'Import substitution industrialization' in developing countries in the 1950s
In the post-WWII years, developing countries specialized in those industries in which they had a competitive advantage, namely agriculture and mineral extraction. But when the export led growth model slowed down after the great depression, the developing world realized they had grown to depend on the goodwill of the developed world. In many countries, the top 3 products accounted for 73% of all exports: high degrees of specialization had led to high degrees of dependence.
Latin American countries began to rethink their development strategies and started to apply a new strategy: state-led industrialization. Developing countries were (and are) systematically disadvantaged due to their dependence on primary goods – even if people’s income grows, they generally buy the same amount of food and other primary goods . Countries that produce manufactured goods are at an advantage, because demand for these goods grows as income grows. Ergo, prices of primary goods tend to fall while those of manufactured goods remain stable or increase. Even if producers of agricultural production become more effective, they continue to face trade deficits.
To get over this, developing countries needed to industrialize. Thus: Import Substitution Industrialization – the substitution of imports with domestic production, in which developing countries industrialized to “catch up” with the developed world, as well as promoted their own domestic industrial product to protect from competition from technologically advanced countries.
How was ISI implemented? Through what Eduardo Silva in his paper “The Import-Substitution Model: Chile in Comparative Perspective” calls a bundle of social and economic policies. Firstly, through protectionism: with high tariffs, quotas and licensing requirements on certain imports (to protect the development of national industries). ISI policy also included requirements on domestic products (like automobiles), as well as foreign currency rationing (in order to push towards the purchase of strategically important capital goods), the channeling of foreign direct investments to industrial development (rather than agriculture or resource extraction), tax exemptions and easily acquirable loans for newly established domestic enterprises, and, finally, public ownership of banks and strategically important sectors. Also implemented were low interest rates and discrimination against primary goods producers (again, agriculre and mining). Social policies included redistributive economic policies – a positive effect of ISI.
How did these play out? What were the effects of these country’s efforts in state-building, centralizing state authority, and “strengthening the autonomy of the state relative to domestic and international social group, especially capital”? Initially, as Eduardo Silva writes in Latin American Perspectives, ISI was a relatively successful response to the problems of the day which were primarily economic stagnation, political disorder, and social inequality. But cracks formed quickly in its foundation.
To analyze these, it’s probably best to look at the implementation of ISI in a specific context, as implementation varied country to country. Like Silva, we’ll focus on Chile. There, we see the creation of CORFO (Corporación de Fomento de la Producción), an organization that facilitated national economic and social planning. Between 1940 and 1950 CORFO built up non-traditional manufacturing, subsidized targeted industries, and conducted joint ventures with the private sector to develop infrastructure like electrification, transportation, and energy production. Industrial policy also began to discriminate against traditional and agricultural mining sectors – this looked like these sectors having to pay more for machinery, parts, and foreign exchange than they would in a world where free-trade was the policy of choice. But this policy also made agricultural inputs more expensive while at the same time making import competition less expensive, therefore stagnating agricultural production between 1933 and 1955. Thus ISI led to stagnation in the agricultural sector.
While agricultural production stagnated, social welfare in Chile grew. The rough times of the 30s and 40s resulted in national-populist and leftist parties that advocated for social welfare measures. So: the industrialists benefited from the industrial policies mentioned above and the the middle and labor classes benefited from social welfare policies. The only people left out were landowners and peasants.
The ISI policy bundle didn’t last, largely due to pushes to increase investment to industrialization and to improve land tenure arrangements. As Silva writes,
“First, it became clear that public outlays for industrial policy coupled with expenditures on social welfare were contributing to strong inflationary pressures. Second, taming these pressures required periodic IMF-sponsored economic stabilization efforts that gave industrial policy a stop-start character. It also fueled social and political unrest, as did increasing efforts to design and implement agrarian reform in some countries. Third, periodic international recessions contributed to fiscal difficulties because the foreign-exchange earnings of the agro-mineral export sector paid for a good portion of the import-substitution industrialization development strategy. Not only that, but growth in this sector generally remained stagnant because of the emphasis on inward-looking development.”
The so-called “easy” stage of industrialization-substitution had ended. The problem, Silva writes, was that early industrialization had focused on industries with low technological requirements, like textiles. They hadn’t focused on basic industry or consumer durables. Social tensions created by these policies were also emerging: within the social support coalition for import-substitution industrialization, there were fights about who would pay for adjustment costs. Stop-start economic growth added to tensions. In Chile, it was ultimately these political factors that led to the end of import-substitution industrialization.