Download Import Substitution Industrialization in Argentina

Mo ki Macias and Rebecca Friedrichs
Economics 216
5.4.04
Import Substitution Industrialization in Argentina
In the post WWII world, countries were struggling to rebuild what they had lost
financially, and Latin America was not excluded from these efforts. During both the
Great Depression and the Second World War, countries such as Argentina, Brazil and
Mexico were affected indirectly by the interruptions in trade flows that the global events
caused. As the 1940s commenced, Latin America began to make an organized effort to
move towards a more self-sustaining economy. Previously, the primarily agricultural
nations relied very heavily on imports for all their manufacturing needs and goods.
During this period a new economic idea emerged, that of Import Substitution
Industrialization (ISI). One of the most interesting cases is that of Argentina, a country
whose economy was booming until the crisis that was driven by the implication of ISI
under the Perón government. This paper will strive to effectively analyze the policies
under the plan of ISI, the reasons behind its implication, and its consequences on the
Argentine economy.
The theory behind the concept of ISI was “establishing domestic production
facilities to manufacture goods which were formerly imported.”1 The aim was to heighten
the countries’ terms of trade while working to make them less reliant on foreign
manufactured goods. The most important argument advocating ISI was called the Infant
Industry Argument. In developing countries, firms in a new industry such as
manufacturing are unable to compete with the well-established manufacturing sectors of
1
Werner Baer, p. 95
other countries. Therefore the Infant Industry Argument theorizes that governments have
a responsibility to support these small firms temporarily, and the most common way to do
that is through enacting import tariffs on those goods.2 Through these tariffs, internal
industries will hopefully be coerced into buying from the home industry, even though on
the world market, foreign goods are less expensive. The government of Argentina used
this Infant Industry Argument to explain some of its move towards ISI in the 1950s.
Historically, however, no such reasons were needed, because the country was known as
having one of the strongest economies in the world prior to the events of mid-century.
The years 1870-1930 were a great period for the economy of Argentina. In 1880
an influx of immigrants provided cheap labor, and the massive meat market became open
for trade as refrigeration was discovered in the beginning of the twentieth century. Grain
exports became extremely strong as wheat was constantly exported to Great Britain, and
low opportunity cost of land made land-intensive products convenient. Rapid growth
continued until World War I, during which it slowed, but did not cease.3 Throughout
1900-1929, total output grew at 4.6 percent per annum, and capital expanded at 4.8
percent. The great wave of migrants expanded the labor market by 3.1 percent, allowing
for the continual growth of a labor-intensive, land-abundant economy as industrialization
took place in the coastal cities such as Buenos Aires.4 Diaz Alejandro writes of pre-1930s
Argentine economy that it was
‘export-led,’ not because exports and their associated capital
inflows provided growing aggregate demand, but because (…)
exports and capital inflows led to an allocation of resources far
2
3
Krugman, p. 256
Alejandro, p. 6
more efficient than the one which would have resulted from
autarkic policies.5
Before the onset of World War II, tariffs were moderately low, and usually used only for
revenue. In general, the character of the tariff was 5-20 percent on goods not produced in
Argentina, and 30-50 percent on those goods that could be bought domestically.6 The
import tariffs and the exchange control were designed to discourage domestic industry.
The only reason there were restrictions on trade was to appease the extremely influential
ranching elite.
The Great Depression served to change world markets enough to affect Argentina,
although she did not experience a depression herself. A shift in world prices and public
policy moved the line of comparative advantage to include textiles, cement, and other
industrial firms. Between 1929-1939, real fixed investment fell 16 percent, however, real
consumption rose by 28 percent. Throughout and immediately following the War, the
government was not actually committed to an ISI plan, however, manufacturing was
granted almost full protection, because it became virtually impossible to buy goods
externally. Intermediate goods and capital, however, remained hard to find. This
unintentional protectionism was exacerbated by Argentina’s neutrality in the War, and
therefore her relations were stressed with her trading partners.
As the War drew to a close, the World Market conditions slowly improved, and
Argentina gained the opportunity for economic growth through exports. With the rise of
Perón, however, ISI became the policy of choice, as privileges were given to any industry
that leaned away from agriculture and towards manufacturing. Instead of working to both
4
5
Alejandro, p. 8
Alejandro, p. 11
foster the export market and invest capital in the manufacturing sector, Perón and his
government put the overwhelming burden of development onto ISI, allowing the export
sector to stagnate.7 Perhaps the reason that the government took this path was because
real GDP growth was not the principle goal. Perón, in order to foster his appeal to the
masses, worked to create jobs in the urban sector, as well as establish social services. The
reasons for this were almost purely political. Firstly, the problems that stemmed from the
War and the Great Depression had disillusioned the people to liberal economic policies,
and they looked towards new ideas to change the situation. Therefore, even though
industries were not necessarily exactly what the economy needed in the long-term,
politically it was a brilliant move for the Perónist government.
Complementing this political strategy came the reemergence of nationalistic
tendencies throughout the masses. After being, as the Argentines viewed it, abandoned by
Great Britain during WWII after declaring neutrality, the citizens were indignant and felt
that protectionist policies would simply serve to hurt those who desired to buy Argentine
exports. They were not able to understand the long-term effects that closing the economy
would produce. As the Perón administration continued throughout the late 40s and into
the 50s, national populism characterized policy decisions.
The tactics that Perón used in his ISI plan were quite unique. He took much of the
rural sector’s export earnings, and funneled them into industry through state spending, as
well as by lowering urban food prices. His nationalization of many different agencies,
including deposit banking, gave him control over export earnings and the ability to enact
import permits. The Argentine Institute for Trade Promotion (AITP) made an effort to
6
7
Alejandro, p. 295
Alejandro, p. 106
buy what foreign goods were needed at the worst of various foreign exchange rates,
therefore using the prices as a form of export tax to subsidize the imports that were still
necessary for industry.8
8
Maxfield and Nolt, p. 73