Import Substitution Industrialization - Latin America

Latin America

Import substitution policies were adopted by most nations in Latin America from the 1930s until the late 1980s. The initial date is largely attributed to the impact of the Great Depression of the 1930s, when Latin American countries, which exported primary products and imported almost all of the industrialized goods they consumed, were prevented from importing due to a sharp decline in their foreign sales. This served as an incentive for the domestic production of the goods they needed.

The first steps in import substitution were less theoretical and more pragmatic choices on how to face the limitations imposed by recession, even though the governments in Argentina (Juan Domingo Perón) and Brazil (Getúlio Vargas) had the precedent of Fascist Italy (and, to some extent, the Soviet Union) as inspirations of state-induced industrialization. Positivist thinking, which sought a "strong government" to "modernize" society, played a major influence on Latin American military thinking in the 20th century. Among the officials, many of whom rose to power, like Perón and Vargas, industrialization (especially steel production) was synonymous with "progress" and was naturally placed as a priority.

ISI gained a theoretical foundation only in the 1950s, when Argentine economist and UNECLAC head Raúl Prebisch was a visible proponent of the idea, as well as Brazilian economist Celso Furtado. Prebisch believed that developing countries needed to create local vertical linkages, and they could only succeed by creating industries that used the primary products already being produced domestically. The tariffs were designed to allow domestic infant industries to prosper.

ISI was most successful in countries with large populations and income levels which allowed for the consumption of locally produced products. Latin American countries such as Argentina, Brazil, Mexico, and (to a lesser extent) Chile, Uruguay and Venezuela, had the most success with ISI. This is so because while the investment to produce cheap consumer products may pay off in a small consumer market, the same can not be said for capital-intensive industries, such as automobiles and heavy machinery, which depend on larger consumer markets to survive. Thus, smaller and poorer countries, such as Ecuador, Honduras, and the Dominican Republic, could implement ISI only to a limited extent. Peru implemented ISI in 1961, and the policy lasted through to the end of the decade in some form.

To overcome the difficulties of implementing ISI in small-scale economies, proponents of this economic policy, some within UNECLAC, suggested two alternatives to enlarge consumer markets: income distribution within each country, through agrarian reform and other initiatives aimed at bringing Latin America's enormous marginalized population into the consumer market, and regional integration through initiatives such as the Latin American Free Trade Association (ALALC), which would allow for the products of one country to be sold in another.

In Latin American countries in which ISI was most successful, it was accompanied by structural changes to the government. Old neocolonial governments were replaced by more or less democratic governments. Banks and utilities and certain foreign-owned companies were nationalized or transferred ownership to local businesspeople.

Many economists contend that ISI failed in Latin America and was one of many factors leading to the so-called lost decade of Latin American economics,while others contend that ISI led to the "Mexican Miracle", the period that lasted from 1940 to 1975 in which economic growth stood at 6% or higher.

As noted by one historian, ISI was successful in fostering a great deal of social and economic development in Latin America:

“By the early 1960s, domestic industry supplied 95 per cent of Mexico’s and 98 per cent of Brazil’s consumer goods. From 1950 to 1980 Latin America’s industrial output went up six times keeping well ahead of population growth. Infant mortality fell from 107 per 1000 live births in 1960 to 69 per 1000 in 1980, life expectancy rose from 52 to 64 years. In the mid 1950s, Latin America’s economies were growing faster than those of the industrialized West.”