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STUDENT NUMBER: 200723875

POLM026 - GLOBALISATION AND THE INTERNATIONAL

MODULE TITLE & NUMBER: POLITICAL ECONOMY OF DEVELOPMENT

PROGRAMME: International Relations

NUMBER OF WORDS: 2176 DATE SUBMITTED: 21/03/2021

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See the School’s postgraduate marking criteria for detailed explanation of these categories

Distinction Merit Pass Fail

Task fulfilment

Research

Quality of Argument

Structure

Presentation

Representation of Sources
 From Import Substitution
Industrialisation to Neoliberalism

Introduction

The idea of Global South marks a shift from colonies to nations in need of development.

In this context, several development theories have been placed. The strategy adopted by

China, Taiwan, South Korea, India, Brazil, Argentina, Mexico, and Eastern Europe countries

is the Import Substitution Industrialisation (ISI). The notion of ISI has fallen out in the 1980s

with the rise of Neoliberalism, which has led to greater dependence on Western countries.

The first part of this paper will illustrate the ISI ideology, the different phases of it and how

was put into practice in different countries of the global South. We will then proceed with the

reasons that caused a transition from ISI to Neoliberalism. The main task will be to

understand the main characteristics of Neoliberalism, the history behind it, how it came to be

the most influential ideology of our time and to grasp the philosophy behind it.

The second part will cover the main regions of the Global South, such as Latin America,

East Asia, and Eastern Europe. By doing this we will breakdown the ways in which ISI was

step by step left behind and Neoliberalism emerged.

Import Substitution Industrialization (ISI) and Neoliberalism

The origin of Import Substitution Industrialization (ISI) was first modelled to satisfy

domestic demand by stimulating the purchasing of national consumers. The model emerged

in a propitious historical context, as Gerald Valpy Fits stated, the ISI is the fruit of the Great

Depression of 1929 and the collapsing of the world liberal order. In his words, the ISI was
just an alternative resulting from the international situations of those particulars years

(Gerald, 1998).

Among the main objective of the model was to assign to internal agents a more

decisive role in creating an endogenous base capable of promoting economic growth and

industrialisation, leaving external forces to play only a complementary role. The model was

also intended to raise the level of employment and equalise income distribution in order to

increase solvent and reduce structural heterogeneity. To achieve the goals of import-

substituted industrialization, countries had to implement practices that limited the number of

imports and discouraged the export of locally manufactured products. Import taxes were

imposed to make local products less expensive than those imported from other countries.

Import quotas were also introduced in an attempt to stimulate local production by preventing

the importation of more than a limited number of a given product. Developing country

governments also determined the ISI by regulating foreign trade, which helped improve the

value of the currency (Bruton,1998).

The First Industrial Revolution was built on laissez-faire, the Second on infant

industry protection. In Late Industrialization, the foundation is the subsidy [from

the state] - which includes both protection and financial incentives.

Alice Amsden

Neoliberalism boosted in the Global South by crisis of ISI and 1980s debt crisis.

Theoretically it can be defined as the last institutional form of capitalism: an idealistic project

that aimed to reorganise international capitalism, or, in line with the thesis of David Harvey,

"a political program to restore the conditions necessary for the accumulation of capital and

thus restore the power of economic elites "(Harvey, 2005). Quoting Harvey: "the general

neo-liberal theory foresees an ideal state which should favour, in a primary way, the

individual right to private property, the primacy of legality, the establishment of markets

capable of functioning freely and free trade ". However, these conditions, considered

essential to guarantee individual freedoms, have not always been realized and often, the
neo-liberal state has determined a chaotic evolution and an irregular development of

institutions which have fomented the strengthening of an authoritarian political climate. The

neoliberal state relies primarily on private enterprise and entrepreneurial initiative.

Proponents of neoliberal policies particularly insist on the privatization of businesses and

services; and the removal of customs barriers for free movement of goods, services, and

capital (Kelly, 2005).

In general, sectors previously managed or regulated by the state must be transferred to

the private sphere and deregulated. For Harvey, the task of the state remains to use its

monopoly of the instruments of violent coercion to protect at all costs the freedom of

commercial enterprises and large corporations to operate within the institutional structure

and in free trade markets. Neoliberal ideas are actually not new in the 70s but began to

make their way as early as the Great Depression of 1929(Harvey, 2005).

Latin American experience: from ISI to Neoliberalism

After the Great War, trade between the United States and Latin America grew

exponentially. Large North American companies had a monopoly on important agricultural

and mining production in South America and the marketing of products was also in the

hands of American companies. For these reasons, the consequences of the Wall Street

stock market crash in October 1929 reached Latin America. The immediate effects, at an

economic level, manifested in the sudden drop in the price of exported raw materials and the

drastic reduction in income and value of exports. The longer-term effects were different:

most governments of the time reacted to this dramatic test of vulnerability by turning towards

nationalism (Edwards, 2009).

The beginnings of ISI can be placed at the turn of the 19 th century and last until the

end of it. It saw the replace of manufacturing imports by domestic production and a massive

intervention of the state in consolidating the restrictions against external competitors. In this

period agriculture sector experienced rapid growth due to currency rate devaluations and
defensive income policies that were adopted by the governments. After the first boom in

economic growth, we can assist at the golden age of ISI. Straight after the end of WW2, the

two decades of 1950 and 1970 assisted at massive growth in industrialisation focusing on

automobile industry and with TNCs as a major partner in each country. Based on Herman

Schwartz, the local producers were encouraged to turn to the local capital goods industry

thanks to foreign exchange controls, devaluation and high tariffs supplemented policy

(Schwartz, 2010).

The strategy of mixing TNC investment with national business in the years did not

produce the results that were hoped after 1970. The reasons behind this are that the TNC

did not have any justification to export as they were happy to live behind tariffs walls and did

not make any efforts to maximize the local productions and to bring it to a world market

standard. These factors contribute to the decline of ISI in Latin America and saw the

economic process run out of steam due to structural failures and because it did not generate

sufficient competitive advantage to gain access to the most dynamic sectors of the world

market (Fajnzylber,1994).

The debt of the major countries such as Brazil, Mexico and Argentina were at their limits,

and as a consequence, ISI failed as a strategy for development in this region.

Adjustment [in Latin America] has been a much slower, more difficult, and more

painful process than the Bank originally envisioned a different way of doing business in the

future."

James Wolfensohn, then President of the World Bank, April 1996

The lost decade (Decade Perdida) was the springboard that pushed Latin America to

carry out a profound economic transformation by adopting the classic remedy recommended

by international financial institutions, the so-called "Washington consensus". Structural

adjustment policies had a heavy effect on living standards in Latin America and led to an

increase in poverty levels. Since the early 1980s, there has been a liberalization of markets
on the Latin American continent, increasing poverty and unemployment. In many cases,

workers' rights were threatened with a decrease in real wages and a spread of informal and

precarious work. All of this led to an increase in inequality and economic and financial

instability. By the mid-1990s, the majority of Latin American countries had per capita

incomes far below the level reached fifteen years earlier and, in some countries, at levels not

seen in twenty-five years (Costa,2005).

Eastern Europe: A variegated form of Neoliberalism

The situation in Eastern Europe was in many ways similar to Latin America. At the

beginning of ISI Eastern- Europe was an agro-exporter towards Germany and Britain. After

the Second World War, Eastern Europe changed its path, with the state taking in its hands

the industrialisation of the country “but some-what unfortunate consequences”

(Shwartz,2010). The Eastern Europe countries did not rely on the TNC investment, but

they bought TNC technology directly, in order to have their own companies. This happened

after the WW2 when industrialisation was under Soviet-style socialism. The states used their

low-manufacture goods and agricultural export to finance the investment that occur in the

country.

As was mentioned Eastern Europe did not allow foreign TNC companies to enter the

national market, they just bought the technology from other European states. Unfortunately,

this strategy failed because the Eastern European states choose the weakest firms, in

particular car firms, and so the technology they got was very poor. For example, Poland,

Yugoslavia and the Soviet Union have the technology and machinery to produce Fiat’s 124

and 127 model and Romania licensed a Citroen model. The result was a complete disaster,

the original plan to sell these cars back into Western Europe as “new used cars” failed

(Schwartz,2010).

As mentioned before, 1970 is the period were Latin America boarded a strategy of

borrowing, this is the same that occur in Western Europe. The borrowing was taken in order
to subsidize the living standards of the people and productive investment. The unsuccess of

ISI together with the poor management of States to deliver the desired result let Eastern

Europe have the same destiny as Latin America. This led and in particular URSS to put in

practice the “glasnost” (openness), a way in which individuals could have their enterprise

and make a profit (Schwartz,2010).

ISI falls with the Soviet Union and the new government embraces neoliberal reforms in

order to have a rapid macroeconomic restructuring, privatisation and liberalization

(Bockman,2002).

East Asia: From ISI to Export Substitution Industrialization

When talking about East Asia experience of ISI and development in general, this part of

the globe results as a benchmark for other countries. The Asian Tiger had exploited at a

maximum level the Import Substitution Industrialization to surpass the wide gap between

them and the West. (Mendes,Bertella and Teixeira,2014)

In East Asia, as in Latin America, we have the same system of state control over many

features of national industrialisation. Tariffs, domestic market, and entry of TNC were heavily

controlled as mentioned in the other parts of the Global South. Luckily for divergent colonial

legacies and foreign aid, especially form the USA, states such as Taiwan and South Korea

used the TNC companies at their benefits and increase their export. The goals of Taiwanese

and South Korean governments were to use the TNCs in order to generate more export and

at the same to gain the knowledge to teach the national firms how to produce goods in an

efficient way and at global standards. The difference between Latin America and Eastern

Europe is the approach of the crisis of 1970. The good management and implementation of

ISI during the first years after WW2, the effort the be at the same standards as the West

prove successful for East Asia tigers. In fact, by 1985 Korea was exporting cars to the USA

at a value of $1 billion and $6 billion by 1997 (Schwartz,2010).

 The main difference between East Asia laid in the fact that the states understood that in

order to develop their economy they have to learn from the ISI procedures and to develop

their way from that. East Asia at the difference of Latin America and Eastern Europe

accepted the pace of technology and adapt to it, the other two remain behind.

Conclusion

Neo-liberal ideology has been a 180-degree changer in global geopolitics. Our ways of

thinking and interact with the state had seen a complete revision. From the ISI policies

where the state had a major impact on the economy of the nation to a time where the nation

is only the guarantor of a free market, free of regulation and policies.

The ways in which ISI was left behind are more complex than this essay can stated.

More complex and deep. The failure of ISI, at least speaking about Latin America and

Eastern Europe, were those of not being able to respond to the needs and problem of the

new global order that they were living in. A difference of East Asia, where with a bit of luck

(see the Korea war) and with a different working culture, the ISI was a way to learn from the

West, to develop its own Tigers and to put them on the Global Market.

This argumentation is not to say that Neo-liberals had brought the desired expectation, on

the contrary, it has brought more division and inequality than ever. This is to explain also that

the passage from ISI was a result of the debts that the states from IMF and World Bank and

the failure to build heterogenic economies.

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