Import Substitution Industrialization in Latin America Expericne and Lesson for the Future

8/11/2019 Import Substitution Industrialization in Latin America Expericne and Lesson for the Future

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Import Substitution Industrialization in Latin America:

Experience and Lessons for the Future

Carlos A. Primo Braa!

I. Introduction

"erner Baer#s contributions to the anal$sis of Latin American economic de%elopment

occup$ a &ell deser%ed place in the economic literature dedicated to the reion. But

"erner is an unusual scholar. 'e has been not onl$ an influential thin(er and researcher)

but also he has *enineered+ one of the larest informal net&or(s of scholars interested in

Latin American economics ,, encompassin enerations of his students -includin

m$self and collaborators at /anderbilt 0ni%ersit$) the 0ni%ersit$ of Illinois at 0rbana,

Champain) the 0ni%ersit$ of S1o Paulo) the Catholic 0ni%ersities in 2io and Lima) etc.

Accordinl$) his impact on the debate of Latin America#s economic experience oes &ell

be$ond his &ritins.

In this paper) I discuss his anal$ses of the pros and cons of import substitution

industrialization -ISI in Latin America) focusin mainl$ on the case of Brazil. I re%ie& a

selected number of his man$ contributions to this literature and) in particular) I as( to

&hat extent some of the 3uestions posed b$ his earlier papers on ISI remain rele%ant to

the contemporar$ debate on trade and de%elopment.

Section II re%ie&s the main insihts and 3uestions that can be extracted from some of

his contributions to the literature. Section III re%isits some of these 3uestions from the

perspecti%e of the onoin debate on trade and de%elopment. Section I/ concludes.

!Carlos A. Primo Braa) Senior Ad%iser) International 4rade 5i%ision) 4he "orld Ban(. Paper preparedfor a seminar in honor of Professor "erner Baer) held at the 0ni%ersit$ of Illinois at 0rbana,Champain)

5ecember !,6) 6778. 4he %ie&s expressed here are personal and should not be attributed to the "orld

Ban( 9roup) its Executi%e 5irectors) or the countries the$ represent.

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II. ISI: Experiences and Interpretations

4his section borro&s its name from one of "erner#s seminal papers -Baer !;6

&hich anal$zed the process of Latin American industrialization in the !! points out that there are t&o *conflictin paradims for

de%elopment strateies.+ ?ne emphasizes the importance of the principle of comparati%e

ad%antae) preachin free mar(et and export oriented policies. 4he other hihlihts that

*there is a natural path of de%elopment @ and that path) for most part) in%ol%ed hea%$

industrialization.+ 4his de%elopment strate$ has been t$picall$ associated &ith

inter%entionist trade policies and focus on fosterin a domestic mar(et %ia ISI.

In his e%aluation of the ISI experience in Latin America) "erner Baer adopts an

anal$tical approach that borro&s from both paradims. 'e presents ISI as *destin$+

&hile criticizin the excessi%e attention to *efficient allocation of resources+ that could

perpetuate a focus on *m$opic+ comparati%e ad%antae -i.e.) a static rather than a

d$namic perspecti%e. At the same time) he reconizes that *one,size does not fit all+ in

e%aluatin ISI experiences in Latin America. Accordinl$) he underscores the rele%ance

of some of the criticism comin from adepts of the *mar(et,oriented+ paradim) &hile

pointin out that some of this criticism applies much better to small economies -e..)

Chile than to the larer Latin American economies -e..) Brazil.

4he point of departure of his e%aluation is the proposition that *all countries &hich

industrialized after 9reat Britain) &ent throuh a stae of ISI that is) all passed throuh a

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stae &here the larer part of in%estment in industries &as underta(en to replace imports+

and that *in this earl$ ISI process in Europe and the 0nited States in the I centur$D

o%ernments pla$ed an acti%e role in encourain and protectin the de%elopment of

infant industries+ -Baer) !;6) pp.


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*b$ transferrin (no&,ho& and oranizational capabilities+ &hile benefitin from the

rents associated &ith protected mar(ets.

ISI led to sinificant structural chanes in the Latin American economies in the post,

"orld "ar II era) &ith the manufacturin sector expandin its share in 95P bet&een

!.! percent. Structural chane &as particularl$

sinificant in the case of Brazil &ere industr$ increased its share in the econom$ from

!.= percent in !>; to 6= percent b$ !8=. Industrial ro&th became the main dri%er of

Latin American economies o%er these t&o decades.

B$ the !;7s) ho&e%er) the ISI model &as alread$ reachin its limits. ot onl$ the

size of Latin American domestic mar(ets constrained the opportunities for further

industrialization) but also the accumulation of distortions associated &ith the panopl$ of

o%ernment inter%entions imposed a ro&in *dra+ on the ro&th prospects of these

economies. Goreo%er) monetar$ and fiscal profliac$ often became the macroeconomic

companions of ISI) as o%ernments tried to stimulate economies amid ro&in sins that

the ro&th di%idend of the *eas$+ ISI phase &as one. 4hese actions pa%ed the &a$ to

the ro&in external debt and balance,of,pa$ment crises experienced b$ Latin American

countries in the !=7s.

In a paper co,authored &ith 5on Coes -Baer and Coes) 6776) p. =86) &hich focuses

on Brazil) "erner points out that macroeconomic *pressures) especiall$ external ones)

&ere the maHor forces in brinin this phase ISID of Brazilian economic histor$ to an

end. ?%er the last t&o decades) especiall$ in the !7s) the pendulum bean to s&in

bac( to a much more open economic model) in &hich barriers to forein trade and capital

flo&s &ere substantiall$ eased.+ 4his characterization can be extended to other Latin

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American economies. At the same time) the ine%itable 3uestion is to what extent can the

pendulum once again swing back towards a more interventionist and closed model of

development? After all) as pointed out in aha) an(ani and 9ill -6778) p.) *althouh

nearl$ e%er$ countr$ in Latin America and the Caribbean has pursued economic reform)+

ro&th o%er the last t&o decades has remained elusi%e. Aainst this bac(round) the fact

that *reform fatiue+ has become a common,denominator in the reion is not surprisin.

An ans&er to the chances of recidi%ism -particularl$ &ith respect to protectionist

trade policies has to address not onl$ economic considerations) but also the e%ol%in

political en%ironment in Latin American countries. In this paper) I &ill limit m$self to the

economic aspects that Baer identified as maHor challenes for polic$,ma(ers dealin &ith

the implications of ISI in the !;7s. It can be arued that these issues -Baer) !;6 !=>

pro%ide a useful reference to Hude the extent to &hich polic$ options adopted in the

!=7s and !7s ha%e pa%ed the &a$ for a sustainable model of economic interation for

Latin American economies.

III. Revisiting the Trade and Development Nexus

?ne possible characterization of Baer#s extensi%e re%ie& of the (e$ challenes faced

b$ Latin American polic$ ma(ers in the aftermath of the ISI phase can be summarized b$

the follo&in three 3uestions: -! can trade polic$ be an effecti%e instrument for a pro,

acti%e industrial polic$J -6 could Latin American countries adopt the Asian model -of

manufactured,based out&ard orientationJ and - can the trade reime be reformed in a


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&a$ that helps po%ert$ alle%iation and fosters a more e3uitable distribution of incomeJ

4he ans&ers to these 3uestions are explored belo&.

The revival of interest in industrial policy

B$ the late !7s) some anal$sts felt confident enouh to arue that *It is enerall$

belie%ed that import substitution at a minimum outli%ed its usefulness and liberalization

of trade is crucial both for industrialization and economic de%elopment.+ -Krueer) !;)

p.!. But the *eternal+ debate about the pros and cons of industrial polic$ -and trade

protectionism has ta(en a ne& format in the last fe& $ears) reflectin the contributions

of authors such as 2odri( and 'ausmann and re%ie&s of the lessons from the !7s.6

At the core of this debate is the proposition see Baer -!;6) p.!!7 ,, that there is no

eas$ economic method to e%aluate if the costs of ISI,related *inefficiencies+ dominated

*the modernization or de%elopment+ brouht b$ ISI. In other &ords) to &hat extent the

costs of resource misallocation and rent,see(in beha%ior surpassed the benefits of

diffuse externalities associated &ith technoloical proress and learnin,b$,doin.

4he ans&er to this 3uestion remains contro%ersial. Some -e..) 2odri( 6778 arue

that the focus on static efficienc$ ains does not amount to a ro&th strate$. From this

perspecti%e) the dismantlin of trade inter%entions &ill not necessaril$ pa%e the &a$ to a

ne& model of export,dri%en de%elopment. Accordin to this perspecti%e) the reduction of

the anti,export bias brouht b$ comprehensi%e trade liberalization in Latin America did

not enerate enouh incenti%es for steerin these countries into an export,dri%en ro&th

path. 4hese critics emphasize) for example) the importance of *self disco%er$+ i.e.) the

(no&lede enerated b$ firms that in%est in *experiments+ to identif$ &hat the$ are ood

6See 2odri( -677> 'ausmann and 2odri() -6778) and "orld Ban( -677


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at producin and exportin aruin that unless there is a pro,acti%e o%ernmental polic$

to stimulate these *experiments+ this t$pe of entrepreneurship tends to be undersupplied)

inhibitin the process of economic di%ersification and ro&th.

In sum) althouh the debate on the Latin American experience &ith respect to ISI

has con%ered to the reconition that *&holesale+ trade protection is not conduci%e to

sustained economic ro&th) man$ of the 3uestions posed b$ "erner Baer in the !;7s

remain rele%ant to the debate about ho& best to implement trade polic$ as a le%er to a

ro&th,oriented strate$. 4he re%i%al of interest in polic$ acti%ism illustrates the

currenc$ of man$ of the points raised in his earlier contributions.

Export Pessimism?

Baer -!=>) p. ! poses the 3uestion *couldD the &orld ha%e accommodated a

situation &here man$ Latin American countries &ould ha%e emulated the East Asian

superexportersJ+ 'e oes on to 3uote Cline -!=6 suestin that if most de%elopin

countries &ere to follo& this model this *&ould ha%e resulted in untenable mar(et

penetration into industrial countries.+

Export pessimism in its different formats -secular decline of terms of trade for

commodit$ exporters) the political econom$ of mar(et access in industrialized countries)

etc. has often been at the %er$ core of in&ard,oriented strateies of de%elopment. 4he

Cline experiment focus on the implications of eneralizin the manufactured,exports

intensit$ achie%ed -!;8 b$ the *9an of Four+ -'on Kon) China South Korea

Sinapore and 4ai&an) China to all de%elopin countries and arues that the *fallac$ of

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composition+ holds i.e.) if all de%elopin countries &ere to adopt an export,oriented

strate$ the results &ould be 3uite different from the experience of the super,exporters.

4he realit$ of the expansion of China#s exports in the last t&o decades) ho&e%er)

underscores that the scope for expansion of manufactured exports from de%elopin

countries &as much bier than *export pessimists+ belie%ed. 4he absorpti%e capacit$ of

import mar(ets is often underestimated) in particular) &ith respect to opportunities for

intra,industr$ trade. Goreo%er) the main implication of implementin trade reforms that

eliminate the anti,export bias of ISI practices is to allo& pri%ate actors to explore

unforeseen export opportunities) contestin ne& mar(ets that are impossible to predict ex

ante.

Gexico and Chile) for example) ha%e sinificantl$ expanded their export %olumes

-and %alue,added in the last decade) illustratin that an out&ard,oriented strate$ can be

successfull$ pursued b$ Latin American countries. It remains true) ho&e%er) that Latin

American and Caribbean -LAC countries ha%e laed behind East Asia M Pacific -EAP

countries in terms of their interation into the &orld econom$. In the mid !=7s) both

reions had similar trade to 95P ratios. B$ 677>) LAC#s trade to 95P ratio &as >7

percent belo& that of EAP. In short) the reion as &hole has remained an underperformer

in terms of trade expansion in spite of sinificant trade reforms in the last t&o decades.

But as EAP countries performance illustrates) the reason for this has less to do &ith the

absorpti%e capacit$ of industrialized countries than &ith macroeconomic %ariables -e..)

fre3uent reliance on o%er%alued exchane rates as monetar$ anchors and institutional

factors -e..) o%ernment effecti%eness) control of corruption) not to mention a distorted

structure of production inherited from reliance on extreme ISI.

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Trade and Poverty

Another theme often addressed in "erner Baer#s &or( is the interaction bet&een

trade reimes) po%ert$ and income distribution. 'e hihlihts -Baer !;6) p. !;=) for

example) the difficulties in pursuin redistributi%e efforts in the post,ISI era to the extent

that the *profile of the producti%e structure &hich resulted from the ISI process reflects

the demand profile often based on 3uite une3ual income distributionD &hich existed at

the time &hen the process &as started.+ Baer -6776 contrasts neo,liberal policies

follo&ed b$ most Latin American countries in the !7s &ith the ISI era. 'e points out

that althouh *ISI helped di%ersif$ the economies of the reion and neo,liberalism

increased efficienc$ b$ openin the economies to more trade and forein in%estments

none of the reimes effecti%el$ sol%ed the reion#s distributional problems+ -Baer) 6776)

p. 7.

"erner Baer#s s(epticism about the impact of trade liberalization a usual

bac(bone of neo,liberal reforms on po%ert$ and ine3ualit$ is &arranted. After all) it is

important to reconize that trade liberalization can be a force for po%ert$ reduction) but

the ultimate outcome &ill depend on man$ other factors) includin initial conditions of

the countr$ underoin reform) the nature of the reform) &ho the poor are) and ho& the$

sustain themsel%es.

Anal$ses of the lin(aes bet&een trade and ro&th) both cross,countr$ anal$ses

and countr$,specific studies) tend to confirm a positi%e association) e%en thouh the

manitude of such a relationship is contro%ersial. After all) there are no examples of

countries sustainin lon,term ro&th &ithout bein open to trade. Sustained economic

For a detailed anal$sis of the e%idence on the lin(s bet&een trade liberalization and po%ert$ see "inters)

GcCulloch and GcKa$ -677>.


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ro&th) in turn) is t$picall$ associated &ith impro%ements in the minimum standard of

li%in and po%ert$ reduction o%er time.

4rade liberalization can contribute to this process not onl$ b$ promotin ro&th)

but also b$ chanin the relati%e prices of the products that are rele%ant to the poor. In

de%elopin countries) protection is often hiher on relati%el$ s(ill,intensi%e oods.>

4hus trade liberalization can benefit the poor o%er those better,off %ia its impact on

prices.

It is &ell (no&n) ho&e%er) that trade liberalization enerates both &inners and

losers. 'ouseholds &ith little access to credit or that are located in remote areas &here

subsistence farmin is pre%alent ma$ not benefit from the process. Goreo%er)

imperfections in the price transmission mechanism are often present in de%elopin

countries &here mar(ets are characterized b$ hih transaction costs and are poorl$

interated into the international econom$. In Gexico) for example) &orld prices ha%e

been differentiall$ transmitted on a reional basis) dependin on distance from the

border and nature of the traded ood -icita 677 ote that this is not necessaril$ the case in LAC as pointed out b$ Perr$ and ?larreaa -6778.

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an entrepreneur. 4he &ae rate of uns(illed labor remains the (e$ %ariable in

determinin if the poor ain more or less than the a%erae in the process of trade reform.

In modelin trade liberalization in the case of Brazil) for example) Ferreira Filho and

'orride -677

remain %alid and underscore the complexit$ of addressin these issues in the postNISI

era. Geasures to facilitate trade and mar(et interation) as &ell as labor mar(et reforms)

education policies and social *safet$ nets+ are important complements to trade reform as

far as the final distributi%e impacts of trade liberalization are concerned.

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IV. Concluding Remarks

As illustrated b$ this brief re%ie& of some of "erner Baer#s contributions to the

literature on economic de%elopment in LAC) man$ of the 3uestions raised in his seminal

&or( remain rele%ant to the modern debate on trade liberalization and models of

de%elopment. For those li(e me) &ho ha%e benefited from "erner#s intellectual

leadership and friendship) this is both a reminder of the rele%ance of his contributions to

the economic literature and a reassurance that orth,South academic collaboration can

ma(e a difference.

Reerences

Baer) "erner -!;6) *Import Substitution and Industrialization in Latin America:

Experiences and Interpretations)+ Latin American 2esearch 2e%ie& %ol. ; -Sprin:


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Cline) "illiam 2. -!=6) *Can the East Asian Godel of 5e%elopment Be

9eneralizedJ+ "orld 5e%elopment !7 -6: =!,7.

Ferreira Filho) Ooa3uim Bento de Souza and Gar( 'orride -677


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Stilitz) Ooseph -!=;) *Learnin to learn) localized learnin and technoloical

proress)+ in P. 5asupta and P. Stoneman) eds.) Economic Polic$ and 4echnoloical

Performance -Cambride: Cambride 0ni%ersit$ Press.

"inters) L. Alan) eil GcCulloch) and Andre& GcKa$ -677>) *4rade liberalization

and Po%ert$: 4he E%idence So Far)+ Oournal of Economic Literature LII -Garch: ;6,

!!

Import Substitution Industrialization in Latin America Expericne and Lesson for the Future

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