An Economic History of Twentiet - Enrique Cardenas

An Economic History of Twentieth-Century Latin AmericaVolume 3: Industrialization and the State in Latin America: The Postwar YearsE. Cardenas; J. Ocampo; R. ThorpISBN: 9780230595682DOI: 10.1057/9780230595682Palgrave Macmillan

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Edited by Enrique Crdenas,Jos Antonio Ocampo and Rosemary Thorp

An Economic History ofTwentieth-Century Latin

America

St Antonys Series General Editor: Richard Clogg (1999 ), Fellow of St Antonys College, Oxford

Recent titles include:

Enrique Crdenas, Jos Antonio Ocampo and Rosemary Thorp (editors)

AN ECONOMIC HISTORY OF TWENTIETH-CENTURY LATIN AMERICA

Volume 1: The Export Age

Volume 2: Latin America in the 1930s

Volume 3: Industrialization and the State in Latin America

Jennifer G. Mathers

THE RUSSIAN NUCLEAR SHIELD FROM STALIN TO YELTSIN

Marta Dyczok

THE GRAND ALLIANCE AND UKRAINIAN REFUGEES

Mark Brzezinski

THE STRUGGLE FOR CONSTITUTIONALISM IN POLAND

Suke Wolton

LORD HAILEY, THE COLONIAL OFFICE AND THE POLITICS OF RACE AND

EMPIRE IN THE SECOND WORLD WAR

The Loss of White Prestige

Junko Tomaru

THE POSTWAR RAPPROCHEMENT OF MALAYA AND JAPAN, 194561

The Roles of Britain and Japan in South-East Asia

Eiichi Motono

CONFLICT AND COOPERATION IN SINO-BRITISH BUSINESS, 18601911

The Impact of the Pro-British Commercial Network in Shanghai

Nikolas K. Gvosdev

IMPERIAL POLICIES AND PERSPECTIVES TOWARDS GEORGIA, 17601819

Bernardo Kosacoff

CORPORATE STRATEGIES UNDER STRUCTURAL ADJUSTMENT IN ARGENTINA

Responses by Industrial Firms to a New Set of Uncertainties

Ray Takeyh

THE ORIGINS OF THE EISENHOWER DOCTRINE

The US, Britain and Nassers Egypt, 195357

Derek Hopwood (editor)

ARAB NATION, ARAB NATIONALISM

Judith Clifton

THE POLITICS OF TELECOMMUNICATIONS IN MEXICO

Privatization and StateLabour Relations, 192895

10.1057/9780230595682 - An Economic History of Twentieth-Century Latin America, Edited by Enrique Cardenas, Jose A. Ocampo and Rosemary Thorp

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Ccile Laborde PLURALIST THOUGHT AND THE STATE IN BRITAIN AND FRANCE, 190025

Craig Brandist and Galin Tihanov (editors) MATERIALIZING BAKHTIN

C. S. NichollsTHE HISTORY OF ST ANTONYS COLLEGE, OXFORD, 19502000

Anthony Kirk-Greene BRITAINS IMPERIAL ADMINISTRATORS, 18581966

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M. K. FlynnIDEOLOGY, MOBILIZATION AND THE NATION The Rise of Irish, Basque and Carlist Nationalist Movements in the Nineteenth and Early Twentieth Centuries

Karina Sonnenberg-Stern EMANCIPATION AND POVERTY The Ashkenazi Jews of Amsterdam, 17961850

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An Economic History of Twentieth-Century Latin America Volume 3

Industrialization and the State in Latin America: The Postwar Years

Edited by

Enrique Crdenas Professor of Economics and Rector Universidad de las Amricas-Puebla

Jos Antonio Ocampo Executive Secretary United Nations Economic Commission for Latin America and the Caribbean (CEPAL/ECLAC)

and

Rosemary Thorp Reader in the Economics of Latin America St Antonys College Oxford

in association with St Antonys College, Oxford


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Editorial matter, selection and Chapter 1 Enrique Crdenas, Jos Antonio Ocampo and Rosemary Thorp 2000 Chapter 7 Enrique Crdenas 2000 Chapter 9 Jos Antonio Ocampo and Camilo Tovar 2000 Chapters 26, 8, 10, 11 Palgrave Publishers Ltd 2000

All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission.

No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 0LP.

Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988.

First published 2000 by PALGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world

PALGRAVE is the new global academic imprint of St. Martins Press LLC Scholarly and Reference Division and Palgrave Publishers Ltd (formerly Macmillan Press Ltd).

ISBN 0333633423

This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources.

A catalogue record for this book is available from the British Library.

Library of Congress Cataloging-in-Publication Data An economic history of twentieth-century Latin America / edited by Enrique Crdenas, Jos Antonio Ocampo, and Rosemary Thorp.

p. cm. Includes bibliographical references and index. Contents: v. 1. The export age / edited by Enrique Crdenas, Jos Antonio Ocampo, and Rosemary Thorp v. 2. Latin America in the 1930s : the role of the periphery in world crisis / edited by Rosemary Thorp v. 3. Industrialization and the State in Latin America : the postwar years / edited by Enrique Crdenas, Jos Antonio Ocampo, and Rosemary Thorp. ISBN 0333913043 (v. 1 : cloth) ISBN 0333633415 (v. 2 : cloth) ISBN 0333633423 (v. 3 : cloth) 1. Latin AmericaEconomic conditions. 2. Latin AmericaEconomic

conditions1918 I. Crdenas, Enrique. II. Ocampo, Jos Antonio. III. Thorp, Rosemary.

HC125 .E37365 2000

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire


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For Carlos Daz Alejandro


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This page intentionally left blank


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Contents

List of Tables and Figures ix

Foreword to An Economic History of Twentieth-Century Latin America xii

Notes on the Contributors xiii

1 Introduction 1

Enrique Ca rdenas, Jose Antonio Ocampo and Rosemary Thorp

2 Technological Learning, Institution Building and the

Microeconomics of Import Substitution 36

Jorge Katz and Bernardo Kosacoff

3 ECLA and the Theory of Import Substituting Industrialization

in Latin America 58

E.V.K. FitzGerald

4 The Influence of International Financial Institutions on ISI 98

Richard Webb

5 The Industrialization of Chile during Protectionism, 194082 114

Ricardo Ffrench-Davis, Oscar Munoz, Jose Miguel Benavente

and Gustavo Crespi

6 Import Substitution and Growth in Brazil, 1890s1970s 154

Marcelo de P. Abreu, Afonso S. Bevilaqua and Demosthenes

M. Pinho

7 The Process of Accelerated Industrialization in Mexico, 192982 176

Enrique Ca rdenas

8 Industrialization in Venezuela, 193683: The Problem of

Abundance 205

Pablo Astorga

9 Colombia in the Classical Era of `Inward-Looking Development',

193074 239

Jose Antonio Ocampo and Camilo Tovar

10 Import-Substituting Industrialization in Argentina, 194080:

Its Achievements and Shortcomings 282

Jorge Katz and Bernardo Kosacoff

vii


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viii Contents

11 Import Substitution, Economic Integration and the Development

of Central America 195080 314

Isaac Cohen

Index 335


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List of Tables and Figures

Tables

1.1 World economic growth 7

1.2 Export growth rate 24

3.1 The external constraint according to ECLA 85

3.2 Aggregate capital, labour and output ratios in Latin

America, 195094 86

3.3 Rates of accumulation (GFCF/GDP) 86

3.4 The fiscal structure in Latin America 88

3.5 Fiscal incidence in Latin America 89

5.1 Chile: rate of growth of GDP 115

5.2 Chile: rate of gross fixed investment 116

5.3 Chile: productivity of capital 116

5.4 Chile: sectoral growth of GDP and share of industry 119

5.5 Chile: average growth rate of value added per industrial worker 124

5.6 Chile: value added per worker in Chile and the US, 197094 124

5.7 Chile: percentage and average expenditure on research and

development by institutional sectors, 196592 129

5.8 Chile: cost per dollar of imports, in real terms 137

6.1 Brazil: coffee price regressions, 18801960 159

6.2 Brazil: GDP and industrial output growth rates, 193080 162

6.3 Brazil: GDP shares (%), 191080 162

6.4 Brazil: distribution of industrial value added, 191959 163

6.5 Brazil: percentage share of coffee and manufactured

exports in total exports, 193080 169

6.6 Brazil: life expectancy at birth, in years, 194080 171

7.1 Mexico: sources of industrial growth, 192939 181

7.2 Mexico: sources of economic growth of industry 185

7.3 Mexico: sources of industrial demand growth 188

7.4 Mexico: sources of financing of the economy, 195070 196

7.5 Mexico: position of the 10 most important industrial

branches, 196081 200

8.1 Venezuela: shares of selected industries in manufacturing 214

8.2 Venezuela: GDP by economic sectors: annual average growth

and shares 221

9.1 Colombia: composition of economic activity 241

9.2 Colombia: external trade ratios and composition 243

ix


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x List of Tables and Figures

9.3 Colombia: evolution of infrastructure 249

9.4 Colombia: composition of industrial GDP 251

9.5 Colombia: sources of growth in the manufacturing sector 253

9.6 Colombia: sources of corporate financing 255

9.7 Colombia: trade policy indicators 259

9.8 Colombia: effective protection according to ISIC classification 261

9.9 Colombia: growth of agricultural sector 264

9.10 Colombia: main educational and health indicators 274

9.11 Colombia: quality of housing 275

9.12 Colombia: average wages for selected sectors 277

10.1 Argentina: the expansion of manufacturing industry, 193049 283

10.2 Argentina: the participation of labour in domestic GDP 287

10.3 Argentina: the expansion of metalworking and chemical

production in the 1950s and 1960s 289

10.4 Argentina: average annual growth rates of industrial value

added 292

10.5 Argentina: industrial output during the 1970s plateau

(1970 = 100) 295

10.6 Argentina: capital flight (in US$ millions) 295

10.7 Argentina: structure of industrial value added, 1974 and 1990 296

10.8 Argentina: raw material processing plants erected during the

final stages of the ISI process 297

10.9 Argentina: flow of foreign private capital to Argentine

manufacturing according to the legal regime 298

10.10 Argentina: foreign private capital by industry, 195461 299

10.11 Argentina: export of `pure' technology by Argentine firms

under the form of turnkey production facilities sold in

Latin America 309

11.1 Central America: total GDP and per capital real growth rates 316

11.2 Central America: GDP composition 317

11.3 Central America: income distribution by households 324

11.4 Central America: the share of intraregional trade in total trade 326

Figures

1.1 GDP growth and composition 17

1.2 Convergence patterns 18

1.3 Relative living standard index (relative to USA) 21

1.4 Exports as % of GDP 23

1.5 Net transfer of resources as % of 1980 real GDP 27

2.1 Technological learning and improvements in production

during the import substitution process 47


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List of Tables and Figures xi

5.1 Chile: Chilean balance of trade pattern 122

5.2 Chile: net trade balance by subsections 123

7.1 Mexico: exchange rate overvaluation and the import coefficient 188

7.2 Mexico: evolution of key real public prices for industry 191

7.3 Mexico: evolution of industrial structure, 196081 199

8.1 Venezuela: value added in manufacturing, 193689 212

8.2 Venezuela: real exchange rate, 192086 223

8.3 Venezuela: labour productivity by sectors, 192090 224

8.4 Venezuela: in support of industrialization 225

9.1 Colombia: fixed investment in machinery and equipment 244

9.2 Colombia: terms of trade vs real import exchange rate 254

9.3 Colombia: Colombian industrial prices/international prices 262

10.1 Argentina: total production of grain in Argentina, 191084 288

10.2 Argentina: performance of the industrial sector, 196474 308

10.3 Argentina: total exports, industrial exports and

manufacturing exports of industrial origin, 1964 and 1974 308


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Foreword to An Economic History of Twentieth-Century Latin America

The three volumes of this mini-series reflect a collaborative effort that began in

1982, when a group of economists and economic historians met to consider the

effect of the 1929 Depression on Latin America, and the explanation of the

continent's rapid recovery. Carlos Daz Alejandro was the leading light of the

group until his premature death in 1985. This initial group effort led to the

study Latin America in the 1930s, published in 1984. Subsequent collaboration

was made possible by the inspiration of Enrique V. Iglesias, President of the

Inter-American Development Bank, whose idea it was to fund a major project

to write an economic history of Latin America for the twentieth century,

accessible to a wide audience but based on the best Latin American scholarship.

His invitation to me to lead the project and write the overview volume gave me

the most stimulating 16 months of my academic career. New friends joined the

group, and we came together in the course of 1997 in a series of workshops

organized to support the project. These workshops resulted in the books

published here as Volumes 1 and 3. Volume 2 is a reprint of the 1930s

study. The overview volume was published by the IDB in 1998 as Progress,

Poverty and Exclusion: An Economic History of Latin America in the Twentieth

Century (available in English, Spanish, French and Portuguese from IDB book-

store, www.iadb.org/pub, and in English through Johns Hopkins University

Press, www.press.jhu.edu.).

My thanks for the opportunity to lead this stimulating project go first and

foremost to Enrique Iglesias himself, to the Inter-American Development Bank

and to the European Union for funding. Tim Farmiloe was our enthusiastic and

patient editor. I owe a particular vote of thanks to my co-editors, who made

themselves available against exceptional pressures and were remarkable part-

ners. Margaret Hancox, Catalina Sanint and Elvira Ryan bore the huge burden

of the final editing and processing.

ROSEMARY THORP

Latin American Centre

Oxford University and St Antony's College

xii


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Notes on the Contributors

Marcelo de Paiva Abreu is Professor of Economics at the Department of

Economics, Catholic University of Rio de Janeiro, and former Director for the

Department, 199097.

Pablo Astorga has a DPhil in Economics from the University of Oxford. He is a

Research Fellow at St Antony's College, Oxford, and attached to IESA, Caracas,

Venezuela.

Jose Miguel Benavente has a BA in Industrial Engineering and an MSc in

Economics from the University of Chile, and an MSc in Economics for Devel-

opment from the University of Oxford. He is Lecturer in Economics, Depart-

ment of Economics, University of Chile, and senior consultant for ECLAC,

Ministry of Economics and CORFO in Chile.

Alfonso S. Bevilaqua is a member of the Department of Economics, Catholic

University of Rio de Janeiro (PUC-Rio), Brazil. He has a PhD in Economics from

the University of California, Berkeley.

Enrique Cardenas is Professor of Economics and Rector of Universidad de las

Americas-Puebla, since 1985.

Isaac Cohen was director of the Washington office of the United Nations

Economic Commission for Latin America and the Caribbean (ECLAC) and is

now a private consultant based in Washington, DC.

Gustavo Crespi is Lecturer in Economics at the University of Chile and senior

consultant for ECLAC Ministry of Economics in Chile.

Ricardo Ffrench-Davis is Principal Regional Adviser of ECLAC, and Professor

of Economics at the University of Chile. He is a former Director of Policies of

the Central Bank of Chile and Director of the Centre for Economic Research on

Latin America.

E.V.K. FitzGerald is Reader in International Economics and Finance at Oxford

University and a Professorial Fellow of St Antony's College, Oxford.

Jorge Katz, previously Professor of International Economics at the University

of Buenos Aires, is currently Regional Adviser on Industrial and Technical

Development at ECLAC in Santiago, Chile.

Bernardo Kosacoff obtained a BA in Economics at the University of Buenos

Aires in 1972; he was a Visiting Senior Fellow, St Antony's College, Oxford, UK.

xiii


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xiv Notes on the Contributors

(1995); Senior Economist, United Nations Economic Commission for Latin

America and the Caribbean, Buenos Aires (since 1983); Professor of Industrial

Organization and Political Economy at the University of Buenos Aires (since

1984) and the National University of Quilmes (since 1993).

Oscar Munoz is an economist, formerly President of CIEPLAN, and presently

Executive Secretary of the Forum for Economic Development, Ministry of

Economic Affairs in Chile, and a Professor at the University of Chile.

Jose Antonio Ocampo is currently the Executive Secretary of the United

Nations Economic commission for Latin America and the Caribbean (CEPAL/

ECLAC). He is a former Finance Minister of Colombia, Director (Minister) of

the National Planning Department of Colombia and Minister of Agriculture of

Colombia. He has also been the Director of research centres in Colombia

(FEDESARROLLO and CEDE).

Demosthenes M. Pinho is attached to the Central Bank of Brazil. He has a PhD

in Economics from the University of California, Berkeley.

Rosemary Thorp is Reader in the Economics of Latin America at the University

of Oxford, Fellow of St Antony's College and Director of the Latin American

Centre. She is also a member of Queen Elizabeth House, Oxford.

Camilo Tovar is currently Adviser to the Executive Secretary of the United

Nations Economic Commission for Latin America and the Caribbean (CEPAL/

ECLAC). Previously, he served as Adviser to the Finance Minister and to the

Director of the National Planning Department of Colombia.

Richard Webb recently co-authored a history of the World Bank published by

the Brookings Institution and is currently President of Banco Latino in Peru.


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1 Introduction Enrique Cardenas, Jose Antonio Ocampo and Rosemary Thorp

In the 1990s, `protection', ìmport substitution' and ìntervention' have

become dirty words, part of the `leyenda negra' of Latin American development

in the postwar period. Like most `black legends', it is at once both true and

false. This book attempts a deeper and as far as possible dispassionate look at

the controversial years between the end of the Second World War and the point

when almost everywhere in Latin America, although at varying dates in differ-

ent countries, a discontinuity occurs in which the postwar `style of develop-

ment' ceased to play a central role in the economic evolution of the region. As

we well know, this process eventually led to a new stage in which `the market'

assumed the predominant role in the development strategy.

The analysis is based on seven case studies covering 11 countries. These

studies were discussed in two workshops, in Oxford in September 1996 and in

Paipa, Colombia, in May 1997.1 The guiding concepts that emerged in the

debate are developed in two conceptual chapters which open the book. On

the micro side, as Katz and Kosakoff in Chapter 2 make clear, the crucial

concept is the èvolutionary' or `maturing process' which characterizes the

development of both technological capabilities and institutions. On the

macro side, Fitzgerald explores in Chapter 3 the issue of accumulation by

the private and public sectors, and its relation both to postwar industrialization

and the `fiscal crisis' of the state. This provides a `positioning' of the theorizing

of ECLAC, (the UN Economic Commission for Latin America and the Carib-

bean), the work of which is at its strongest a theory of capital accumulation. A

closing chapter by Webb presents a historical perspective on the thinking of

multilateral financial institutions at the time.

The book tries to answer several questions: what are the distinguishing

features of the `style of development' which characterized this period? Is it

adequately captured by the common concept of ìmport-substituting industria-

lization' (ISI)? Do the different national experiences give rise to a single stereo-

type? What external and internal forces shaped development patterns? What

1


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2 Introduction

was the role of ideas, and particularly what role did ECLAC's thinking play?

Given existing constraints, what were the real alternatives to inward-looking

industrialization? What were the benefits and costs of the path adopted? To

what extent were the debt crisis and adjustment problems of the 1980s a

reflection of such costs? Were such problems a result of the internal contra-

dictions of the development model followed, or rather of political instability,

macroeconomic financial mismanagement or exogenous reasons? As we will

see, the answers to these questions vary by country and subperiod, and are in

fact less neat than generally assumed.

The following section of this introduction explores the core topic of the

volume. We then elaborate the context, both national and international, to

which postwar industrialization was responding, and finally review the overall

results for Latin America.

The topic of the volume

Our subject is the period of accelerated industrialization that followed the

Second World War in large and medium-sized Latin American countries, with

ècho' effects in the smaller countries. In many cases, the postwar development

pattern had clear continuities with the 1930s and even before, a fact which is

brought out in several of the case studies. This period has typically been

referred to as ìmport substituting industrialization', but this is not a very

helpful label, since it is as much about a new and expanded role of the state

as it is about import substitution. In addition, modern manufacturing first

appeared in several countries of the region in a significant scale in the late

nineteenth and early twentieth centuries, as a response to the expansion and

integration of domestic markets induced by increasing integration into the

international economy. For obvious reasons, that first spurt of industrialization

was largely stimulated by the substitution of goods hitherto imported, mostly

consumer goods, and so qualifies as ìmport substituting industrialization'.

Moreover, in several cases (Brazil, Chile, Colombia and Mexico being notable

examples), protection actually promoted such domestic linkages during the

export age, in the late nineteenth and early twentieth centuries, indeed as part

of a stylized international practice at the time (see the introduction and coun-

try cases in the companion volume on the export age).

Ìmport substitution' is an imperfect label for many additional reasons. In the

postwar years the export sector continued to play a fundamental role, although

increasingly as a source of the foreign exchange required to finance the imports

of capital and intermediate goods which were not produced domestically. In

most mineral export economies most notably Venezuela throughout the

period of analysis mineral rents were a major source of capital accumulation.

Moreover, in many, particularly small, countries industrialization did not


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Enrique Cardenas, Jose Antonio Ocampo and Rosemary Thorp 3

totally replace but was actually superimposed on the primary export model,

which continued to dominate development trends, as the chapter by Cohen on

Central America in this volume makes clear. In some medium and large coun-

tries, export promotion was introduced as an essential component of the

development strategy at some stage of the industrialization process, which in

these cases thus became a `mixed model' that combined import substitution

with export promotion. The model was also `mixed' in several countries at

different times in the sense that it actively promoted, with similar instruments

to those used to encourage industrialization, several agricultural activities,

which served to generate export income or produced foodstuffs for a growing

urban population or inputs for the manufacturing sector. On top of that,

despite protectionism, there was often no net import substitution during the

process and import substitution was not always or consistently over time the

leading source of growth, even in new industries, whereas domestic demand

generally played a more consistent role.

Therefore, the essence of the period covered in this volume is best expressed

as `state-led industrialization' or `accelerated industrialization',2 a process

accompanied by a thorough transformation of the particular economies and

societies. Indeed, accelerated industrialization was only possible through the

integration of domestic markets, and a greater and more ubiquitous role of the

state. It developed together with urbanization and an increasing role of labour

unions, entrepreneurial associations and state enterprises. It included a whole

range of governmental support through fiscal, trade and exchange rate policies.

Although many of these policies first appeared during the 1930s as a consequence

of the Great Depression and some even predated it (see the two previous volumes

in this series), it was only in the postwar period that more conscious policies were

developed and implemented to speed up industrialization.

These policies were pushed up to the point variable among countries

where the diminishing returns from their use became evident. As we have

pointed out, this led in some cases to a rationalization of the development

strategy towards a `mixed model', maintaining, nonetheless, high levels of

state intervention. The old forms of intervention were kept but were detached

increasingly in many countries from a development strategy of any sort, as the

short-term management of booms and crises came to dominate totally the

economic scene. This was increasingly true in the years following the first oil

shock. In this sense, the strategy of `accelerated industrialization' was effect-

ively abandoned in many countries in the early or mid-1970s, even though its

policy manifestations maintained an inertia of their own. Throughout this

process, there was a gradual shift in policy-making ideology away from protec-

tion and towards openness and belief in the value of exposure to international

competitive pressures. However, the Chilean case aside, the new ideology

became dominant only in the second half of the 1980s and, particularly, in


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4 Introduction

the 1990s. Thus, a long period elapsed in many countries between the effective

end of the era of state-led industrialization and its replacement by the new,

market-oriented strategy.

The process of accelerated industrialization must thus be viewed together

with the transformation of the state and society which accompanied it. The

political economy dimension, by which new actors appeared, such as entrepre-

neurial organizations, labour unions, peasant movements and technocrats, as

well as the transformation of political parties and movements to which these

processes led, grew in depth and complexity. Major social conflicts built up in

several countries: the Cuban revolution accelerated this process, but it was

probably only in the 1970s that social conflict became the dominant feature,

to the point of seriously undermining investor confidence in several countries.

External and internal forces shaping development

The external context

The outstanding characteristic of the postwar scene was the new dominance of

the USA. While European countries had suffered terrible destruction, the pro-

ductive capacity of the USA had increased 50 per cent during the war and in

1945 produced more than half the worldwide total of manufacturing goods,

and was capable of quickly converting productive capacity from war to peace-

time production. Still more significant, the USA owned half of the world supply

of shipping, compared with only 14 per cent in 1939, and supplied one-third of

world exports while taking only one-tenth of world imports (Ashworth, 1987,

p. 266).

The USA also had a relatively clear agenda. Whereas in the interwar years the

signals pointing to the need for change in the international system were

there but were weak and conflicting, as the Second World War drew to a close

the international system was clearly perceived to have broken down and to

require major institutional change. Led by the USA, talks had gone on at many

levels during the war itself to prepare to build the peace. The economic agenda

comprised: (i) institutional developments to ensure stable and expanding trade

and capital flows; (ii) the use of those institutions to reduce discriminatory

controls; and (iii) a sufficiently rapid recovery of the main trading nations to

complement the institutional renewal of the international system. The agenda

shaped the Bretton Woods agreement of 1944, which saw the creation of the

International Monetary Fund (IMF) and the World Bank (IBRD), specifically

aiming at a return to a system of stable exchange rates and to an assured supply

of long-term capital, with a progressive liberalization of the European econo-

mies. The `dollar shortage' made that process a very gradual one, leading to

practices which, for many years, continued to be far more protectionist than


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the theory.3 As it became clear that these actions alone would not be enough to

kick-start the European economies, a more radical US role was conceived with

the Marshall Plan in 1947. Lengthy negotiations eventually added the General

Agreement on Tariffs and Trade (GATT), signed in 1947 in Geneva by 23

nations (including Argentina, Chile and Cuba), but failed to add the Interna-

tional Trade Organisation (ITO).4

What was only to become clear with time was how far down the US agenda

was the position of Latin America in the early postwar years. The embodiment

of this was the series of conferences which began with Chapultepec in 1945

before the war ended. The eighth Inter-American Conference in Chapultepec

was a disillusion, in that economic issues were mostly postponed to a confer-

ence to deal with them specifically. Nonetheless, at least Latin America

appeared to be on the agenda, and it was possible to sign pious statements

about free trade while reserving the right to make just about any specific

exceptions they should see fit to make. On the issue of most concern to the

USA conditions for direct foreign investment the Latin Americans were

rather interested in responding. But then the economic conference was post-

poned so often that Rabe (1978) christened it the `elusive' conference. By the

ninth Inter-American Conference in Bogota in 1948, after the invention of the

Marshall Plan and audacious suggestions that the time was ripe for a similar

effort in Latin America, General Marshall's chief preoccupation was to persuade

the Latin American nations that the USA had too much on its shoulders as a

reconstructor of world peace and security to be considered a major source of

finance for the rest of the hemisphere.5 The corollary was that, therefore, the

essential thing was to put in place good solid guarantees so that private capital

could come and do the job. The clashes over the `Calvo doctrine' on the lack

of resident aliens' rights to appeal to their home government were such that

thereafter the US private sector strongly counselled the abandonment of a

conference and the concentration on bilateral negotiations on direct foreign

investment legislation (Rabe, 1978, p. 289). This is what happened.

A further characteristic of the postwar period was the emerging consensus

that industrialization of developing countries provided both interesting invest-

ment opportunities and good sales of machinery and equipment. Meanwhile,

on the Latin American side, the ample foreign exchange reserves in place as the

war finished vanished sooner than anyone thought possible, and provoked an

abrupt resort to import quotas. When foreign firms found that they were

completely excluded from the market through quotas, this produced a strong

incentive to move to local production, as it became suddenly the only option.

So, the early building of the postwar boom and the shaping of Latin

America's mode of insertion went hand in hand. As Webb indicates, the

World Bank was quite tolerant of protectionism in developing countries not

so with respect to Europe preferring a mix of export promotion and `efficient'


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6 Introduction

import substitution; it also quietly favoured protectionism in the specific

industries which the Bank or the International Financial Corporation were

financing. It was also less influential in policy formulation than it became

later on. In its earlier years and even decades the IMF also did not altogether

dislike protection, and indeed viewed it as a useful complementary instrument

to correct payments imbalances.

In due time, of course, Latin America became more central to US policy. As

had been true in the early postwar years, this was intimately associated with

how important the region was in the struggle against communism. Early Latin

American initiatives to create a regional development bank initially found no

support from the USA. In 1958, at the meeting of the Inter-American Economic

and Social Council, the USA announced that it would support the initiative,

and the 1959 Cuban revolution gave a new urgency to the initiative. An

announcement to establish the Inter-American Development Bank (IDB), and

within it the Social Progress Trust Fund, specifically designed to lend to sectors

neglected by existing financial organizations education, health, agriculture,

and so on was signed in 1960. This was soon followed by a more ambitious

initiative, the Alliance for Progress which, under the leadership of President

Kennedy, came formally into existence with the Charter of Punta del Este in

August 1961. This initiative also became closely interlinked with the postwar

patterns of state intervention. The key themes were integration, planning, tax

reform, agrarian reform and modernization, and investment in the social

sectors, many of them central to the agenda which the United Nations Eco-

nomic Commission for Latin America (ECLA6) had been pushing forward since

the 1950s. Many initiatives in these areas were put in place, the flow of outside

funds increased and the IDB was able to direct financing to the neglected

sectors. But the flow of funds was less than promised, and the tied character

of US aid and the condition that it had to be spent on US goods, `additional' to

what would have been bought anyway, became a source of significant friction.

By the end of the 1960s, it was clear that expectations unleashed at the start of

the decade by the Alliance for Progress had not been fulfilled.

Meanwhile, the world economy had entered a period of unprecedented

prosperity. The depressed conditions of the 1930s followed by the wartime

stimulus to innovation had left a backlog of technology waiting to be applied.

These opportunities, the rapid success of European reconstruction, the gradual

but steady return to freer trade and the successful application of macroeco-

nomic stabilization tools, among other factors, helped to unleash the century's

fastest economic growth in the world industrial centres. The growth of the

welfare state and, in many countries, of state enterprises, led to a large-scale

expansion of the state in developed market economies, which was accompan-

ied in parallel by the expansion of centrally-planned economies. In 195073,

the economic growth of the industrialized countries accelerated, not only with


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Table 1.1 World economic growth

187013 191350 195073

GDP GDP GDP GDP GDP GDP

growth growth growth growth growth growth

(%) per capita (%) per capita (%) per capita

(%) (%) (%)

Western Europe 2.1 1.3 1.4 0.9 4.7 3.9

Western offshoots 3.9 1.8 2.8 1.6 4.0 2.4

Southern Europe 1.5 1.1 1.3 0.4 6.3 4.9

Eastern Europe 2.4 1.0 1.6 1.2 4.7 3.5

Latin America 3.3 1.5 3.4 1.5 5.3 2.5

Asia 1.1 0.6 1.0 0.1 6.0 3.8

Africa 1.1 0.4 3.0 1.0 4.4 2.0

World 2.1 1.3 1.9 0.9 4.9 2.9

Source: Maddison (1995).

respect to the interwar period but also with respect to the previous period of

rapid expansion, 18701913. Moreover, this was part of and largely propelled

an unprecedented, generalized world economic expansion. As Table 1.1

makes clear, annual world economic growth reached 4.9 per cent in 195073

vs 2.1 per cent in 18701913, according to Maddison's estimates (1995). This

was also accompanied by the most rapid expansion of world trade in history:

real world exports grew at an annual rate of 7 per cent in 195073 vs 3.4 per

cent in 18701913 (see Maddison, 1995, table I-4). Indeed, the growth of trade

continued to be very rapid even after growth in the industrialized economies

and the world economy at large decelerated, after the first oil shock. The

growth of multinational corporations was also part of this process. The growth

of trade and direct investment was finally accompanied, with a lag, by the

reconstruction of an international financial system, which had been severely

hit by the crisis of the 1930s.

By the early 1970s, when the era of `state-led industrialization' in Latin

America was coming to an end, the international economy had experienced

significant changes with respect to what had been typical in the early postwar

years. A dynamic economy had replaced the crippled world economy of the

interwar period and the international trade and financial systems had been

rebuilt. Multinational corporations had become a major agent in the interna-

tional economy. The state had become a central player in market economies

and obviously the central player in non-market ones but one of the oldest

forms of state intervention, protectionism, was undergoing a gradual process of

negotiated erosion. The Bretton Woods institutions, GATT, the United Nations

organizations and several regional bodies most importantly those supporting


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8 Introduction

European integration had become well-established, bringing a presence of

state intervention to a more global level.

Rapid growth had `trickled down' to the developing countries through both

trade and investment channels. The expansion of world trade was largely

concentrated in transactions among industrialized nations, and tariff reduc-

tions maintained a structure that discriminated against the imports of light

manufactured and some agricultural products. However, the expansion opened

windows of opportunity for exports from the periphery, which were rapidly

taken advantage of by some countries in the developing world particularly in

East and Southeast Asia. Also, the growth of the international financial system

concentrated largely on financial transactions among developed countries, but

since the late 1960s, at least, it began to offer large-scale opportunities for

external financing as an alternative to multilateral banks and bilateral agencies.

The developing countries underwent, as a result, their own phase of rapid

expansion, as Table 1.1 indicates, and Latin America was certainly part of that

story. However, with some notable exceptions, GDP per capita grew less in the

`periphery' than in the `core' of the world economy. Thus, income gaps tended

to increase in the world economy during its `golden age'. New mechanisms

were designed to enhance the diffusion of progress, both at an international

that is, the Generalized System of Preferences and commodity agreements or

regional (that is, the Alliance of Progress) level, but they were generally per-

ceived to be insufficient. The call for a `new international economic order', a

central debate of the mid-1970s, was a clear reflection of that fact.

The call also demonstrated how far from the international agenda were the

ideas of economic liberalization as the engine of progress of the developing

world at the end of our period of analysis. These ideas had made some headway,

both in economic thinking and in national practice in some countries, but by

the standards of the late 1990s the classic treatise of the time that argued for the

reduced use of protectionism as a development tool (Little et al., 1970), could

be read today as a defence of moderate state intervention! Indeed, it could

be viewed as further from current ideas than from Rau l Prebisch's report

to UNCTAD a few years earlier (Prebisch, 1964). As Webb argues in his

chapter, the World Bank continued to defend, up to the late 1970s, the ideas

that industrialization was essential to economic development, and that

protectionism was an essential stage in the process of industrialization,

ideas which were clearly exposed by its most influential thinker at the time,

Hollis B. Chenery.

The internal context

There have been several attempts to classify the different stages of industrial-

ization. In Chenery's well-known classification, emphasis is placed on whether

the process relies on production for the domestic market vs exports inward vs


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outward orientation and on when specific industries appear in the process of

industrialization èarly' vs `late' manufactures (see, for example, Chenery et

al., 1986). The latter classification is associated to the idea, which was wide-

spread in the period we are analysing, that there was a first èasy' phase of

import substitution during which mostly non-durable consumer goods were

produced, and later phases in which import substitution `deepened' producing

non-durable consumer as well as intermediate and some capital goods. Based

on our case studies, four stages in the evolution of industrialization in Latin

America can be differentiated.

The first stage came as a natural byproduct of export expansion. The expan-

sion and integration of domestic markets, as a result of rising export revenues

and the development of modern transportation networks, was combined with

that of modern monetary systems, capital and wage labour markets. As we have

pointed out, in several countries state protection actually encouraged the

`domestic linkages' of the dynamic export sectors, as well as their linkages to

domestic agriculture.

The second was an èmpirical' stage of state-led industrialization, in which

policy-makers followed their intuition and external conditions created the

appropriate price structure to stimulate domestic rather than external demand.

The 1930s and the Second World War provide a good example of this stage, but

the First World War had been an important precedent. The collapse of com-

modity prices and capital flows in the 1930s led to a wave of devaluations and

protectionism which shifted relative prices in favour of domestic industries and

agricultural production. Indeed, exchange controls, protectionism and the

proliferation of bilateral trade agreements, which enhanced the complexity of

tariff structures, became such widespread practices in the industrialized nations

in the 1930s that it seemed natural and even necessary to practice them under

the circumstances. In particular, bilateral trade agreements introduced direct

controls of foreign trade operations to guarantee bilateral trade equilibria,

practices which were unknown before.

This led to the development of direct import controls at a more general level.

On the other hand, in all cases but Mexico, the Second World War isolated

national economies, forcing them to exploit existing capacity, and to produce

or create the plans to produce a wider variety of products which were not

available given war shortages. The concept that some èssential' or `strategic'

industries should be encouraged was, thus, a natural byproduct of the war.

After the experience of the 1930s and the Second World War, protectionism,

tariff discrimination, direct trade controls, import substitution in manufactur-

ing and agriculture, and plans to encourage èssential industries' became fairly

widespread practices, but they were more a byproduct of the deficient func-

tioning of the international economic system than a `development strategy' of

any sort.


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10 Introduction

The end of the war reopened the possibility of importing all kinds of goods,

expanding output even further, and saw the gradual evolution of the third

stage. Rising commodity prices supported this process; but the repressed

demand was soon manifested in an avalanche of imports. Dollar foreign

exchange reserves evaporated and most countries reacted by imposing or hard-

ening trade restrictions and exchange controls. Inconvertibility in European

countries was an additional constraint on the way adjustments operated in the

early postwar period for those countries for which Europe was the main export

market. Following the experience of the `empirical phase', early postwar bal-

ance of payments crises now established a pattern by which each crisis

increased the previous levels of protection. Now, however, a more conscious

industrialization strategy came into existence, the so-called ISI model, based on

tariff and non-tariff protection of industry and some agricultural activities,

changes in the internal terms of trade against traditional primary exports, the

design of development banks to support these activities, strong public sector

investment in infrastructure and in `strategic' sectors, including energy and

other raw materials, and the rationing of foreign exchange, with multiple

exchange rates to channel it preferentially to the imports of non-competitive

intermediate and capital goods. An essential characteristic of the model was

that new layers of protection, to promote new sectors, were imposed on older

layers associated with previous import substitution phases. It should be noted

that, even at the time, the model was not exempt from criticism, not even from

ECLAC which was instrumental in justifying and rationalizing the strategy. At

all times, there were voices of warning on the limits of the strategy, particularly

on the rising costs of new industries being promoted, which affected older

industries adversely, and on the diminished capacity to reach the explicit

goal of reducing import dependence. This `classic' stage of inward-looking

development `desarrollo hacia adentro' dated from the late 1940s to the

early 1960s in most medium and larger economies.

Finally came the `mature' stage. During this stage, countries differed substan-

tially in the relative weight of two different strategies. The first was to give more

emphasis to export promotion, generating what we have called a `mixed'

model. It was characterized by the imposition of a new layer of in some

cases, very high export incentives on old layers of protection, generally

accompanied by a moderate rationalization of the latter. The second was to

further deepen import substitution in intermediate and capital goods. Among

the countries covered in this volume, Argentina, Chile and, particularly,

Colombia were closer to the first, Mexico and Venezuela closer to the second

supported in the 1970s by rising oil revenues in both cases whereas Brazil

very actively mixed both up to the eve of the debt crisis. Mexico had followed a

more `mixed' strategy in its own classic period, 194862, as the chapter by

Cardenas in this volume make clear, and effectively moved backwards to a


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more traditional emphasis on import substitution in its mature phase. Among

the countries not covered in this volume, Peru is another example of such a

backward shift. Central America effectively never moved into the advanced

stages of import substitution and, rather, followed still another `mixed stra-

tegy': import substitution at the subregional level, superimposed on the prim-

ary export model.

As we have pointed out so far, at some point short-term macroeconomics

totally replaced long-term strategies in many countries, and/or the latter were

swamped by rising social conflicts which then became the dominant force

determining social as well as economic events. However, the Chilean case

aside, the older layers of high protection and the more recent of export promo-

tion in those countries where they were fully developed survived up to the

liberalization period which took off in the mid-1980s and speeded up in the

region in the 1990s. Although deeply defended by their beneficiaries, they were

increasingly detached from a real development strategy of any sort.

The process of industrialization went hand in hand with other major changes

occurring in Latin American societies and economies. The restructuring that

took place in the 1930s (see the previous volume) continued during and after

the war. The state had acquired a number of policy instruments, such as

monetary discretion, and a more diverse tax base, while the abandonment of

the gold standard had left financial authorities free to manoeuvre the exchange

rate. In some cases, this led to the illusion that money creation was one and the

same as wealth creation. The state had also taken on its shoulders the respon-

sibility for promoting economic development. It did so by enlarging economic

infrastructure in some instances or by establishing state enterprises, either for

defence purposes as in Argentina under Peron or to assure domestic supplies of

certain `strategic' inputs, as in Brazil, Mexico and many other countries. It also

created public sector commercial and development banks, or encouraged new

private financial institutions and forced all of them to channel funds to priority

sectors. The role of the state was also enlarged to incorporate new entrepren-

eurs, often actually `creating' them under the umbrella of large government

contracts related to the construction of roads, public utilities, dams and so on,

which therefore implied a certain working relationship that often surpassed the

business component and entered the political sphere.

In several countries, the postwar period witnessed an acceleration of popula-

tion growth caused by the decline of infant mortality rates. Within a few years,

that implied a corresponding increase in the labour force, creating enormous

pressures for the economy to grow. The Latin American population increased

from 126 million in 1940 to 210 million twenty years later, and 139 million

more were added in the 1960s and 1970s. Due to falling mortality rates and a

lagged transition in fertility, population growth peaked at an average level of

2.72.8 per cent a year from the mid-1950s to the mid-1960s, with over 3 per


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12 Introduction

cent in several countries. Indeed, Latin America and Africa faced the strongest

population pressures, a fact which probably contributed to depressed growth in

per capita GDP (see Table 1.1). Cities also multiplied in size, creating increasing

demands on public utilities, schools, hospitals and the like. The rate of urban-

ization was 41.6 per cent in 1950, but had already reached 5673 per cent in the

four `success stories' of the export age (Argentina, Chile, Cuba and Uruguay).

By 1970, 57.7 per cent of the population lived in urban areas (75 to 82 per cent

in Argentina, Chile, Uruguay and Venezuela) and most Latin American capitals

had become large, sophisticated metropolitan areas.7 This was accompanied, as

we will see, by significant improvements in human development and the

incorporation of a proportion of the population into the benefits of a modern

economy, but also by the persistence of high levels of inequality in the dis-

tribution of income and assets.

The role of ECLAC

A consensus among participants in the workshops is that the role of ECLAC has

been exaggerated in the mythology of ISI unfortunately in part because for

some in the US State Department and elsewhere Prebisch became paradox-

ically, given his rather conservative background identified as the spokesman

for ideas coming out of Moscow and Prague, and thus a victim of Cold War

paranoia.8 In fact, as we have seen, the development of many of the building

blocks of strong state intervention took place as a spontaneous process during

the `empirical' phase of import substitution and even during the export age,

and corresponded to international practice at the time. Thus, all clearly pre-

dated the creation of ECLAC in 1948. Large governments were also not an

innovation of ECLAC or Latin America, either, but rather a widespread inter-

national practice in the postwar period.

However, the wider importance of ECLAC is undoubted. It helped to bring

about almost the first glimmerings of continental self-awareness, in particular

by providing theoretical and empirical support to the evolution of a regional

identity.9 It played a significant role in spreading modern economic analysis

and statistical techniques, and in developing institutions such as schools of

public administration and planning ministries. In due course, it was important

in developing the notion of protection at the regional level, and it thus played

a central role in the design of the Latin American Free Trade Association

ALALC, according to its Spanish abbreviation, later Latin American Integration

Association the Andean Group and, most notably, the Central American

Common Market, as the chapter by Cohen makes clear. It also helped to press

for reforms in the social area, many of which set the stage for the Alliance for

Progress in the 1960s.

At the conceptual level, ECLAC gave a logic to and helped to rationalize the

strategy of development which had been springing up in the region. It built


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upon a theory of capital accumulation, not a theory of static efficiency. Indus-

trial development was primarily seen as the mechanism to transfer technical

progress to peripheral countries in the face of the slow growth in primary

commodity markets. Capital accumulation, structural changes associated

with industrialization and the transfer of technological innovations from the

centre were, thus, seen as three facets of a unique process. It was also seen as a

mechanism to absorb labour displaced from rural areas and to manage macro-

economic constraints associated with foreign exchange scarcity. As Fitzgerald

makes clear, these ideas on industrialization were different from the infant

industry argument, as well as from those associated with the role of dynamic

scale economies in more recent theories of trade and growth. Tariff protection

was seen as a way to guarantee a stable demand for new sectors and public

sector investment as the way to guarantee the provision of skills and infra-

structure. The problems of this strategy were also recognized, and some policies

were designed to overcome them regional integration, the `mixed' strategy

but others were seen as intrinsic to peripheral industrialization.

The institution also played a negative role at the level of ideas and percep-

tions. Most important, it never developed, during our period of analysis, the

ideas of protection as a time-bound instrument and the need to tie incentives

to performance; the latter played an important role in rapid East Asian indus-

trialization, according to some interpretations. It was thus lenient on the

`geological' layer over layer pattern which protection adopted and the

inefficiencies and political economy which it generated. It also tended to

view new developments in international trade with a pessimistic lens. None-

theless, it shifted gradually in the 1960s and, particularly, in the 1970s, to a

favourable view of export promotion (Bielschowsky, 1998). Several times it

manifested distrust for relative price adjustments and, particularly, for active

foreign exchange rate policies, which were certainly instrumental in encour-

aging structural diversification (see below).

However, it should be emphasized again that ECLAC's views on industrializa-

tion, protection and state intervention agreed with contemporary wisdom.

Moreover, in the regional debate it always remained in the centre, more mod-

erate than the more radical dependency school visions that sprang from its

work, as well as Marxist thinking. Its character as an intergovernmental institu-

tion certainly determined that.

What were the alternatives?

A distinct conclusion of the project, which comes clearly from the previous

sections, is that it is hard to imagine countries choosing other than they did in

the early postwar years. On the one hand, at the time, and despite favourable

short-term trends, continued reliance on primary exports did not look like a

good alternative in the light of past trends and instability in the terms of trade.


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14 Introduction

Indeed, after the mid-1950s the renewed downward trend of commodity prices

generated a new wave of balance of payments crises, which further encouraged

regional protectionist trends. The coexistence of GATT with renewed agricul-

tural protectionism was an additional argument, particularly for those coun-

tries which exported temperate zone agricultural products. The export of

manufacturing products from developing countries was a very distant alternat-

ive, although the Mexican experience during the war had made a first start.

High levels of protection were still the rule in the industrialized countries and it

was clearly necessary to undergo a long period of continuous growth in inter-

national trade to convince countries and authorities which had lived through

its collapse to regard it as a reliable alternative. The failure of the International

Trade Organization was also a wrong signal, as well as that of the other institu-

tions Keynes had envisaged as accompanying the familiar Bretton Woods cre-

ations, including a commodity buffer fund and a soft aid facility through the

United Nations. A further reality in the early postwar years was inconvertibility,

as a reflection of the `dollar shortage'. Sterling export earnings, in particular,

could not be converted into dollars to buy US machinery.

On the other hand, the option for industrialization had already been made de

facto in the larger countries, in an unmistakable sense since the 1930s, and this

was clearly reflected in the positions of emerging industrial groups in Latin

America and in their growing political weight. Politically, also, urban growth

and continuing migration were making industrialization crucial. During the

Second World War, the USA backed the push for expanded state involvement in

economic affairs and even a direct role in industry. After the war, the official US

line, and the framework for the new Bretton Woods institutions, was to pull

back from state involvement but, as Webb's chapter reveals, the international

financial institutions were not hard on that line, at least with respect to devel-

oping countries. As we have seen, the multinationals' views on protection

changed rapidly as they began to perceive the extent of the profits to be

made in `tariff-hopping'. Under Truman's Four Point Plan, launched in 1949,

the industrialization of the developing world was an important policy object-

ive, and the technical missions that followed were intended to design devel-

opment plans including the devising of foreign exchange controls and tariffs

(Maxfield and Nolt, 1990). Finally, as we have seen, economic ideas at the time

and indeed for a long period continued to favour state intervention, and

indeed, in this regard as well as in practice, probably the real option was central

planning that is, more rather than less state involvement.

A difficult part of the assessment of alternatives concerns the role of external

pressures. Was the enthusiasm for protection among Latin American adminis-

trators mainly a result of exclusion from the financial aid available for postwar

reconstruction, rather than a response to endogenous forces within Latin

America? Fitzgerald argues in his contribution to this volume that there was a


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marked willingness to conform to free trade rules as long as it seemed that even

a Marshall Plan for Latin America was not beyond the pale. But by Havana it

was clearly beyond the pale, and countries rapidly changed their tune and,

more to the point, their practice.

The situation had, of course, changed considerably by the 1960s when the

international economy did start to offer an alternative in a real sense. Indeed,

the shift to what we have called a `mixed model' indicates that many Latin

American countries did not ignore it. The country studies provide, indeed,

many instances of this change of direction. Chile was the first to introduce

the crawling peg in 1965, and combined this with an extensive set of policies

developed over the next few years, including tax rebates, tariff reductions and

rationalization of the tariff structure. CORFO was active in these years with

programmes that laid the basis for subsequent exports in fishery, forestry and

fresh fruits. Colombia had adopted in the late 1950s and early 1960s a series of

export incentives that were rationalized in 1967, when the crawling peg was

introduced and wide-ranging institutional reforms in the foreign trade and

exchange regimes were adopted. Mexico actually introduced its maquiladora

programme in the same year as Taiwan (1965). The introduction of the crawl-

ing peg in Brazil in 1968 had been preceded by export incentives since 1965.

Venezuela had certainly not ignored her opportunities in oil throughout. At

the same time, in the smaller countries, the opportunities in more traditional

commodity markets had not been ignored, and exports of coffee, bananas and

cotton were generating export dynamism in Central America from the mid-

1950s. This is also true of some South American countries not included in the

case studies Ecuador, in particular. Indeed, as we will see, there was a sense of a

`golden age' in many Latin American countries towards the end of our period of

analysis, from some year around the mid-1960s to the first oil shock.

Examples abound, however, in which senior advisers recommended devalu-

ations, tax reforms or other policy measures in circumstances where, with

hindsight, the institutional conditions and macro/micro relations would have

allowed successful policy alternatives, but the options were rejected for polit-

ical reasons. Many individual examples can also be quoted concerning the

pushing of import substitution programmes when it was already clear that

market size could not sustain them. Obviously, the very ambitious industrial

investment plans of Brazil, Mexico and Venezuela following the first oil shock

are the most remarkable examples, although some actually partly paid off in

the long term, even in terms of export expansion. Outside our case studies, Peru

is probably the most outstanding example of a country which opted for a more

inward-oriented policy in the late 1960s, against regional and international

trends and without adequate export backing, and failed. Decisions to plan

import substitution at a subregional level by a political allocation of the pro-

duction of certain goods to specific countries, in the Andean Group and the


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16 Introduction

Central American Common Market, were definite failures. But the most frus-

trating experience was, obviously, the resistance to liberalizing competitive

imports in regional and subregional integration agreements the Central

American Common Market aside. It is a historical paradox that the great

invention of ECLAC to rationalize import substitution, regional integration,

succeeded only when fully-fledged trade liberalization was undertaken in the

1990s, that is, when import substitution as a development strategy had

been abandoned! It is, indeed, a double paradox, as orthodox thinking pushing

for trade liberalization considered integration agreements to be close to an

aberration.

More generally, the major problem was the reduced flexibility that built up

during the years of state-led industrialization. This is closely associated with the

political economy which characterized the process. As we have pointed out, a

remarkable feature was the absence of the ideas of protection as a time-bound

instrument and the need to tie incentives to performance. This was obviously

supported by the political economy that characterized the process, in which

protection to a specific sector was a permanent conquest. The pessimistic

export lens was also a feature, although decreasingly so in most countries. An

interesting counterfactual exercise would be to ask whether, in the absence of

the oil shock and the `macro mess' which followed, the model would have

evolved in a different direction as a result, for example, of the success which

the `mixed model' was starting to show in some countries. Nonetheless, by that

time macroeconomics and politics were taking over the scene. We will return to

this analysis later on.

The overall results10

The benefits (with some qualifications)

Latin American economic performance during the three decades that followed

the Second World War was remarkable, inducing a widespread transformation

of society. On the one hand, continental GDP grew at 5.6 per cent per year in

194574, or 2.7 per cent per capita.11 This was unparalleled for Latin America,

just as the developed country record was the fastest in recorded time. In the

intermediate period between this phase of long-term growth and the debt

crisis, growth was only slightly slower 5 and 2.5 per cent, respectively12

though it was more than two percentage points lower than the peak rate of

growth of 196874 (see below). The manufacturing sector was the engine

of growth, growing 6.8 per cent a year in 194574, reaching a peak share of

GDP of 26 per cent in 1973, 7 percentage points more than in 1945. Sectoral

behaviour is vividly summarized in Figure 1.1b, where industry gains at the

expense of primary production, as also occurred in most developing areas in

the world.


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% o

f GDP

at 1

980s

con

stan

t pric

es

1939

1939

1941

3%

26%

25%

24%

23%

22%

21%

20%

19%

18%

17%

16%

Figure 1.1 GDP growth and composition Source: ECLAC.

The temporal pattern of GDP growth was a very rapid recovery in the early

postwar period, which was interrupted by a series of balance of payments crises

in the late 1940s and early 1950s. Growth then stabilized for the region as a

whole around a rate somewhat above 5 per cent. In the late 1960s and early

1941

1943

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1943

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1%

1%

3%

5%

7%

9%

Current growth rate Three years centred moving average

1939-45 Latin Amrica six largest economies Three years centred moving average L.A. (6)

17Enrique Cardenas, Jose Antonio Ocampo and Rosemary Thorp


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18 Introduction

1970s there were clear signs of acceleration (see Figure 1.1a), and the period Pe

r cap

ita G

DP g

rowt

h, 1

945

74 (%

) ended in a `golden age' with peak rates of growth in 196874 7.2 per cent

a year, or 4.2 per cent per capita. This reflected a fairly broad pattern of growth

acceleration. There was also a discernible reduction in the volatility of

growth in the last phases of the postwar boom.

Growth was not uniform among countries, either. A certain `convergence'

was achieved due to the fact that the three `success stories' of the export age

(Argentina, Chile and Uruguay) grew at a slower rate. This is also true if the

fourth `success story' of the export age, Cuba, was added to the picture, but no

comparable long-run GDP series for this country exists.13 These cases aside,

however, there was no clear convergence pattern. Very fast growth was experi-

enced by both countries with low initial per capita GDP, notably Brazil, but also

by countries which started with a medium-level per capita GDP, particularly

Mexico and Venezuela. On the other hand, Bolivia, Honduras, Paraguay and,

particularly, Haiti constitute a sample of countries with low initial per capita

GDP which grew at slow rates and, thus, performed contrary to convergence

patterns (Figure 1.2).

Along with growth came labour productivity gains, which translated into

higher real wages of those employed, and a stronger labour union movement.

Labour productivity increased at an annual rate of 3.4 per cent in 195073,

which exceeded that of the USA but was below those typical in the most

dynamic developed market economies and the Asian NICs.14 This reflected

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Documents

An Economic History of Twentiet - Enrique Cardenas