Friday, February 3, 2017

Why Did Latin American Import Substitution Industrialisation Run into Serious Problems by 1970s/1980s?

Of course, it is well known that hot money inflows and financial deregulation in the 1970s caused a disaster in Latin America, since, in the late 1970s and early 1980s, Paul Volcker’s quasi-monetarist experiment and hiking of US interest rates caused a debt crisis in Latin America that broke their economies in terrible ways. (A phenomenon which, incidentally, was a forerunner of the Asian Financial Crisis of 1997–1998.)

But I am not concerned with that here. This post is concerned with the internal problems with Latin American Import Substitution Industrialisation (ISI) policies.

Erik S. Reinert’s How Rich Countries Got Rich, and Why Poor Countries Stay Poor (2007) lays out the shortcomings of Latin American planning, as follows:
(1) Latin American Import Substitution Industrialisation (ISI) neglected the need for export-led growth in industries and the need to eventually drive these industries to compete on the world market. Competition on the world market was needed with policies to drive innovation, manufacturing productivity growth, and growth in market share. In other words, Latin American planners failed to understand the importance of Thirlwall’s law and Kaldor’s growth laws. Yet, at the same time, pure cut-throat free market competition was not the answer either, but rather gradually reducing protectionism and assisting industries when necessary with government intervention to promote their ability to compete.

(2) technology used in industries tended to lag behind the rest of the world;

(3) failure to create domestic industries that produced more of the technology and factor inputs used in major manufacturing industries;

(4) the type of industries created did not drive demand for large numbers of educated workers and technocratic professionals, and governments neglected the education of such people where there was demand for such workers;

(5) a higher degree of nepotism in the appointment of people involved in industry rather than meritocracy;

(6) problems in land reform and land distribution;

(7) income inequality and failure to expand internal demand restricted the domestic market for manufactured goods and hence capacity of the manufacturing sector to expand. That is to say, the home market remained small;

(8) profits increasingly derived from static rent-seeking;

(9) deleterious competition between producers and suppliers, when in fact intense co-operation (as in the East Asian model) works better by creating highly-integrated domestic supply chains (Reinert 2007: 311–312).
As Reinert notes, the East Asian nations like Japan, South Korea and Taiwan did the opposite of Latin America with respect to the things in the list above (Reinert 2007: 311–312).

Had the planners in Latin American governments not made these mistakes early on, then Latin American industrialisation would have been much more successful, much like the case of East Asian development. Furthermore, since a number of Latin American nations are very rich in natural resources they would have been in a better position for long-run economic growth as compared with East Asia, which is resource-poor.

Reinert, Erik S. 2007. How Rich Countries Got Rich, and Why Poor Countries Stay Poor. Carroll & Graf, New York.

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  1. ohh its actually an interesting piece to counter free trade advocates when they bring latin america.

  2. An excellent article. In relation to Argentina, points 2, 3 and 4 are especially relevant. The industrial jobs that create a middle class come when nation-states invest in infrastructure and training to support the processing of primary product (agriculture and mining product).

    Australia did, for a time, invest in such infrastructure and enjoyed a relatively high standard of living during the middle 20th century as a result. At this time, Argentina's standard of living was slipping, despite the otherwise positive influence of Peronist politics.

    Australia no longer invests in secondary processing of our primary products, having swallowed the economic rationalist argument that it's not our 'natural strength'. The labour share of GDP falls. Trader union membership is at the lowest level for 50 years. Our middle class shrinks. Economic inequality grows. Our Treasurer assures us that all is well and that rivers of Asian real estate investment money will float all boats (he doesn't use those words, obviously..).


    1. It would be too long to provide a reply. But Brazil provides a counter example. Up to the debt crisis it was growing faster than South Korea (sure State-led Industrialization had problems there too). But what brought it to an end in the early 1980s, was Volcker. And the debt renegotiation aftermath, which was much harder on Latin America than in East Asia.