IMPORT SUBSTITUION INDUSTRIALIZATION Looking Inward for the Source of Economic Growth Group 2 Lauree Cameron, Wendy Crabb, Rob Huges, Catherine Stone & Alrick Thomas

Historical Legacies During colonial period (>1494) Spaniards and Portuguese used exploitative techniques to extract Latin American resources Encomienda system established - Indian labor deeded to work the land on behalf of settlers Small elite controlled capital and political power During period of independence (>1822) - political elite maintained encomienda system for stability

Agricultural Export Boom Late 1800s to early 1900s LA benefited from short agricultural export boom Problems Development policies focused on needs of export sector - ignoring domestic production Demand for exports was determined abroad

Single Commodity Exports Absorbed countries resources and gave way to unbalanced development Dependence on one export fatal for a country when price of export drops When single commodity is a primary product - commodity suffers from being both price and income inelastic- people only buy so much! Needs of local economy dependent on foreign capital

Dependency Theory –Center (industrialized) countries control periphery countries –Local elites form alliances with international capitalists: hindered long term growth in favor of short term profits –Sustainable growth not possible

Dependency Theory (cont.) Revolution needed to remove elites from power “Underdeveloped countries were not developed countries in the making; rather, industrialized countries caused underdevelopment in other nations in the process of economic expansion” “Industrialized countries had access to cheap inputs for growth through the extraction of resources, export of minerals, and exploitation of cheap labor in the underdeveloped world.”

Structuralist School Powerful center (industrialized) countries controlled advanced technology Developing countries traded primary products (raw materials and agricultural products) for technology Primary products tend to be price and income inelastic- regardless of price of good or people’s income - people will only buy so much of a primary good (Engel’s Law)

Structuralist School (cont.) Rewards accrue to those engaged in technological businesses LA shaped by power and politics, not economics - strong state policy necessary for development “Although the neoclassical model predicts benefits for poor countries from international trade, structuralists contend that international trade exacerbates inequality between and within nations because those countries and companies with control make the rules in their favors.”

Import Substitution Industrialization ISI policy shaped by dependency theorists and structuralists Sought to create industries capable of producing substitutes for expensive imports while promoting industrial growth and expansion in protected environment State support of key industrial sector with forward and backward linkages: e.g auto industry Active government role

ISI Tools Active industrial policies State Own Enterprises (SOEs) - heavy industries, including oil, petrochemicals, telecom, steel and aircraft Backed by gov’t guarantees, SOEs had easier access to intn’l financial markets Ministry resources for technology Human resource re-allocation Long term focus

ISI Tools (cont.) Protectionism –High tariffs to protect infant industries –Quotas, import licensing, export subsidies –Overvalued exchange rates making some imports cheaper to purchase Monetary and Fiscal Measures –National development banks formed –Subsidies to domestics firms –Tax credits/ –Soft credits

Multinational Activity In strategic sectors transnational corps. Welcomed as providers of technology and capital Transnat’l corps. had to commit to tech. transfer and labor training Under threat of mkt. closure - transnat’l firms agreed to jt. ownership and use of local inputs Dev. of local parts suppliers promoted by requiring 99% local content by weight for passenger cars produced locally

ISI Performance Ave annual growth rates of 5.5% over GDP tripled b/w 1950 and 1970 Performance varied by country Production of basic consumption goods widespread w/ some heavy machine goods indust. Urban middle class developed which demanded infrastructure entitlements (water and sewer) National business class and labor union movement emerged

ISI Challenges Unsustainable over time Poor intn’l. quality stds. caused by protectionism Export market needed for increased production Exacerbated inequality - with > 1/3 of population still poor - internal demand was restricted Resources focused on industry neglected agriculture- led to increase in food imports which further distorted balance of pmts. Labor gravitated towards urban areas - pressuring cities

Auto Industry as Example of Successful Case of ISI Auto industry credited w/ number of production processes that changed labor relations and intn’l trade (Fordism and Toyotaism) Prompted many bkwd. linkages for steel suppliers, glass, paint, textile and rubber producers Developed fwd linkages for gas and oil suppliers, repair and service shops and road infrastructure