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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