Import Substitution Industrialization in Latin America:

Experience and Lessons for the Future

Carlos A. Primo Braa
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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.
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Carlos A. Primo Braa) Senior Ad%iser) International 4rade 5i%ision) 4he "orld Ban(. Paper prepared
for 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$zed the process of Latin American industrialization in the !:<7s and !:87s.
In that paper) the nature of ISI) the results of the industrialization process and the
prospects for future de%elopment policies in the reion &ere re%ie&ed.
Stilitz -!:=;) p. !>!. points out that there are t&o *conflictin paradims for
de%elopment strateies.+ ?ne emphasizes the importance of the principle of comparati%e
ad%antae) preachin free mar(et and export oriented policies. 4he other hihlihts that
*there is a natural path of de%elopment @ and that path) for most part) in%ol%ed hea%$
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$) he underscores the rele%ance
of some of the criticism comin from adepts of the *mar(et,oriented+ paradim) &hile
pointin out that some of this criticism applies much better to small economies -e..)
Chile. than to the larer Latin American economies -e..) Brazil..
4he point of departure of his e%aluation is the proposition that *all countries &hich
industrialized after 9reat Britain) &ent throuh a stae of ISIA that is) all passed throuh a
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stae &here the larer part of in%estment in industries &as underta(en to replace imports+
and that *in this earl$ ISI process Bin Europe and the 0nited States in the CIC centur$D
o%ernments pla$ed an acti%e role in encourain and protectin the de%elopment of
infant industries+ -Baer) !:;6) pp.:<,:8.. 'e oes on to attribute the dela$ &ith &hich
Latin American countries embar(ed in this process to socio,economic considerations: an
elite focused on the hih profitabilit$ of primar$ exports) suppl$,side bottlenec(s -&ea(
entrepreneurial classes) poor endo&ment of s(illed labor) and inade3uate infrastructure.)
as &ell as limited mar(et size and pressures from external po&ers interested in the
maintenance of liberal trade policies.
'is anal$sis of the historical path to&ards ISI in Latin America differentiates bet&een
ISI spurts induced from abroad -associated &ith external shoc(s such as the t&o &orld
&ars and the 9reat 5epression. and ISI as a deliberate polic$ tool for economic
de%elopment in the !:<7s and !:87s. 'e points out that after "orld "ar II) most *of the
larer countries of Latin America implicitl$ or explicitl$ accepted the ECLA anal$sis of
the hopelessness of earin their economies to&ards the traditional &orld di%ision of
labor+ -Baer) !:;6) p. :;.. In most countries) the mix of trade and macroeconomic
policies adopted in this phase t$picall$ in%ol%ed trade barriers and exchane rate
controls) taxin export acti%ities and fosterin import substitution. In man$ countries this
&as complemented b$ a complex mechanism of preferences for strateic imports -e..)
capital oods and industrial ra& materials.) the direct participation of the state in the
econom$ -%ia state,o&ned enterprises. and cheap credit for *strateic+ sectors. It is
&orth notin) ho&e%er) that forein capital &as often an important partner in this process
E
*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
!:<7 -!:.8 percent. and !:8; -6>.! 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. Fot 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 BISID 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 Iaha) Fan(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) !:;6A !:=>.
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$JA -6. could Latin American countries adopt the Asian model -of
manufactured,based out&ard orientation.JA and -E. can the trade reime be reformed in a
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&a$ 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& $ears) reflectin the contributions
of authors such as 2odri( and 'ausmann and re%ie&s of the lessons from the !::7s.
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At the core of this debate is the proposition L see Baer -!:;6) p.!!7. ,, that there is no
eas$ 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$+ L i.e.) the
(no&lede enerated b$ firms that in%est in *experiments+ to identif$ &hat the$ are ood
6
See 2odri( -677>.A 'ausmann and 2odri() -6778.) and "orld Ban( -677<..
8
at producin and exportin L 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. !EE. poses the 3uestion *BcouldD 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) ChinaA South KoreaA
SinaporeA and 4ai&an) China. to all de%elopin countries and arues that the *fallac$ of
;
composition+ holds L 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 Boften 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. E7:..
"erner Baer#s s(epticism about the impact of trade liberalization L a usual
bac(bone of neo,liberal reforms L 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.
E
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
E
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>..
:
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 -Ficita 677<.. As a conse3uence) Forthern states
can expect more reduction of po%ert$ associated &ith trade liberalization than Southern
ones. In other &ords) trade liberalization can increase income ine3ualit$ and this
underscores the importance of complementar$ o%ernmental policies to deal &ith its side
effects.
It is also important to reconize that income effects of trade reforms are relati%el$
more important for the poor than consumption effects. If the price of one commodit$
increases sinificantl$) it is often possible to consume less of it. But it is much more
difficult to shift from bein an uns(illed &or(er) to bein a s(illed &or(er or to become
>
Fote that this is not necessaril$ 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<. sho& that multilateral trade liberalization could impro%e income
distribution in Brazil) reflectin its potential impact on ariculture and related industries
in the poorest parts of the countr$.
As pointed out in "orld Ban( -677<) p. !<!.) ho&e%er) *the e%idence on trade
liberalization and &ae ine3ualit$ remains inconclusi%e. In Arentina) Brazil) Costa
2ica) the 5ominican 2epublic) and Gexico) the industries that are most exposed to
international competition pa$ the hihest &aes.+ 4o the extent that adoption of ne&
technoloies could be fostered b$ trade openness) this can lead to a relati%e increase in
the demand for s(illed labor) leadin to more ine3ualit$. Actuall$) Perr$ and ?larreaa
-6778. arue that in the case of Latin America relati%e factor endo&ments -relati%e
richness in natural resources.) d$namic effects of trade -leadin to s(ill,biased technical
chane.) and a pre,reform structure of protection biased to&ards uns(illed labor
intensi%e sectors explain increases in the o%erall income ine3ualit$ in LAC in contrast
&ith the experience of other de%elopin reions.
Summin up) it is clear that trade liberalization is not a *sil%er bullet+ to deal &ith
po%ert$ and income distribution problems. In this context) "erner Baer#s concerns
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 Forth,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.: :<,
!66.
Baer) "erner -!:=>.) *Industrialization in Latin America: Successes and Failures)+
Oournal of Economic Education -Sprin.: !6>,E<.
Baer) "erner -6776.) *Feo,Liberalism in Latin America L a 2eturn to the PastJ+
Financial Gar(ets and Portfolio Ganaement !8 -E.: E7:,!<.
Baer) "erner and 5onald /. Coes -6776.) *Fational so%ereint$ and consumer
so%ereint$: Some conse3uences of Brazil#s economic openin)+ 4he Puarterl$ 2e%ie&
of Economics and Finance ->6.: =<E,8E.
Ber) Andre& and Anne Krueer -6776.) *4rade) 9ro&th and Po%ert$)+ paper
presented at the 6776 Annual Ban( Conference on 5e%elopment Economics) mimeo.
!6
Cline) "illiam 2. -!:=6.) *Can the East Asian Godel of 5e%elopment Be
9eneralizedJ+ "orld 5e%elopment !7 -6.: =!,:7.
Ferreira Filho) Ooa3uim Bento de Souza and Gar( 'orride -677<.) *4he 5oha
2ound) Po%ert$) and 2eional Ine3ualit$ in Brazil)+ in 4homas ". 'ertel and L. Alan
"inters) eds.) Po%ert$ M the "4?: Impacts of the 5oha 5e%elopment Aenda
-"ashinton) 5.C.: "orld Ban( and Palra%e GcGillan..
'ausmann) 2icardo and 5ani 2odri( -677E.) *Economic 5e%elopment as Self,
5isco%er$)+ Oournal of 5e%elopment Economics -5ecember..
Krueer) Anne -!::;.) *4rade Polic$ and Economic 5e%elopment: 'o& "e Learn)+
American Economic 2e%ie& =;-!.: !,66.
Ficita) Alessandro -677<. *Gexican 'ouseholds: 4he Effect of the 5oha
5e%elopment Aenda)+ in 4homas ". 'ertel and L. Alan "inters) eds.) Po%ert$ M the
"4?: Impacts of the 5oha 5e%elopment Aenda -"ashinton) 5.C.: "orld Ban( and
Palra%e GcGillan..
Perr$) 9uillermo and Garcelo ?larreaa -6778.) *4rade Liberalization) Ine3ualit$ and
Po%ert$ 2eduction in Latin America)+ Paper presented at ABC5E Conference) San
Petersbur) mimeo.
Primo Braa) Carlos A. -677<.) *4he Polic$ Coherence Aenda: Connectin 5ebt and
4rade)+ in 5ebt and 4rade: 4ime to Ga(e the Connections -5ublin: /eritas Publications..
2odri() 5ani -6778. *9oodb$e "ashinton Consensus) 'ello "ashinton
ConfusionJ+ Oournal of Economic Literature) forthcomin.
Srini%asan) 4.F. and Oadish Bha&ati -!:::.) *?ut&ard,?rientation and
5e%elopment: Are 2e%isionists 2ihtJ+ mimeo
!E
Stilitz) Ooseph -!:=;.) *Learnin to learn) localized learnin and technoloical
proress)+ in P. 5asupta and P. Stoneman) eds.) Economic Polic$ and 4echnoloical
Performance -Cambride: Cambride 0ni%ersit$ Press..
"inters) L. Alan) Feil GcCulloch) and Andre& GcKa$ -677>.) *4rade liberalization
and Po%ert$: 4he E%idence So Far)+ Oournal of Economic Literature CLII -Garch.: ;6,
!!<.
"orld Ban( -677<.) Economic 9ro&th in the !::7s: Learnin from a 5ecade of
2eform -"ashinton) 5.C.: 4he "orld Ban(..
Iaha) 2oberto) 9obind Fan(ani) and Indermit 9ill -6778.) *2ethin(in 9ro&th)+
Finance and 5e%elopment >E -Garch.: ;,!!.
!>