ISI
• Dependency Theory An Explanation for
  Backwardness
• From Dependency Theory to Development Policy
  ECLA and the Structuralist School
• From Structuralism to ISI
• The ISI Toolbox
• Performance of ISI
• The Crisis of ISI

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Recap from last classes on ISI

• Economic historians argue that protection in
  Latin America can be traced back to the 19th
  Century
• In the particular case of Argentina, we argued
  that a) the terms of trade hypothesis did not
  justify interventions, and b) Argentina fell
  behind because excessive ISI-style government
  intervention
• More generally, ISI policies adopted strongly by
  LA6 after the Great Depression, growth increased,
  but income distribution worsened or remained the
  same while poverty indicators did not improve

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Dependency Theory An Explanation for Backwardness

• Industrialized countries (The Center) caused
  underdevelopment in developing countries (The
  Periphery)
• I.e., Paul Baran (1952)
• International capitalists in industrialized
  countries local elites in the center
  (monopolies and latifundists) hindered
  long-term growth because concentrated markets
  weakened competitive pressures ? revolution
• Others (F. E. Cardoso and E. Faletto) agreed
  with the principle but disagreed had a different
  prescription ? active state could counteract the
  power of the center

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From dependency theory to structuralism

• Structuralism in Latin America strongly linked to
  Economic Commission for Latin America under
  leadership of Raúl Prebisch
• -disappointing growth performance first half of
  20th C linked to volatility primary commodity
  exports and terms of trade deterioration
  (increased difficulty paying for sophisticated
  technology imports)
• - seemingly positive correlation between growth
  and isolation during World War I and World War II
• - low income elasticity of primary commodities
  relative to technologically sophisticated
  industrial goods, in turn explained terms of
  trade deterioration

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In addition

• Complete brake with neoclassical theory
• - economic activity conditioned by interest
  group politics
• - markets in Latin America
• - producers oligopolies (price makers)
• - consumers followed consumption patterns set
  by elites
• - no trickle down ( trade as in the theory of
  comparative advantage)
• Economic historians would however argue that
  postwar growth was neither dynamic nor as
  isolated as dependency theorist would suggest

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From structuralism to ISI

• Instead of relying on international trade as an
  engine of growth, ISI policies sought to develop
  industries in a protected environment
• Main goal to create local industries capable of
  producing substitutes for expensive imports and
  promote industrial growth and expansion of
  domestic markets
• ? state-led technical change

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Reinforced with two key concepts (Albert
Hirschman (1945, 1955, 1970)

• Bottlenecks
• Linkages Backward and Forward
• -?
• Powerful state intervention for braking
  bottlenecks and for targeting growth in
  industries with largest linkages
• Moreover, powerful state also needed due to a
  market failure
• In turn led to populist movements (i.e., J.
  Peron and G. Vargas) mobilization of labor and
  industrial elites in the service of nationalist
  development strategies

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ISI Toolbox

• Industrial Policy
• Form state-owned firms
• Form mixed economic economic enterprises
• Require foreign firms to form joint ventures
• Pressure local firms to increase local content

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2) International instruments

• - Tariffs on final goods
• - Quotas on imports
• - Exchange rate overvaluation
• - Foreign exchange rationing
• - Import licences

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3) Fiscal and monetary policy

• - Subsidies for cheap inputs such as electricity
• - Subsidies for public transportation
• - Tax breaks in production
• - Preferential interest rates
• - Accommodating monetary policy

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But performance varied across countries

• Strongest growth rates during 1950 1980
• Brazil
• Mexico
• Ecuador

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The Crisis of ISI

• Exhaustion due to the limited size of the
  internal market
• Export market could not develop because
  manufactured protected goods did not meet
  international standards
• Lack of economic integration due to sharp
  variation of economic performance across regions,
  small potential demand and politics
• Political and sociological explanations
• Exacerbated income inequality
• Fostered creation of inefficient institutions
• Neglect of agriculture

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Lessons?

• Policies adopted during 1990s points to inherent
  flaws
• Appropriate policies for the period but times
  changed (Bauer in your syllabus)
• Macroeconomic stability and debt crisis in the
  1980s?
• -? Next class Topic 10 in your syllabus