ECON-2220 Chapter Notes - Chapter 3: Autarky, Foreign Exchange Controls, Comparative Advantage
15 May 2018
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Study Guide on ISI Import Substitution and Industrialization in LA (Baer’s article)
1. What were some of the difficulties faced by LA due to ISI policy?
Industrial growth had slowed, job opportunities in industry for Latin America’s rapidly growing
urban population were scarce, income distribution had in many countries either remained
unchanged or had become more concentrated than in the early post-World War II years, and
most industrial goods were produced within the region were priced so high that export
possibilities were severely limited.
2. Describe the theoretical purpose of ISI. What does it entail?
ISI is an attempt by economically less-developed countries to break out of the world division of
labor which had emerged in the nineteenth century and the early part of the twentieth century.
Under this division, Latin America specialized in the export of food and raw materials, while
importing manufactured goods from Europe and the United States. Import Substitution consists
of establishing domestic production facilities to manufacture goods which were formerly
imported.
3. Was ISI intended to last forever?
No. ISI was to come to an end essentially after industries were strong enough to be self-
sufficient. Was supposed to phase out.
ISI would come to a close when most investment was channeled towards the construction of
capacity to produce for new incremental demand.
4. When and where did the the 1st wave of ISI occur?
The first ISI wave occurred in Europe and the United States occurred in the middle and second
half of the nineteenth century.
5. What were characteristics of the 1st wave of ISI?
Early ISI process governments played an active role in encouraging and protecting the
development of infant industries. Another characteristic of nineteenth century ISI is its “national”
character. Although in some countries finance for infrastructure investment was obtained from
abroad, industries were for the most part in domestic hands, while the design of machines and
skilled manpower to run them were often imported from England in the early industrialization
period. It didn’t come to an end after this initial stage, but it ceased being mainly a mechanism
of industrialization, and became in the twentieth century part of a continuing process of growth
and of a changing pattern of industrial specialization among economically advanced countries.
6. Why didn’t Africa, Asia and LA undergo ISI at the time of, or right after, Europe and the
USA’s ISI?
Colonial policies of European countries provide much of the explanation for the Africa and Asia.
Socioeconomic structure helps explain the Latin American case. The presence of attractive
external markets for the region’s primary exports, which benefited the elites, meant that there
was little political desire to change the structure of the economies. Also in the nineteenth
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century and early part of the twentieth century, Latin American countries did not have the
entrepreneurial classes, labor force, infrastructure, market size, or administrative capacity to
cope with an extensive industrialization process. Also in the case of some countries, like Brazil,
European powers had enough leverage to force governments to maintain free trade policies,
thus in effect blocking any possibility of ISI.
7. What international event triggered the formal implementation of ISI policies in LA?
World War I, the Great Depression of the Thirties and World War II induced pronounced spurts
of ISI in most larger Latin American countries. The interruption of shipping and the decline of
non-military production in Europe and the United States during WWI created severe shortages
of imported manufactured goods in Latin America, raised relative prices of such goods, and
increased profitability of ISI investment.
The depression of the Thirties resulted in renewed shortages of imported goods. The fall of
foreign exchange receipts from exports forced most countries of the region drastically to curtail
imports. (depression-induced)
WWII had a stimulating effect on ISI industries: shortages of foreign manufactured goods led to
full utilization of industrial capacity; some investment in new capacity occurred when capital
goods could be imported; and even some textile products were exported by Argentina, Brazil,
and Mexico.
But it was only after WWII that ISI became a deliberate policy tool for economic development.
8. Before implementation, what were the predicted impacts of ISI on the LA economy?
It was thought that ISI would introduce a dynamic element into the Latin American economies
and increase their rates of growth. The latter were deemed essential to deal with the population
explosion of the region and to meet the demands of the increasingly urban population for the
ways of life of the masses in more advanced countries. It was also thought that ISI would bring
greater economic independence to Latin American countries: self-sufficiency in manufactured
goods would place Latin American economies less at the mercy of the world economy.
9. What were the principal policy instruments used to promote and intensify ISI?
The principal policy instruments used to promote and intensify ISI were: protective tariffs and/or
exchange controls; special preferences for domestic and foreign firms importing capital goods
for new industries; preferential import exchange rates for industrial raw materials, fuels and
intermediate goods; cheap loans by government development banks for favored industries; the
construction by governments of infrastructure especially designed to complement industries;
and the direct participation of government in certain industries, especially in the heavier
industries, such as steel, where neither domestic nor foreign private capital was willing or able
to invest.
10. Name and describe the arguments of the two schools/ types of critiques of ISI policy.
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From TA:
Market critics argued that ISI used resources inefficiently, which hindered development (think
underpricing of electricity, for example, so more electricity was used than was optimal).
Structural critics were more concerned with demographic factors, such as population growth,
income inequality, and urbanization rates.
1. The market critics: view Latin America’s ISI as an inefficient way of using resources to
develop the region’s countries. Each country should specialize in the sectors where it
has the greatest comparative advantage, so Latin America should have continued to
specialize in the production of primary products. This specialization would have
maximized world output and made possible a higher income level in all parts of the
world. They criticize the indiscriminate way in which ISI was carried on, that is, by
across-the-board promotion of industries without regard even to potential comparative
advantage. Emphasis on autarky (maximizing internal vertical industrial integration) is
seen as prejudicial to rapid economic growth for a number of reasons. Autarkic industrial
growth leads to the development of inefficient and high-cost industries.
○ “Effective protection” shows the percentage by which the value added at a stage
of fabrication in domestic industry can exceed what this would be in the absence
of protection. In LAC, effective protection/tariff on consumer goods was found to
be much higher than for intermediate or capital goods. This eliminates incentives
to increase production efficiency and make it difficult to bring the cost of
production to international levels. In short, resources are not used in sectors
where they will produce the highest possible output.
○ Detrimental results of neglecting exports during the heyday of ISI
○ Failure to diversify export structure and neglect of exports during ISI periods
(many commodity compositions remained the same by the late sixties)
2. Structural critics
○ Failure of ISI to create direct employment opportunities
○ Low labor absorption rate
○ No incentives to adopt labor-intensive techniques of production
11. What were some of the criticisms leveled at ISI by market critics?
● Indiscriminate way in which ISI was carried out: across-the-board promotion of industries
without regard even to potential comparative advantage
● Neglected agriculture
● Neglected exports
● Too much protection
12. Why did protectionism ultimately fail in preparing LA domestic firms for competing
on the international market?
● Protection usually confines the protected manufacturer to the domestic market and so
inhibits the exploitation of economies of scale, especially in small countries and in
industries where scale economies are important and call for very large-scale operations.
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Document Summary
Isi is an attempt by economically less-developed countries to break out of the world division of labor which had emerged in the nineteenth century and the early part of the twentieth century. Under this division, latin america specialized in the export of food and raw materials, while importing manufactured goods from europe and the united states. Isi was to come to an end essentially after industries were strong enough to be self- sufficient. Early isi process governments played an active role in encouraging and protecting the development of infant industries. Another characteristic of nineteenth century isi is its national character. Colonial policies of european countries provide much of the explanation for the africa and asia. Socioeconomic structure helps explain the latin american case. The presence of attractive external markets for the region"s primary exports, which benefited the elites, meant that there was little political desire to change the structure of the economies.
