Import Substitution and Industrialization in Latin Amercia: Experiences and Interpretations Author(s): Werner Baer Source: Latin American Research Review, Vol. 7, No. 1 (Spring, 1972), pp. 95-122 Published by: The Latin American Studies Association Stable URL: http://www.jstor.org/stable/2502457 Accessed: 26/08/2009 09:21 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=lamer. 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The Latin American Studies Association is collaborating with JSTOR to digitize, preserve and extend access to Latin American Research Review. http://www.jstor.org IMPORT SUBSTITUTION AND INDUSTRIAL- IZATION IN LATIN AMERICA: EXPERIENCES AND INTERPRETATIONS* WernerBaer, Vanderbilt University THROUGHOUT MOST OF THE FIFTIES AND SIXTIES MANY LATIN AMERICAN GOVERN- ments adopted Import SubstitutionIndustrialization (ISI) as their principalmethod to achieve economicgrowth and socio-economicmodernization. By the opening of the Seventies,however, there is considerabledoubt about ISI's successin solving the region's developmentproblems. In many countriesthe possibilities for further im- port-substitutionhad disappeared.Industrial growth had slowed, job opportunitiesin industryfor Latin America'srapidly growing urbanpopulation were scarce,income distributionhad in many countrieseither remainedunchanged or had become more concentratedthan in the early post-World War II years, and most industrialgoods produced within the region were priced so high that export possibilities were se- verelylimited. Considerabledebate has taken place among economistsand policymakersover the merits of ISI as a strategyfor economicdevelopment, the performanceof ISI in various countries,over the nature of post-ISI problemswhich these countrieshave faced,and over policiesto deal with these post-ISIproblems. In this review articleI shall first describethe natureof ISI in Latin America,its occurrenceprior to World War II, and its developmentin the decadesof the Fifties and Sixties. I shall then review the problems which developed as ISI reachedma- turity and review various analyses developed to explain these problems. Finally, I shall examinevarious strategies which have been suggestedfor the post-ISI period. THE NATURE OF ISI IN LATIN AMERICA ISI is an attempt by economicallyless-developed countries to break out of the world division of labor which had emerged in the nineteenthcentury and the early part of the twentiethcentury. Under this division, LatinAmerica (and most areasof Asia and Africa) specializedin the export of food and raw materials,while import- ing manufacturedgoods from Europe and the United States. Import substitution consists of establishing domestic production facilities to manufacturegoods which were formerlyimported. It follows that all countrieswhich industrializedafter Great Britain, went through a stage of ISI; that is, all passed through a stage where the larger part of investmentin industrieswas undertakento replaceimports. ISI would * The author wishes to thank David Felix, Andrea Maneschi, Carlos M. Pelaez, William Steel, and William 0. Thweatt for many useful suggestions. 95 Latin American Research Review come to a close when most investmentwas channeled towards the constructionof capacityto producefor new incrementaldemand. The ISI wave in Europeand the United Statesoccurred in the middle and sec- ond half of the nineteenth century.' It is a well-known fact that in this early ISI processgovernments played an activerole in encouragingand protectingthe develop- ment of infant industries. Another characteristicof nineteenth century ISI is its "national"character. Although in some countriesfinance for infrastructureinvest- ment was obtainedfrom abroad,industries were for the most part in domestichands, while the design of machinesand skilled manpowerto run them were often imported from Englandin the earlyindustrialization period. Once Western Europeand the United Stateshad undergonetheir initial indus- trializations,import substitutiondid not come entirelyto an end. However, it ceased being mainly a mechanismof industrialization,and becamein the twentieth century part of a continuingprocess of growth and of a changingpattern of industrialspecial- izationamong economically advanced countries.2 There are varioushistorical reasons why the countriesof Africa, Asia and Latin Americadid not undergoISI at the time of, or right after, the EuropeanISI's. Colon- ial policies of Europeancountries provide much of the explanationfor the former two cases,while socio-economicstructure helps explain the LatinAmerican case. The presenceof attractiveexternal markets for the region'sprimary exports, which bene- fited the elites, meant that there was little political desire to change the structureof the economies.Also in the nineteenthcentury and earlypart of the twentiethcentury, Latin Americancountries did not have the entrepreneurialclasses, labor force, infra- structure,market size, or administrativecapacity to cope with an extensive industrial- ization process.Also in the case of some countries,like Brazil, Europeanpowers had enough leverage to force governmentsto maintainfree trade policies, thus in effect blockingany possibility of ISI.3 ISI BEFORE AND DURING THE SECOND WORLD WAR Latin America was not completelydevoid of manufacturingactivities prior to World War I. It has by now been well documentedthat in the latter part of the nineteenth centuryworkshops and small factories in textiles and food products in- dustrieshad developed in some parts of Argentina,Brazil, Mexico and other larger countries.Also, machine tools and spare parts workshopsdeveloped to service rail- roads,sugar refiningmills, etc.4These activitieswere usually startedby importersof equipment.There were some isolatedattempts to raisetariffs both to protectincipient industriesand to stimulatethe creationof new ones.5 It would be mistaken,how- ever, to speakof "industrialization"prior to World War I. The bulk of manufactured goods consumed in Latin Americawere either imported or producedby small do- mestic workshops, while exports consisted almost entirely of primary products.6 Except for Argentina, the population was primarilyrural, and the primaryexport sector was the pacesetterof economicactivity, while workshopsand small industries were appendagesto generaleconomic activity. It should be noted, however, that on the eve of World War I the primaryex- 96 IMPORT SUBSTITUTION IN LATIN AMERICA port sector with its complementaryactivities in services (banking, merchandizing, government) and social infrastructure(communication, transportation, etc.) had in many Latin Americancountries created a fairly substantialmiddle dass which con- sumedlarge quantities of importedmanufactured consumer goods. ISI INDUCED FROM ABROAD World War I, the GreatDepression of the Thirties and World War II induced pronouncedspurts of ISI in most largerLatin American countries.7 The interruption of shipping and the decline of non-militaryproduction in Europe and the United Statesduring World War I createdsevere shortages of importedmanufactured goods in Latin America,raised relativeprices of such goods, and increasedprofitability of ISI investment.Textiles, food products,and various other light consumergoods in- dustries were the principal fields of ISI in that period. In the Twenties many of these newly createdISI industriesstagnated because of renewedU. S. and European competitionand the general refusal of policy makersto protect infant industriesof recent vintage. It was generally thought that World War I had been an aberration from the naturalorder of things, which was reflectedin the world division of labor of the nineteenthcentury. Hence policy makerswere reluctantto tamperwith a move- ment backto "normalcy."8 The depressionof the Thirtiesresulted in renewedshortages of importedgoods. The fall of foreign exchange receipts from exports forced most countries of the region drasticallyto curtailimports. The decline resulted at first in increaseduse of productivecapacity which had been underLtilizedin the Twenties, and later in the creationof new industrialcapacity.9 As in World War I, the depression-inducedISI occurred primarily in light consumer goods industries, although in some cases, especiallyBrazil,10 steel and capitalgoods industrieswere developed on a relatively small scale. World War II had a stimulatingeffect on ISI industries:shortages of foreign manufacturedgoods led to full utilization of industrialcapacity;" some investment in new capacityoccurred when capital