Trade and Development I:
Import Substitution Industrialization
READING ASSIGNMENT:
Oatley – Chapter 6
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Plan
1. Interests & Institutions explanation for ISI
2. Economic justification for ISI
3. What is ISI?
4. The effect
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Part 1:
Interests & Institutions
explanation for ISI
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• Up through WWI, developing countries
had liberal trade policies
• By late 1950s, developing countries turn
protectionist
• 2 questions:
– Who were the winners from globalization?
– Did they have political power?
• Trade politics in developing countries
dominated by urban-rural cleavage
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• Generally, developing countries are abundantly
endowed with land and poorly endowed with
capital…
• Agriculture is the ________-________ sector
– EXPORT ORIENTED SECTOR
• Manufacturing is the ________-________ sector
– IMPORT-COMPETING SECTOR
• So, land-owners should be ___-free-trade
– PRO-
• Owners of capital should be ___-free-trade
– ANTI5
Recall Rogowski’s model
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Pro-trade
Pro-trade


Examples:
CLASS
CONFLICT
Anti-trade
Peron in
Argentina,


Vargas in
Brazil
Developing
URBANAnti-tradeRURAL
CONFLICT
Pro-trade
Pro-trade


URBANRURAL
Anti-trade
CONFLICT

CLASS
Anti-trade
CONFLICT

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Smoot-Hawley, Great Depression
Developing
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Part 2:
Intellectual justification for ISI
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Intellectual justification:
Structuralist argument
• The shift of resources from agriculture to
manufacturing would not occur unless the
state adopted appropriate industrial policy
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International Anti-trade stance
• Haberler Report:
– Von Haberler – Harvard economist (Austrian origin)
– Reports a decline in the “terms of trade” for primary producers
– From 1955: commodity prices fell by 5%, industrial prices rose by 6%
• 1964 United Nations Conference on Trade and Development
(UNCTAD)  Group of 77
• (Von Haberler did not mean that there was a systematic longterm (secular) decline in the terms of trade. He left Harvard in
1971 for American Enterprise Institute)
•  Singer–Prebisch Theory (Intellectual justification for ISI):
– Participation in GATT will make it harder for developing countries to
industrialize
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Terms of trade
• Relates the price of a country’s exports to
the price of its imports
• “Improvement” in the terms of trade:
– Price of exports is rising relative to the price of
imports
• “Decline” in the terms of trade:
– Price of exports is declining relative to the
price of imports
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Summarizing:
Why did governments adopt ISI?
1. Interests
– Losers from globalization gain power during
the Great Depression
– (Globalization dries up, so the “winners” lose
substantial income)
2. Ideas
– Some economists (legitimized by the United
Nations) argued against free trade
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Part 3:
What is ISI?
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Import Substitution Industrialization
• Industrialize by substituting domestically
produced goods for manufactured items
previously imported
• Typically called “ISI”
• 2 stages:
– “Easy” ISI
– Secondary ISI
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Easy ISI
•
Develop domestic manufacturing of simple
consumer goods
•
Soda, beer, apparel, shoes, furniture
What do you mean by “easy”? Easy how? How is it easy?
1. Large domestic demand preexisting
2. Requires “Low-Tech” machines
3. Requires “low-skilled” labor
Ya know… “easy.”
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Asia & Latin America
• Both practiced “easy” ISI
• But then Asian countries switched to an
EXPORT-ORIENTED STRATEGY:
– Producing manufactured goods that can be sold in
international markets
– EXPORT rather than produce exclusively for the
domestic market
• Latin America moved to “SECONDARY ISI”…
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SECONDARY ISI
• Production of consumer durable goods,
intermediate inputs, and the capital goods
needed to produce consumer durables
• E.g., automobiles (Argentina, Brazil, Chile)
• Begin by importing auto pieces and
assembling them domestically
• Gradually, increase the % of locally
produced parts
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20
Argentine
Torino
http://www.taringa.net/posts/autosmotos/4559857/Autos-del-Turismo-CarreteraChevy-Falcon-Dodge-Torino.html
http://www.taringa.net/posts/autosmotos/16261340/Renault-Torino-un-fierrazoD.html
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Government policies to promote ISI
• Investment in activities the private sector would
not produce:
– Roads, transportation networks, electricity,
telecommunications
– Large-scale operations – steel plants, auto plants
• State-owned Enterprises (& mixed-owned)
– Chemical, telecommunications, electricity, railways,
metal fabrication
• Trade barriers (tariffs)
• Tax policies:
– “Taxed” agricultural exports through “Marketing Boards”
– Marketing Board – purchased crops from farmers at
below-world market prices, then sell them on the world
market at world market prices
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Marketing boards
• Disincentivized agricultural production
• Subsidized industrialization
Tariffs
• Incentivized local consumers to buy locally
manufactured industrial products
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Closer look @ Brazil
• Labor-abundant, capital scarce
• Late 19th century – slave labor
• 1877-78 Grande Seca (Great Drought) in the cotton-growing
northeast, led to major turmoil, starvation, poverty and
internal migration
• Slavery abolished 1884
• Still, primary commodities – #1: Coffee – dominate until the
Great Depression
• Drop in prices hurt land owners again – this time a coup
• 1930 Getulio Vargas
• Pursues the easy ISI stage – Protectionism promotes light
manufacturing
• Transition to 2ndary ISI in 1950s…
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Consumption of capital goods in Brazil
80%
% imported
60%
60%
35%
40%
20%
10%
0%
1949
1959
1964
Year
Oatley 2011: pages pg. 126-127
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http://www.youtube.com/watch?v=cbOdUqf-mUI
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Argentina’s Bicentennial Celebration:
http://www.boston.com/bigpicture/2010/05/argentinas_bicentennial.html
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Results
• How did they pay for industrialization?
– Borrowed
• How did they pay it back?
• Latin American Debt Crisis (1982)
– The Lost Decade
• IMF to the rescue?
– Washington Consensus
– Dismantle the state’s presence in the economy
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Take-homes
• Political motivation for ISI:
– Losers from trade in Latin America (urban sector) gain
political power
• Intellectual justification for ISI:
– Declining terms of trade for primary products
• Asia & LA both practice “easy” ISI
• LA moves to Secondary ISI
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Thank you
WE ARE GLOBAL GEORGETOWN!
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