Latin American and Caribbean countries: From Import-oriented substitution strategy to Export-oriented industrialization

April 17, 2020

The aftermath of World War II and the Great depression in Latin America and Caribbean countries (LAC’s) industrialization was marked by an import-oriented strategy (ISI). However, as the international market recovered, countries in the LAC adopted a process of liberalization, that was accompanied by the robust implementation of an export-oriented industrialization strategy or (EOI). Briefly, we explain the two strategies, Import-oriented industrialization (ISI) and Export-oriented industrialization (EOI) in Latin American and Caribbean countries.

1. Import-oriented industrialization (ISI) as a strategy of development in Latin American and Caribbean countries (LAC’s):

Due to the international turmoil caused by the WWII and the Great depression in 1930, several Latin American and Caribbean countries opted for insulating their economies from the fluctuations in the international market and the whims of developed countries. Thus, import-oriented industrialization (ISI) economic policy was used to increase domestic production, reduce external market dependency, and achieve economic growth and development.

The ISI strategy consisted in establishing domestic production facilities for manufactured goods that were formerly imported (Baer, 1984). Also, the government played a crucial role in protecting infant industries, subsidizing companies, guaranteeing special exchange rates, and encouraging nationalization. Policy instruments like tariffs, trade barriers, non-tariffs barriers, and quotas were used against import-competitor’s industries. Moreover, to restrict imports of manufactured products that were meant to be produced at home, the government applied strict exchange rates control.

Besides, the government-subsidized domestic and foreign companies that imported capital equipment for new industries and special import exchange rates were given to companies that imported industrial raw materials, fuels, and intermediate goods (Baer, 1984). Also, the government gave special treatment to foreign capital because it was critical for the development of new manufacturing industries.

According to Eichengreen (2009), in Latin America and Caribbean countries, the ISI strategy worked well because after the global market suffered the World War II and the Great Depression in 1930, neither international trade nor lending had yet recovered, and the accumulation of new technologies will produce economic growth (p. 178).

However, in the 1990s, with the recovery of the international market and the liberalization of the international market, ISI was not able to convert LAC countries into self-sufficient states. Hence, countries in Latin America and the Caribbean started to shift from import-oriented industrialization to a new policy of market openness. These new world tendencies and market pressures dictated a new direction for the LAC countries trade and economic policies, consequentially export-oriented industrialization (EOI) was implemented.

2. Export-oriented industrialization (EOI) as a strategy of trade and development in Latin American and Caribbean countries (LAC’s)

Between the 1980s and 1990s, ISI demonstrated not being able to convert Latin American and Caribbean countries into self-sufficient states; scholars and policymakers started to advocate for a more export-oriented strategy to achieve economic growth and development. Thus, export-oriented industrialization (EOI) strategy was chosen as a response to ISI failure.

EOI or export-led growth is an economic and trade strategy that aims to increase industrialization through the pressure of exporting goods with a comparative advantage. In the EOI strategy, differently from ISI, the leading role of the government was to provide optimal macroeconomic conditions. Thus, the state’s policies aimed to maintain economic stability, control inflation, adopt restrictive fiscal and monetary rules, avoid protectionism, and maintain a friendly market environment to potentialize exports and attract direct foreign investments (Dussel, 2016).

Also, differently from ISI, the private sector was the main actor to impulse industrialization and development (Dussel, 2016). In this perspective, efficiency resulted from the allocation of production resources (e.g., infrastructure) on the export-oriented industries with comparative advantage. In EOI, the government also benefited by attracting foreign direct investments (FDI) since LAC countries have had a comparative advantage in unskilled workers with lower wages. Since its implementation, export-oriented industrialization has been a promising strategy to promote economic growth and development; nevertheless, in the 21 century, EOI started to be questioned mainly because of the challenges raised on trade conditions and competition between domestic and foreign industries with low-cost of production like China. Latin American and Caribbean countries implemented the import-oriented industrialization (ISI) strategy aimed at self-sufficiency in the context of market fluctuations proper to the 1950s.

Overall, ISI increased industries, raised wages, and transferred knowledge and skills from foreign capital to domestic industries. However, ISI was not a flexible strategy and only benefited a few industries. Other segments included agriculture were prejudiced because “the overvalued exchange rates for imported goods that favored the industrial sector made agricultural products less competitive in the global market and less profitable to produce for exports than the domestic market” (Bart, 1984). Nevertheless, ISI strategy became outdated with the openness of the international market while export-oriented industrialization raised. Due to globalization and the increase of global trade, EOI has become a strategy that provides economic gains to Latin American and Caribbean countries. Still, EOI raised new challenges in competition, especially with countries with an excess of production capacities like China. Latin American and Caribbean countries must adopt the best of both strategies, learn from past policies, and be prepared to compete globally. 

REFERENCES

  1. Dussel Peters, Enrique. (2016). "“Mexico´s new industrial organization since the 1980s: Glocal challenges from export-orientation and polarization”". In, Weiss, John and Michael Tribe (edits.). Routledge Handbook of Industry and Development. Roudledge: New York, pp. 320-334. .
  2. Baer, W. . (1984). "Industrialization in Latin America: Successes and Failures". The Journal of Economic Education, 15(2), 124-135. doi:10.2307/1182052.

About Author(s)

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Marilu Nuñez Palomino
Marilu Nuñez is a graduate student of Public and International Affairs with a major in International Political Economy at the University of Pittsburgh. She has a Master's Degree in Accounting for the FEA-USP in Brazil. Currently, she is doing research on International Trade and Mental Health in the Americas.