1. ISI Analysis Presented by Group 1 Alex Hardy Dana Hauser Adam Lussier Christy Lynch

2. Import Substitution Industrialization Government intervention and protection of industries that would be serviced by imports in a free market environment. –Included: licensing, tariffs, and government investment in local industry (built plants, etc.) Dominant growth and development strategy of Latin America from 1930 to 1960. Disillusionment in the 80’s, but effects set the stage for today.

3. Reasons for ISI It is dangerous to rely on one primary commodity export industry. Prebisch-Singer Hypothesis: Deteriorating terms of trade for LA necessitate intervention. Labor intensive exports trap workers in low wage industries. Helps “infant industries” grow. Cut imports rather than encourage exports (elasticity pessimism).

4. Imports are blocked = less currency in international market = inflated exchange rate. This contributes to less competitive export industries = reduced tax revenue from abroad. High Fx = negative BoP = budget deficit Externally: ISI Distorts BoP

5. Simultaneously, ISI necessitates government investment in modernization at expense of traditional industries. Labor demands for skilled workers. Low interest rates cause low savings rate and investment in heavy industry. Inflation due to high cost of goods manufactured domestically. Domestic Effects of ISI

6. Concluding Thoughts ISI served a purpose It was a step in the process of industrialization. Government can stimulate free market forces, but not replace them. ISI needed an exit (transition) strategy from the start!

7. Back-up Slides

8. Uneven protection = poor pricing = no international competitiveness = overcapacity Agricultural industries and workers hurt. Again, low interest rates caused low savings rate, investment in capital intensive industry and high budget deficit. Major Criticisms of ISI

9. Goodbye ISI – Hello Trade Reform The 60’s were growing years, but… Strong labor unions wanted a piece of the pie, government could grow fast enough, and class tension erupted. Crawling peg Fx rate = inflation. Export subsidies (1965) = government borrowing = more deficit & more imports.

10. The Rise of ISI The Great Depression caused a drop in commodity prices, foreign exchange reserves dried up, and LA countries could not buy necessary imports. Solution: Make them. WWII raised demand for LA goods. Lots of exports and nothing to import. Solution: make more of them.

11. Implementation of ISI Economy-wide strategy designed to establish new industries. Included: licensing, tariffs, overvalued Fx, and government investment in local industry (built plants, etc.) Easy access to credit / low interest rates.