Latin America Economy 1910

- 1960
Wars, Depression and LAC reactions
 Prelude to Depression: WWI
Wartime International Economy (1910s)
 Military production raised demand for LAC exports

 Non-military production fell has risen relative price of LAC import, kicked
started 1st ISI
 1st ISI industries are mainly consumers’ luxury goods

 Supported by growing middle class professionals, providing

complementary services to Export-Import trade.

Inter-war international economy (1918 – late 1930s)

 Sustained demand for LAC exports.

 1st ISI industries stagnated to

-> Renewed US & Europe competitions

-> LAC governments’ lack of protection
 Great Depression:
Crisis for Export-Import Model
LAC income shrinks
 Falling international raw material demand Falling raw material prices
 LAC income fall with raw material prices

Expensive Imports
 Falling international production  Imported goods shortages

Results:
 Falling net current balance (i.e. Import cost > Export revenue)
 Demand for manufactured goods sources (luxury consumer goods)
 Demand for surplus export good market

Summary: Export-Import model breaks down to

1. No export market and
2. Relatively unprofitable import, vis-à-vis Import substituted, manufactured goods
 Import-Substitution Industrialisation
(ISI): The Theory
 Objective: Economic autarky by building local manufacture industry
 Why? Reduce dependence on exporting raw material for income
Reduce dependence on foreign manufactured import
Improve current balance of payment’s health by reducing import.
Regain control of industry and raw material ownership by capital accumulation
 How? Build industrial base to manufacture consumption and capital goods for domestic
market.
 Stage 1: Purchase capital goods to create the light industry base for consumers’ goods
production, e.g. Textiles, TV, canned food, cigar
 Stage 2: Purchase capital goods to create the heavy industry base for producing capital
goods, e.g. Tractors
 Depression-induced ISI
 Type: Light consumer goods industries, with some capital goods industries
 Why? Supply to import gap for manufactured goods, due to depression-
induced shortage
 Results
-> Expanded LAC industrial base
-> Export-Import revived under WWII

Why did ISI stagnate again?

 Attractive external market for primary goods
 No supporting conditions for extensive industrialisation, e.g. entrepreneurial
classes, labour force, infrastructure, market side, administrative capacity
 LAC Governments’ unwilling to industrialise
 ISI in earnest: 1950s – 60s (I)

Why?
 Reliance on primary export, with it, price instability and slow demand
growth, means unstable long term economic growth.
E.g. Stop-and-go cycle, where expansion followed a contraction, and
expansion again
 ISI increase growth rate, and absorb excess labour from region’s
population boom and growing urban population.
 ISI led to greater economic independence, by retain control of
industry and reduce dependence on manufactured goods import
 ISI in earnest: 1950s – 60s (II)
How?
State Protection, e.g. Protective tariffs, exchange controls,
State Incentives, e.g. preferential import exchange rates, cheaper loans,
government direct investment
Infrastructure, e.g. infrastructure building to complement industries

What?
 Expand state’s role in economy
 Incentify manufacture
 Vertical industrialisation, e.g. from consumer, intermediary, to capital
goods (Canned fruits, cars, textile machines)
 Role of foreign capital in technological and know-how transfer.
 ISI criticised: 1970s (I)
Two Schools of critique: Market and Structural Schools

Market School’s critique

 Inefficiency: LAC’s greatest comparative advantage is primary good production,
industrialisation prevents this advantage to be maximised, leaving the world economy
less efficient
 High Cost industry: Indiscriminate industrialisation develop inefficient, high cost
industry unable to achieve the scale of production, nor quality, enjoyed by industrialised
countries
 Contradictory policy: high protection reduce incentives to increase supply, and
increase production efficiency.
 Weak rate of transformation: Indiscriminate industrialisation often use more
domestic resources than the gain from saving a unit of foreign exchange, i.e. it cost more
to produce a car domestically than import one.
 ISI criticised: 1970s (II)
Market School (Cont.)
 Anti-agriculture: Industry-friendly credit leaves few resources for agricultural
development. This is compounded by overvalued exchange rates, reducing agricultural
goods price competitiveness whilst favouring import of industrial capitals.
 No export diversification: focus on self-sufficiency neglected exports, leading to LAC
export structure remains primary goods orientated (Late 1960s, 90% Argentine exports
remain primary)
 Deepen dependency: ISI switch dependency on export income, to dependence in
maintaining industry and, with it, industry-led economic growth(By 1960s, 18.6%.
29.3%, 27.7% of Argentina’s, Brazil’s, Mexico’s GDP are from manufacturing/industry
sector)
 Political inability for correctional policy (See Latin America Politics 1910 – 1960)
 ISI criticised: 1970s (III)
Structural School
 Low Labour absorb rate: Almost half of LAC manufacturing workforce are in artisan
(Employment growth rate in manufacturing from 1960 – 69: 2.3%, artisan: 1.6%)
 Price distortion: Special exchange rate for capital good import, cheap credit, labour
legislations set artificial high wages, made manufactured goods’ price more expensive than
market rate, and give no incentive to adopt most efficient production method, in LAC’s case,
labour intensive production.
 Income inequality: Underemployment, combine with leading industry’s capital intensive
production, without fiscal redistribution, income concentrates to capital owners than wage
earners.
 Unsustainable demand: Income inequality reduce market size for manufactured goods,
as less people can afford them.
 Unsustainable supply: vertical integration made each industry indivisible to each other,
forcing each to generate supply substantially ahead of demand, leaving excess unsold goods,
further depressing long term supply.
 Structural un-sustainability: ISI started on income inequality platform, as soon as
those who can afford manufactured goods are supplied, it leaves little room for ISI to
continue, leaving industries with limited market and stagnates.
 ISI: End Notes
Can ISI be made to be sustainable?
 Depend on flexibility of industrialised sector in adjusting
its production to changing demand structure(i.e. from
producing luxury to mass manufactured goods)

 Depends on government’s ability to implement

redistribution policies, thus changing demand structure.
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