What was import substitution industrialization and why did it fail

ISI2 has also received a black eye from mainstream, neoliberal economists. Sebastian Edwards, a proponent of the neoliberal policies of the Washington Consensus, provides perhaps the best summary about why ISI is considered an abysmal failure:.

By the late s, the region had, by far, the most unequal distribution of income in the world. To these problems, Edwards adds a low return on investment.

According to him, the debt crisis beginning in the s revealed the fragility of the ISI2 system. Edwards then goes on to explore the success of the neoliberal reforms.

Even most former cepalinos agree that the parallel balance of payments, exchange rate, inflationary, and anti-agricultural biases were evidence that ISI as practiced was unsustainable. Could ISI have been fixed? As far back as early s, CEPAL was urging important modifications such as exporting manufactures, reducing urban bias, and increasing integration with other Latin American countries.

Albert O. Hirschman discussed the need for major adjustments in a seminal article in ; see Hirschman, See also Thiesenhusen and Baer In practice, the ISI2 model was pushed out by the oil price and debt crises by the s, when the present paradigmatic shift to neoliberalism was consummated. While Chile instituted neoliberalism in the s, and Argentina began attempting macroeconomic stabilization policies inspired on neoliberalism from , as a whole the region did not embrace the new paradigm until the s.

See Hira Though dissenting voices were available, they have largely been ignored. Fajnzylber called for the restoration of macroeconomic stability through fiscal balance and control of inflation as well as an active state engaged in improving the productivity. Productivity improvements could include investment in physical and human capital; moving strategically from natural-resource based 'nonrenewable income' sources to renewable ones in agriculture and manufacturing; emphasizing continual improvements in technological capacity; embracing the idea of competing with the international economy; developing a competent public sector that enhances international competitiveness and works cooperatively in pacts between state, business, and labour.

Most importantly, he suggested that equity and productivity are not only compatible but mutually necessary. Unfortunately, these competing voices were drowned out by the sea of literature espousing neoliberalism. It is equally interesting, if not unexpected, historical development that neoliberalism has also sparked polarizing debates about its performance. Beyond the expected dependency critics on the one hand, 12 12 For an overview of anti-neoliberalism from the left, see Ellner Lance Taylor summarizes some of these nicely as: 14 14 Lance Taylor , pg.

This fragility is exacerbated by violent movements of external capital in and out of national economies via liberalized capital accounts. Indeed, competition may have weakened in manufacturing sectors in which concentration of ownership has gone up in the wake of privatization. We think it is high time to synthesize a more comprehensive, empirically-based view of the performance of ISI2, comparing it with neoliberalism.

This exercise will give us a more accurate view about Latin America's policy choices over the last 5 decades. As we shall see in the next section, by any number of measures Latin America did industrialize. The key question may be more along the lines of the quality and type of industrialization that took place, a question to which we shall return later. The caricature that critics of IP make of its "clear failure" in Latin America is presenting the image of the overblown and inefficient state-owned enterprise that is rife with corruption, political patronage, and cronyism, effectively punishing consumers for the political and economic gain of a small minority.

It's unfortunate that this caricature seems to pervade much of the economic analysis of Latin America's recent history, particularly by the international institutions that most affect external financing for the region.

The 'Washington consensus' view of import substitution industrialization as a massive detour, a 'policy mistake' which could somehow have been avoided, is grossly ahistorical and inappropriate Its implicit view of the collapse of state-led industrialization as a manifestation of its own inadequacies is as inadequate as the Marxist prescription that capitalism would collapse because of its own internal contradictions Pure economic explanations are an inadequate route to understand both the excesses of state-led industrialization and also its demise.

The stereotype suffers from at least two basic flaws. First, it is based on prejudice, rather than analysis. There were a vast array of instruments used in industrial policy, and the effects of these are impossible to separate out, given the limited number of national cases and the intertwining of the instruments and a wide variety of constantly changing local, domestic, and international economic conditions and policies.

Second, there are an equally wide variety of experiences and types of arrangements with state-owned enterprises, not only in Latin America, but internationally. We think a comparison is particularly important because we would like to avoid simply criticizing economic policies in isolation, which is all too easy an exercise. While it is important to recognize that there are differences within the ISI and neoliberal periods, and across countries, each economic policy framework represents a fundamentally shared philosophy towards economic development.

Therefore, the more important the question is, what does the historical comparative record tell us about the optimal role of the state and protection for Latin American growth and equity? The answer to this question will give us a better idea of which policies make sense for Latin America given long-term constraints and patterns in economic policy conditions. We create criteria based upon the criticisms, both left and right, of the ISI2 and neoliberal periods, and then add a few additional measures of our own, as demonstrated in Table 1 below.

Since Latin American development occurs in a positive historical trajectory in a sense of absolute standards of living, we will be measuring improvement over the period. We define the ISI period as , and neoliberalism as That is, political, social, and other institutional factors.

A critical feature is the dependent relationship that emerging countries often have with developed nations. In fact, Latin American structuralism has become a synonym for the era of ISI that flourished in various Latin American countries from the s to the s. Prebish outlined an interpretation of Latin America's burgeoning transition from primary export-led growth to internally oriented urban-industrial development in a report.

That report became " the founding document of Latin American structuralism " to quote one academic paper and a virtual manual for import substitution industrialization.

They expanded the manufacturing of non-durable consumer goods, like food and beverages, and then expanded into durable goods, such as autos and appliances.

Some nations, like Argentina, Brazil, and Mexico, even developed domestic production of more advanced industrial products like machinery, electronics, and aircraft.

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 s, many Latin American nations sought loans from the IMF and the World Bank. At the insistence of these institutions, these countries had to drop their ISI protectionist policies and open up their markets to free trade.

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Since the luxury of sustained large export subsidies as opposed to high tariffs under ISI is not there due to possible retaliation or countervailing duties by importing countries, making a success of such a policy automatically forces the government to address reform of domestic policies.

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