Import Substitution Industrialization Bragdon Heuser Kittredge Squires CurtisJonathan KevinBrent ISI

Why ISI Methods of Implementation Examples of ISI in Practice Conclusions and Questions Why ISI?MethodsExamplesConclusions

Why ISI? Breaking dependence on commodity export model “Dutch disease”: a hot commodity causes a distorted pattern of development Minimal linkages between commodity production and other products Why ISI?MethodsExamplesConclusions

Why ISI? Financial resources dedicated to primary exports created imbalanced development Inability of Latin American countries to protect themselves from external shocks Infrastructure needed for industrialization Why ISI?MethodsExamplesConclusions

Dependency Theory “Rich countries became rich by making other countries poor.” Developed countries had unlimited access to resources from underdeveloped countries Owners of resources in underdeveloped countries received all benefits Why ISI?MethodsExamplesConclusions

Structural vs. Neoclassical Theory Decline in trade with industrialized countries during war periods resulted in high economic growth Economy shaped by power and politics versus open market competition Trickle-down theory did not hold true Why ISI?MethodsExamplesConclusions

State Owned Enterprises (SOEs) Advantages –Strategic Focus –Access to resources –Access to capital Limitations –Labor policies –Political liabilities –Uncompetitive Why ISI?MethodsExamplesConclusions

Protectionism Advantages –Reduced competitiveness of foreign firms –Protected fledgling local industries –Aided domestic development Limitations –High cost structures –Inefficient management –Non-compliance with international standards Why ISI?MethodsExamplesConclusions

Industrial Policy Advantages –Subsidies and targeting –National development banks –Transnational corporations Limitations –Overextension of government resources –Over-reliance on foreign firms –Possible success? Why ISI?MethodsExamplesConclusions

Country Specific—Brazil & Chile Active Industrial Policy Brazil—over 50% of railways, ports, water, telephone, electricity, mining, chemicals & developmental services Protective International Instruments Tariff Rates—Brazil 168% Tariff Rates—Chile 138% Fiscal/Monetary Policy & Multinational Activity Brazil: 22% paper—88% transportation equip Chile: 8% paper—65% transportation equip JV between Brazil and General Motors Why ISI?MethodsExamplesConclusions

Country Specific—Argentina Active Industrial Policy Steel, electrical & telecom state owned enterprises Protective International Instruments Tariff Rates averaged 131% Fiscal/Monetary Policy & Multinational Activity Foreign ownership: 14% textiles—44% transportation equip Why ISI?MethodsExamplesConclusions

Conclusions Long term impact Doomed from the start? Return to ISI? Why ISI?MethodsExamplesConclusions

Long Term Impact Development – : Population 2x, output 5x –Percentage of imports unchanged (except Brazil) –Middle class, business, and labor emerge Crisis and Collapse –Small Market –Exports problematic (uncompetitive, FX) –Inequality: Concentration of wealth Lingering Effects –Corruption –SOE (e.g. telecom) Why ISI?MethodsExamplesConclusions

Doomed from the Start? Structural Problems –Comparative Advantage –No entrepreneurial class Success –Auto industry –Development of linked industries where they would have otherwise developed Cannot be judged as a perpetual policy –Meant to generate industry –Response to poor bargaining position Why ISI?MethodsExamplesConclusions

Return to ISI? Mercosur –Common market to make Latin American products more competitive amongst member countries –Problem of coordinating amongst states – similar problem that ISI had State Control –Venezuelan oil production GATT/WTO –Theoretically the end of subsidies and “unfair” trade policies –Should promote competitiveness Why ISI?MethodsExamplesConclusions

Final Thoughts Ultimately, ISI was a success, but not one that could continue in perpetuity. It is unlikely that Latin America will be able to pursue such an insular policy again. Doing business in Latin America requires dealing with the echoes of ISI. Why ISI?MethodsExamplesConclusions