Import Substitution Industrialization (ISI) PDF

Import Substitution Industrialization  From primary export-led growth… Until 1930 the dominant paradigm for economic development in the Global South was primary export- led growth. Exports promoted substantial economic growth in Latin America in the late 19th to early 20th...

Import Substitution Industrialization  From primary export-led growth… Until 1930 the dominant paradigm for economic development in the Global South was primary export- led growth. Exports promoted substantial economic growth in Latin America in the late 19th to early 20th century, but prices tumbled during the Great Depression. Traditional exports from Latin American Countries  Top 1 product accounts for 54%, Top 3 for 73% of all exports  Trade and production 1929–1937 (1929=100) percentage change 1929 1930 1931 1932 1933 1934 1935 1936 1937 1929–32 1932–7 1929–37 Consequences World Prices a) Food of the 100Great 84 66 52 46 42 40 42 46 -48 -12 -54 b) Raw Materials Depression 100 82 59 44 40 40 39 42 47 -56 7 -53 c) Manu factures 100 94 78 64 56 50 48 48 51 -36 -20 -49  … to import substitution industrialization Prebisch-Singer thesis: Demand for food and raw materials remain constant while demand for manufactured goods grows. As a result, costs for imports tend to exceed revenues from exports resulting in a growing trade deficit. The solution: Rather than importing manufactured goods, developing countries have to industrialize. Import substitution industrialization policies Protectionism: tariffs, quotas and licensing requirements on certain High exchange rates and foreign currency rationing. Channeling of foreign direct investments to industrial development. Tax exemptions and cheap loans for newly established industries. Public ownership of banks and strategically important sectors. Low interest rates. Mexico Mexican (economic) miracle (1956-1970): - GDP averaged 6.7% per year. - Fixed investment (as share of GDP) increased from 15 to 20%. - Labor productivity increased by 3.3% per year. - Real wages increased 4.5% per year. - Share of manufacturing increased from 17.5 to 23.3% (of GDP). Mexican protectionism: - Tariffs: Up to 85% on consumer durables and more than 40% on other consumer goods. - Licenses: certain imports needed prior approval by the governments. - Domestic content requirements: A certain proportion of components from Mexico. In 1960 Mexican tariffs accounted for 40% of consumer goods and 85% for some consumer durables.  International trade accounted for less than 20% of GDP in 1970 – compared to more than 60% in 2000 Mexican ‘economic miracle’ ISI Outcomes Sustained and substantial economic growth. Increasing importance of manufacturing. Growing investment and growing productivity. Comparable low (official) unemployment rates. Stable jobs in large enterprises, along with the informal work. Growing living standards, especially in urban areas. Declining poverty, but continuous inequality.  Substantial growth between 1950 and 1980 Growth rates were higher than in the 1980s and 90s Limited catch-up with the US and Europe Mexico: from 30 to 45% of US GDP per capita  Increasing productivity  Productivity still lacked behind the US Structural change: Increasing importance of manufacturing Improvements in living standards Why did ISI fail? Inward instead of outward industrialization. Lack of exports caused growing current account deficits. Increasing and in some cases hyper inflation. Growing interest rates increased costs of borrowing. Latin American debt increased from 20% of GDP in 1974 to 60% in 1984. IMF/World Bank imposed structural adjustment to deal with debt. Declining exports (as % of GDP) Declining exports (as share of world trade). Increasing current account deficit. Increasing public debt Growing budget deficits and inflation Increasing debt as a result of higher interest rates  1980s Latin American debt crisis