ECO342H1 Lecture Notes - Lecture 11: Import Substitution Industrialization, Dutch Disease, Allopatric Speciation
ECO342 – Lecture 11
11 Developing Countries:
Import Substitution (South America):
- followed the model of growth by trying to develop domestic industries to substitute for
imported goods of a higher order; transitioned populations from agriculture to manufacturing
- this meant applying tariffs to certain consumer goods that were imported to develop local
industries
- this would contradict the Ricardian model of trade that would have focused on the production
of commodities that yielded a comparative advantage
- there was rapid growth until the 1970s into the 6% range
- external debt from 1975 to 1983 exploded from $75B to $315B and Mexico defaulted on the
debt in 1982
- growth rates were 0% throughout the 1980s; the IMF and World Bank determined that import
substitution was the cause of the collapse due to inefficient industry and big government; similar
to the infant industry argument
- they argued that the development needed to be financed via capital markets and banks; they
recommended fiscal austerity and exchange rate devaluations
- debt skyrocketed from $280B to $380B; but neo-liberals were undeterred
The Washingtion Consensus:
1. Fiscal discipline: constraint on public spending and tax reform
2. Liberalization of interest rates, foreign direct investment and trade
3. A competitive exchange rate
4. Deregulation of the economy
5. Privatization of public enterprises
- its aftermath was more crises, low growth and high poverty rates, according to Arestis
- rates of poverty rose from 1980 to 1990s and didn’t fall back to 1980s levels until 2004
- critics point not to government mismanagement, but draconian interest rates and inflation,
collapse of commodity prices and resource demand in the 1980s
- Latin America borrowed to weather the oil crisis but was met with exorbitant interest rates and
exploding debt
- Capital markets were fine, foreign direct investment was flowing in before the crises
Export-led Growth:
- post-war costs of communication and transportation went down drastically, allowing for
vertical chains of production within companies across many nations to achieve scale and division
of labour
- export-oriented economies did outperform import-substitution economies
- there are a few problems though:
1. Geographical isolation may raise transport and communication costs
2. Specialized production of staple goods may delay transition into manufacture
- Dutch Disease: exports of one resource push up the country’s exchange rate so much that other
industries suffer
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Document Summary
Followed the model of growth by trying to develop domestic industries to substitute for imported goods of a higher order; transitioned populations from agriculture to manufacturing. This meant applying tariffs to certain consumer goods that were imported to develop local industries. This would contradict the ricardian model of trade that would have focused on the production of commodities that yielded a comparative advantage. There was rapid growth until the 1970s into the 6% range. External debt from 1975 to 1983 exploded from b to b and mexico defaulted on the debt in 1982. Growth rates were 0% throughout the 1980s; the imf and world bank determined that import substitution was the cause of the collapse due to inefficient industry and big government; similar to the infant industry argument. They argued that the development needed to be financed via capital markets and banks; they recommended fiscal austerity and exchange rate devaluations. Debt skyrocketed from b to b; but neo-liberals were undeterred.
