5.3 Import Substitution Industrialization

Latin America's economic landscape shifted dramatically from 1930 to 1960. Countries adopted Import Substitution Industrialization (ISI) to reduce foreign dependency and boost local manufacturing. This strategy aimed to create jobs, save foreign exchange, and promote self-sufficiency.

ISI was part of a broader shift towards state-led development and economic nationalism. Governments intervened heavily in the economy, nationalizing industries and imposing trade barriers. These policies shaped Latin America's economic and political trajectory for decades to come.

Economic Theories and Policies

Import Substitution Industrialization (ISI)

• Economic development strategy aimed at reducing foreign dependency through local production of industrialized products
• Focuses on domestic manufacturing of previously imported goods to satisfy domestic demand
• Protects domestic industries through high tariffs, import quotas, and government subsidies
• Intended to create employment, reduce foreign exchange demand, and promote self-sufficiency
• Often criticized for creating inefficient industries, lacking economies of scale, and leading to high costs for consumers

Structuralist Economics and Dependency Theory

• Economic Commission for Latin America and the Caribbean (ECLAC) promoted structuralist economics emphasizing state intervention and ISI
• Raúl Prebisch, an Argentine economist, served as the executive director of ECLAC and advocated for structuralist policies
• Prebisch argued that the global economic system perpetuated the underdevelopment of peripheral countries through deteriorating terms of trade
• Dependency theory emerged, asserting that the global capitalist system maintained the underdevelopment and dependency of peripheral countries on core countries
• Proponents of dependency theory called for delinking from the global capitalist system and pursuing self-reliant development strategies

Infant Industry Argument and Protectionism

• Infant industry argument justifies temporary protectionism and government support for nascent industries until they become internationally competitive
• Protectionist measures, such as high tariffs and import quotas, shield domestic industries from foreign competition during their development phase
• Proponents argue that temporary protectionism allows domestic industries to achieve economies of scale and become efficient
• Critics argue that protectionism can lead to inefficiencies, lack of competition, and higher costs for consumers
• The success of infant industry protection depends on the ability of protected industries to become competitive and contribute to long-term economic growth

State Interventions

State-Led Development and Economic Planning

• Governments play a central role in directing economic development through planning, investment, and regulation
• State-owned enterprises (SOEs) are established in strategic sectors (oil, mining, utilities) to control key industries and generate revenue
• Economic planning involves setting production targets, allocating resources, and coordinating investment across sectors
• State-led development aims to promote industrialization, infrastructure development, and social welfare
• Critics argue that excessive state intervention can lead to inefficiencies, corruption, and crowding out of private investment

Nationalization and Expropriation

• Governments take control of foreign-owned assets, particularly in strategic sectors (oil, mining, utilities), through nationalization or expropriation
• Nationalization transfers ownership and control of assets to the state, often with compensation to foreign owners
• Expropriation involves the seizure of assets without compensation, often justified on the grounds of national interest or social justice
• Nationalization and expropriation aim to assert national sovereignty over natural resources and redistribute wealth
• These measures can strain relations with foreign investors and lead to legal disputes and economic sanctions

Trade Barriers and Import Restrictions

• Governments impose tariffs, which are taxes on imported goods, to protect domestic industries and generate revenue
• Import quotas limit the quantity of specific goods that can be imported, restricting foreign competition
• Non-tariff barriers, such as licensing requirements and technical standards, can also restrict imports
• Trade barriers aim to protect domestic industries, promote self-sufficiency, and improve the balance of payments
• However, trade barriers can lead to higher costs for consumers, reduced competition, and potential retaliation from trading partners