Download import substition industrialization

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
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Ave annual growth rates of 5.5% over 1950 -1980
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
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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