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GMS 693: The Latin American & Caribbean Business

Environments

Lesson #3: From ISI to Export led

Economic Growth
Inward vs. Export Orientation

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Inward vs. Export Orientation
There have always been
tensions between:
• those who saw an export led future for the
region – one which embraces the global
economy.
• those who were more inward looking and
nationalistic.
• The latter camp arguing that the region should
not be held hostage to the vagaries of the
global commodity markets and international
politics. 4
Inward vs. Export Orientation
Since “independence” from the
colonial powers the countries of Latin
America and the Caribbean have moved through
several boom and bust cycles
driven by external events and government policy
responses.
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In the colonization of Latin
America and the Caribbean
(LAC), Europeans imposed a
system of mercantilism
treating LAC countries as
producers of raw materials for
export to Europe.
This is a pattern that persists until
today.

Sculpture by Eduardo de Sá - Caramuru

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Comparative Advantages and specialization

Countries in the region used

their comparative advantage
in specific products to
develop export market share.

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Comparative Advantages and industry specialization
Comparative advantage suggests that countries
will engage in trade with one another,
exporting the goods that they have a
relative advantage in productivity.

https://www.investopedia.com/terms/c/comparativeadvantage.asp 8
 Comparative Advantages and specialization
•The concept of Comparative
advantage was first introduced by
David Ricardo in the year 1817.

https://www.investopedia.com/terms/c/comparativeadvantage.asp 9
 Comparative Advantages and specialization
•Absolute advantage refers to the uncontested
superiority of a country to produce a
particular good better.

• Comparative advantage introduces

opportunity cost as a factor for analysis in
choosing between different options for
production.
https://www.investopedia.com/terms/c/comparativeadvantage.asp 10
Comparative Advantage and the Commodity Lottery

• Countries in the region used their comparative

advantage in specific products to develop export
market share.

• The Caribbean islands focussed on sugar and

bananas; Argentina on meat and wool; Mexico on
precious metals e.g. silver and Brazil on coffee,
rubber and cacao (Spillan, 2014). 11
Back in the 19th century, LAC economies were export
oriented
• Countries exported raw agricultural
products and other commodities to the
industrialized world and imported
manufactured products and textiles
primarily from Britain and the US.

Britain was the region’s dominant trading

partner until the early 20th century when
the US became more of a dominant
force.
https://www.historyextra.com/period/victorian/why-how-britain-
became-global-superpower-empire-industrial-revolution/
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“Latin America holds nearly
half of the world’s copper and
silver, a quarter of its nickel
and bauxite, and stores of the
rare earths and metals used in
computers, solar panels, and
next-gen fuel cells.”

Source: https://theintercept.com/2019/12/07/amazon-latin-america-extractivism/

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Despite being rich in
natural resources, it is
the MOST UNEQUAL
region in the world.

Source: https://dailybrief.oxan.com/Analysis/GA249332/Latin-America-poverty-progress-is-being-reversed

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Are Natural Resources a curse or a
blessing?

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The New York Times: In Latin America’s Rich Lands, Poor People
A girl playing and covering
herself in mud at the bank of a
river in a community affected by
oil pollution.
Over three decades of oil drilling
in the Ecuadorean Amazon,
Texaco (now Chevron) dumped
more than 18 billion gallons of
toxic wastewater into the rain
forest, polluting rivers and
streams that residents depend
on for drinking, cooking, bathing
and fishing. https://www.nytimes.com/slideshow/2015/08/25/blogs/in-
Orellana, Ecuador. 2010. latin-america-s-rich-lands-poor-people/s/20150825-lens-
gustavo-slide-IK13.html?auth=login-google
 The New York Times: In Latin America’s Rich Lands, Poor People

A petroleum pipeline
called SOTE (Trans-
Ecuadorean Pipeline
System) carries crude oil
through the country, 310
miles from the Amazon
jungle to the Pacific Coast.

Lago Agrio region,

Ecuador. 2011.
https://www.nytimes.com/slideshow/2015/08/25/blogs/in-latin-america-s-rich-
lands-poor-people/s/20150825-lens-gustavo-slide-8HBN.html?auth=login-google
 The New York Times: In Latin America’s Rich Lands, Poor People
The Uyuni Salt Desert
contains 50 to 70 percent of
the world’s lithium reserves.
The global demand for
lithium, a metal used in high-
powered batteries for
cellphones, laptops and
hybrid cars, is expected to
triple in the next 15 years.
Bolivia. 2012.

https://www.nytimes.com/slideshow/2015/08/25/blogs/in-latin-america-s-rich-
lands-poor-people/s/20150825-lens-gustavo-slide-23KU.html?auth=login-google
The paradox of plenty

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Video – Resource curse

https://www.youtube.com/watch?v=6Pu5XiYKlAQ

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21
Commodity exports = Vulnerability to external events
The reliance on commodity exports
was problematic for LAC countries as
they were held hostage to repeated
boom and bust cycles.

As a result, while the economies did

prosper, it was difficult to sustain
consistent economic growth and
development (Spillan, 2014). 22
 Commodity Lottery – Concept Definition
Horwitz (2015) and others refers to this as the “commodity Lottery”. She writes:

“The success or failure of any economic strategy

was essentially a matter of pure chance,
dependent upon the type, number, location, and
assortment of commodities a country possessed
and was able to extract, process, and, finally,
efficiently export.”
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 The Commodity Lottery

•Some countries e.g.

Argentina exported meat
which required forward
linkages to a domestic
processing sector (with
resultant increases in
employment, wages and
economic activity).
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Source:
 The Commodity Lottery
A country such as
Dominica which exports
bananas would not have
these opportunities.

http://dominicanewsonline.com/news/homepage/news/agriculture/domi
nica-to-resume-banana-exports-to-uk-drigo-says/
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 The Commodity Lottery
Thus, some commodities
were conducive to
economic growth, i.e.
value added processing
while others left the
country vulnerable to
economic boom and
bust cycles.
http://marel.com/meat-processing/news/making-the-most-of-argentinian-beef/4606
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However…
Global Powers Intervention - Roca-Runciman pact
Roca-Runciman (1 de
mayo de 1933) pact
signed with the
government of Great
Britain that forced
Argentina to ship at least
85% of its meat exports
through British
companies. https://turismo.buenosaires.gob.ar/en/article/brief-history-argentine-beef
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EU-Mercosur deal
History repeating itself?

In the EU-Mercosur
deal, Argentina will
export raw
materials and
import finished
products. https://explicitoonline.com/argentina-en-un-deja-vu-permanente-pacto-ue-mercosur-pacto-roca-runciman/ 28
 World Economic Interdependence
•The Great Depression dealt a
serious blow to the region.
•Demand from the US and
European countries fell off a
cliff and commodity prices
plumbed new lows.

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World War 2 and
Global Trade
In addition to the Great Depression
World War 2 impacted the demand
from LAC commodities.

The effects at the supply side of

global value chains are amplified
by a condition know as
“the bullwhip effect”.

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 The Bullwhip Effect in Global Supply Chains
•A phenomenon whereby ordering patterns
experience increased variance towards the upstream
stages of the supply chain.

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Source: Pearson Education (2016).
The Bullwhip effect – Effects of Crisis are amplified
upstream the supply chain

https://www.economist.com/britain/2020/03/26/how-covid-19-exacerbates-inequality https://www.iadb.org/en/news/deep-inequalities-worsen-latin-america-and-caribbean-
vulnerabilities-crises-idb-report
Exports as a % of GDP Latin America
The ones in favor of developing internal markets consider it to be a vital strategy to
reduce the exposure to external events that could affect the domestic economy in
the region.

After the Great

Depression and
WWII there was a
significant drop in
exports from LAC.

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Source: Bertola and Ocampo (2019)
Volatility and Distribution of Wealth

The ups and downs of global markets also

gave rise to debate on the distribution of
the gains from trade (between local and
foreign actors as well as between local
actors) as well as the issue of backward
and forward linkages to the rest of the
economy.
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 Import Substitution Industrialization (ISI)

•ISI was embraced across the region.

It represents an economic doctrine
based on the protection of local
industries, the stimulation of local
demand and support of the local middle
class.

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 Import Substitution Industrialization (ISI)

The state took the lead in self-sufficient

development – nationalizing industries,
implementing protectionist trade
policies, creating local demand and
subsidizing key industries e.g. power
generation, deemed important to
economic development (Spillan, 2016).

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Inward looking as way to escape the “Commodity Lottery”
Import Substitution Industrialization (ISI)
Going back to the implications of the Great
Depression…
• Trade dependency was seen as the reason
for the divergence between the rich North
and the poor South.
• Nationalism increased as well with the
Cardenas Administration in Mexico (1934-
1940) nationalising US oil companies in 1938
(Spillan, 2014). http://media.gettyimages.com/photos/mexican-president-lazaro-cardenas-
announces-the-nationalization-of-picture-id112875634

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 Import Substitution Industrialization (ISI)
•ISI was pursued not only by the large countries
such as Mexico, Brazil and Argentina but also by
the smaller countries in Central America.

•The countries in the Caribbean also pursued an

ISI strategy – erecting high tariff and NTBs (non-
tariff barriers including quotas, industry
standards, bureaucracy, etc).
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 Import Substitution Industrialization (ISI)

• Raul Prebisch, an Argentine

economist, was the main intellectual
behind the ISI philosophy (Spillan,
2014).
• He created what came to be known as
the Dependency School – a neo-
Marxist and neo-Keynesian approach
that sought to blame Latin America’s https://www.iss.nl/about_iss/honorary_fello
ws/raul_prebisch/

underdevelopment on the structure of

world trade. 39
 Import Substitution Industrialization (ISI)
• The Dependency Theory argued that the way
the world system was structured resources
flowed from the periphery (underdeveloped
states) to the center (developed states)
enriching the latter at the expense of the
former.
• In order to reverse this tendency
underdeveloped countries needed to pursue
a deliberate strategy of industrialization.

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Import Substitution Industrialization (ISI)

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ISI worked for the LAC countries – until it didn’t.

•The model is essentially inward looking.

•The strategy of protecting domestic industries and

stimulating local demand was flawed and did not
insulate the region from external shocks.

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 Import Substitution Industrialization (ISI)
• Horwitz (2015) notes that by the late 1970s a number of US
multinationals began to look abroad for cheaper sources of labour.

• These companies turned their attention to Asia which gave rise to the
so-called Asian Tigers - Singapore, Taiwan, South Korea, Hong Kong,
as well as Indonesia, Malaysia, and Thailand.

• These Asian countries embraced export-led growth which proved

resilient to external shocks . Countries in our study region, however,
stood on the sidelines while a new international division of labour
emerged. 43
 GDP Grwoth Comparisson 1980-2010

Source: Kohli (2012)

 Exports Latin America

Source: Kohli (2012)

 Exports Asia

Source: Kohli (2012)

 Income Distribution - Inequality
(proportion of the 20% poorest compared to the 20% richest)

Source: Kohli (2012)

 Washington Consensus – Transition from ISI to open economies
Williamson (1990) – IMF and World Bank Reforms to modernize LAC
economy

Although successful in several ways, the implementation of ISI did lead to

high inflation and other economic problems. When these were exacerbated by
stagnation and foreign debt crises in the 1970s, many Latin American nations
sought loans from the IMF and the World Bank.
At the insistence of these
institutions, LAC countries
had to drop their ISI
protectionist policies and
open up their markets to
free trade.
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Fonte: Rodrik (2006, p. 976)
Boom and Bust

• Trinidad is a case in
point with that
country heavily
reliant on oil and
natural gas and
faced severe
hardship in the
collapse in oil prices
in 2014.
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http://www.businessinsider.com/annotated-history-crude-oil-prices-since-1861-2014-12
 Boom and Bust
Country attempts to
diversify the economy
including a focus on
manufacturing for export
and tourism.

However, a recent
discovery of Oil…
A blessing or a curse?
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http://www.businessinsider.com/annotated-history-crude-oil-prices-since-1861-2014-12
 Boom and Bust
• Venezuela is another example of a
country in the region that focused on
Oil revenues to drive its economic
development.

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http://www.businessinsider.com/annotated-history-crude-oil-prices-since-1861-2014-12
Boom and Bust – During the 1970s Oil-crisis…
In 1976, Venezuela`s oil minister
and OPEC co-founder Juan
Pablo Pérez Alfonzo, warned:

"Ten years from now, twenty

years from now, you will see,
oil will bring us ruin... It is the
devil's excrement."
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Publisher: Banco Central de Venezuela. (2011)
Oil revenue goes down
making it difficult to pay
for Imports (scarce and
more expensive) causing
Inflation to go up

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http://www.businessinsider.com/annotated-history-crude-oil-prices-since-1861-2014-12
 Diversification

Other countries in
the region, like
Mexico, have been
able to diversify
their exports away
from primary
commodities.
photo: Ginnette Riquelme/MCT/Newscom 54
Diversification and reduced risk?

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Diversification and Interdependence

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Diversification of products however, there is a great dependence on
a single trading partner.
Mexican shipments by dollar value during 2018. Also shown is each import country’s
percentage of total Mexican exports.
1. United States: US$344.9 billion (76.5% of total Mexico’s exports)
2. Canada: $14.1 billion (3.1%)
3. China: $7.2 billion (1.6%)
4. Germany: $7.1 billion (1.6%)
5. Brazil: $4.4 billion (1%)
6. Colombia: $3.5 billion (0.8%)
7. Japan: $3.3 billion (0.7%)
8. Netherlands: $2.4 billion (0.5%)
9. South Korea: $2.3 billion (0.5%)
10. United Kingdom: $2.2 billion (0.5%)
11. Chile: $2.1 billion (0.5%)
12. Belgium: $2 billion (0.4%)
13. Guatemala: $1.95 billion (0.4%)
14. Italy: $1.78 billion (0.4%)
15. France: $1.77 billion (0.4%) 58
Source: http://www.worldstopexports.com/mexicos-top-import-partners/
 Boom and Bust

Note that in most cases policy

makers also contributed to the
problem by not doing enough to
PROTECT and to diversify their
economies during the boom times.

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http://www.businessinsider.com/annotated-history-crude-oil-prices-since-1861-2014-12
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In our next class, we will explore how
these changes are affecting trade and
investments in the region.

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Thank you!

Questions?

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